More divestment activities

■ FLCT divests Cross Street Exchange for S$810.8m while CICT announced the sale of JCube for S$340m.
■ Transactions are done above book value and are likely to boost BV/unit. FLCT’s gearing could improve to 29.3%.
■ Reiterate sector Overweight. Our sector top pick is KDC REIT.

FLCT sells Cross Street Exchange

● Frasers Logistics and Commercial Trust (FLCT) announced this morning that it has divested Cross Street Exchange (CSE) to an unrelated third party for S$810.8m. The sale is a 28.3% premium over its Sep 21 book value of S$632m. The divestment of this non-core leasehold asset is in line with its active portfolio management strategy. According to management, the divestment is expected to result in a net gain of
S$170.7m and boost its FY21 BV/unit by 4% to S$1.29. Based on CSE’s FY21 net income of S$20.1m, the property made up 5% of FLCT’s FY21 net property income. The divestment yield works out to be c.2%. Management expects the deal to be completed by Mar 2022. FLCT indicated that the net proceeds may be used to fund potential acquisition opportunities, repay debt and make distributions to FLCT unitholders. Assuming 49.2% of the net proceeds are used to repay outstanding debt, management expects FLCT’s proforma gearing is expected to decline to 29.3%.

Divestment sooner than expected, boosts debt headroom

● We think that this deal is positive for FLCT. Although the property is a non-core asset, the divestment timeline was earlier than expected. Post-sale, FLCT indicated that logistics and industrial asset exposure is expected to increase to 66.9% of its AUM vs. 61.1% at end-FY21 while portfolio occupancy and weighted average lease expiry (WALE) metrics would also improve to 97.1% and five years, respectively. Although
some income top-up may be required to fill the income vacuum if there is no new acquisition in the near term, we believe that with a lower gearing of 29.3%, FLCT is well placed to leverage on its increased debt headroom of c.S$3bn (assuming a 40% gearing level) to fund new purchase opportunities in the medium term. We continue to like FLCT for its attractive FY22F yield of 5.8%, low gearing and potential to deliver
inorganic growth and maintain our DDM-based TP of S$1.62.

CICT sells JCube for S$340m

● Separately, Capitaland Integrated Commercial Trust (CICT) also announced this morning the sale of JCube for S$340m to a wholly-owned subsidiary of Capitaland. The sale price of S$340m is 21-26% above the S$278m-280m valuation in Dec 21. According to management, CICT will generate a net gain of S$56.7m from the sale. JCube has a committed occupancy of 95.5% as at Dec 21. The sale was transacted at less than 4% yield. Under the terms of the Sale and Purchase Agreement, the purchaser will grant CICT a right-of-refusal (ROFR) for 10 years for the commercial component (if the property is redeveloped into a mixed-use development with a commercial component) or if the property is redeveloped into a new commercial development. Management indicated that the divestment is expected to complete by 1Q22. The divestment makes up a small component, c.1% of CICT’s enlarged AUM (including its recent 3 Australian acquisitions) and provides CICT an opportunity to rebalance its portfolio and redeploy capital into other growth opportunities. We retain our Add rating with a DDM-based TP of S$2.57.

Reiterate sector Overweight

● While the near-term performance of SREITs could remain choppy as the market adjusts to the prospect of rising interest rates, we think this could present buying opportunities for the medium term. KDC REIT remains our sector top pick given its income resilience and stability. We also believe that REITs which offer strong forward DPU growth or drive DPU growth through acquisitions or asset enhancement opportunities such as FLCT, MINT and CICT, could potentially hold up better in an environment of yield spread compression, due to rising rates. Re-rating catalyst: lower than projected rate hike. Downside risk: more than expected rate hikes that would erode yield gap further.