Taking another bite of Waterway Point
- FCT to acquire an additional 10% stake in WWP, bringing its stake to 50%.
- We estimate FY23F/24F DPU accretion of 0.2%/1.0% if the acquisition is fully debt funded, and 1.1%/1.9% if internally funded.
- Gearing could rise from 33.9% at end-Jun to 36.6% if the acquisition is fully debt funded, and 35.8% if internally funded, based on our estimates.
- Reiterate Add as acquisition lifts FCT’s suburban mall exposure.
Acquisition will increase FCT’s stake in WWP from 40% to 50%
FCT entered into a sale and purchase agreement on 12 Sep 22 to acquire an additional 10% stake in Waterway Point (WWP) from Japanese developer, Sekisui House Ltd (1928 JP, Not rated), increasing FCT’s stake in WWP from 40% to 50%. The agreed property value of S$1,312.5m was 0.96% above WWP’s 31 Jul 2022 valuation of S$1,300m, translating to a cap rate of 4.5%. Total acquisition outlay, inclusive of professional and acquisition fees, amounts to S$132.3m. The acquisition will be funded via a combination of debt and/or internal sources. The Manager has elected to receive its acquisition fee paid in units. The purchase consideration, which is based on the NAV of WWP, will be subject to two rounds of adjustments 30-days and one year after the acquisition is completed. Post-transaction, Sekisui’s stake in WWP will be reduced from 20% to 10%, with the remaining 40% held by an unrelated third-party. We estimate completion of the acquisition to happen in mid-1Q23. FCT did not provide pro-forma DPU accretion, but we estimated acquisition DPU accretion for FY23F/24F to be 0.2%/1.0% if fully debt funded and 1.1%/1.9% if internally funded. According to our estimates, gearing would increase from 33.9% as at 30 Jun 2022 to 36.6% and 35.8% post-acquisition respectively.
Upping stake in a dominant mall in a growing residential catchment
FCT acquired its initial 33.3% stake in WWP from its Sponsor on 11 Jul 2019 and a subsequent 6.7% stake from Sekisui on 18 Sep 2019. Both tranches were based on WWP’s valuation of S$1,300m as at 1 Apr 2012. WWP’s valuation has remained stable since acquisition. However, negative reversions during the pandemic have compressed NPI yield from 4.7% at time of initial investment to 4.5% in FY21. Nonetheless, we view the acquisition favourably given WWP’s high committed occupancy of 98.4% as at 30 Sep 2022 and its superior location. The mall is directly connected to Punggol MRT and LRT stations and the temporary bus interchange. Leases signed at WWP in 1H22 achieved positive reversions of 2.2%. We also expect WWP’s shopper catchment to be uplifted by the increase in residential units in the Punggol precinct.
Reiterate Add with unchanged DDM-based (COE 6.5%) TP of $2.75
We leave our estimates unchanged pending the completion of the acquisition. We think that FCT would be the preferred buyer should the JV partners decide to sell out their stakes in WWP as FCT’s ownership and familiarity with WWP’s operations. Acquisition of Sekisui’s remaining 10% stake in WWP in the near-term is likely given its minority ownership, in our view. Re-rating catalysts include stronger-than-forecasted reversions and acquisitions. Downside risks include weaker-than-forecasted reversions and leasing.