Newly minted titan of the suburbs
- Acquisition of dominant mall NEX at 4.9% yield cements FCT as a titan in Singapore’s suburban retail sector, with potential compression to c.4% for quality retail assets
- Our deep dive analysis indicates DPU upside of c.3.0% driven by tenant remixing, GFA optimization and future tax transparency
- Future acquisitions from sponsor, and stake increase in NEX, WWP, NPC South Wing unlocks a S$2.9b AUM expansion opportunity
- BUY, higher S$2.70 TP; potential surprise from FCT’s inclusion in STI
Frasers Centrepoint Trust (FCT) announced its long-awaited acquisition of a further stake in NEX mall in Jan-24, the first notable acquisition and fund raising within the REIT sector this year. The announcement was to purchase the remaining 24.5% stake from Gold Ridge Pte. Ltd. (GRPL), the entity holding NEX mall, raising total stake within the asset to 50%.
First fund raising for the year, strong interest, 2.5x oversubscribed. The merits of this deal differed slightly from the acquisition of an initial stake in NEX mall in early 2023 but overall positive. The REIT’s increased stake in NEX reflects a higher valuation for the mall at S$2,127m, representing a 2% y-o-y increase, supported by cashflow improvement as initial yield remained at an attractive c.4.9% (vs transactions in the 4.1%-4.3% range in Singapore’s suburban retail space). The total cost of acquiring the 24.5% stake was S$532m. This translates to an initial cost outlay of S$321m after taking on GRPL’s debt, and was funded by a private placement of S$200m (which was 2.5x oversubscribed) and debt.
Due to equity financing, DPU accretion was 0.40%, lower compared to the accretion for the initial stake in NEX at 0.52% which was fully funded by debt. The long-term AEI plans in place for the mall and tenant refresh strategies that FCT will explore will help to further extract organic growth from the asset. The GFA optimization strategy to convert 60k sqft of carpark space into retail space should yield another 0.7% DPU accretion when it takes place.
Acquisition at 4.9% cap rate is favourable compared to market transactions in the low 4% range.
Given the tightly held retail assets in Singapore, bids for quality retail assets in Singapore have been strong, in the low 4% cap rate range, similar to FCT’s divestment of Changi City Point and Allgreen’s ongoing due diligence to buy Seletar Mall, estimated to be in the low c.4% on our estimates (report link). The deal metrics of NEX mall shines a favourable light on FCT to execute a deal at 4.9% cap rate and sponsor’s continued support in lending its balance sheet to grow the REIT.