On Dec 14, Frasers Commercial Trust (FCOT) announced that, together with parent Frasers Centerpoint Limited (FCL), will jointly acquire a prominent business park west of London.
The Business Park is valued at 175 mil pounds (SG$315.6 mil) and would be acquired by the JV at 175 mil pounds (SG$315.5 mil). FCOT will pay 88 mil pounds (SG$158.7 mil) for their 50% share.
Any outstanding rent free incentives granted by the existing owner of the property will be paid to the JV. There is a car showroom that will be completed in Jan 2019. The existing owner will pay a monthly contracted rent and service charges from this time till the car showroom is completed.
According to FCOT:
- FCL has local network and experience in UK, which is their 3rd major market after Singapore and Australia. They have been operating there for the past 15 years
- The business park is freehold
- Very well connected to motorways and direct train service to Waterloo Station, London. It is adjacent to the TAG Farnborough Airport
- Diversified tenant base of 36 tenants, taking into account 2 committed pre-leases
- 98% occupancy with 89% tenant retention rate
- a WALE of 8.3 years, although factoring potential lease breaks, the WALT is 5.9 years
- The NPI will increase from SG$113.8 mil to SG$123.8 mil or SG$10 mil. This is based on a headline rent of 12.1 mil pounds (SG$21 mil) inclusive of incentives. The NPI yield is 6.3%.
- This deal will result in a DPU improvement of 1.6%. It is projected to improve the last annualized DPU of 9.82 cents to 9.97 cents.
FCL currently holds 26.8% interest in FCOT, making them FCOT’s controlling shareholder. FCL also own the manager of FCOT.
This JV agreement would constituted an “Interested Party Transaction”. As this JV, together with the interest of FCL and its associates in FCOT make up more than 3% of FCOT Net Tangible Assets, the manager must make an announcement of this transaction.
However, this JV agreement falls under the exception under Rule 916 (2) of the listing manual, thus FCOT do not require the approval of shareholders to enter into this JV agreement.
How this deal will be financed
FCOT intends to finance this deal with a combination of equity and debt.
The debt looks to increase by SG$80 mil and unit holder funds by SG$78 mil.
A bridging loan will be arranged to facilitate the acquisition if required. If this acquisition is 100% funded by debt, the debt to total asset will go up to 39.2%.
My estimation is that they will do a placement at $1.40, which will increase the number of FCOT outstanding shares by 55.7 mil. This will be a 6.7% dilution.
My Thoughts of this Acquisition
Recently, we been observing FCL starting a few subsidiary in Germany:
And in UK:
This gives us an indication that the pipeline for FCOT is not just the existing commercial properties in Frasers Property Australia, FCL’s commercial properties in Singapore but these regions.
Still, it has been some time since FCOT made an acquisition, the last one being 357 Collins in Melbourne.
This acquisition is welcomed as it validates some of these properties acquired by the parent will eventually flow to the REIT.
We can see that the industrial may eventually go into FLT (Frasers Logistics and Industrial Trust) and commercial to FCOT.
As an overall portfolio, FCOT will have a portfolio diversified across:
The NPI yield of 6.3% is also higher than China Square Central and 55 Market Street.
To be able to manage these properties well, the manager needs to be entrenched to a certain degree in these markets that they operate in. FCOT can depend on FCL’s Frasers Property Australia expertise in Australia and now they could depend on the parents ability in UK.
However, I do think that FCL’s presence is more to the hospitality side in Europe, thus I think we should take their 15 years of experience with a pinch of salt. (some one do correct me if I am wrong here)
Eventually, we can see FCOT as a REIT that is diversified across these matured developed countries. As an investor, you could compartmentalize this and think if this is a good buy and hold, or that these area lacked rapid growth.
One thing that was not mentioned was whether there are any rental escalations or rent reviews for the lease. Without these in place, a long lease potentially might result in the passing rent to be much lower than the prevailing market lease in the future.
How this would change the outlook for FCOT
FCOT needed a deal like this.
The asset value of this business park is small relatively to the portfolio. However, FCOT is facing quite a fair bit of uncertainty:
- China Square Central undergoing renovation, and poor Grade B office market rent, being supported by the cash flow from the sale of rights to build a hotel to parent FCL
- HP Enterprise and Singapore moving out of Alexandra Technopark. FCOT have 1 year to re-lease this huge space. This will be supported by FCOT taking scrips, and management fee in units
- Rio Tinto’s 12 year lease in Central Park comes into effect. The anticipation is that the rent will be lower, given the collapse in rent in Perth when the agreement was signed.
Thus as an investment, you can see why FCOT is trading at a much higher dividend yield versus its peers.
The table above is taken from my dividend stock tracker, where you can keep track and compare the dividend yield of some of the most prominent dividend stocks in Singapore.
As an investment, this could go either way.
Don’t take it that just because they say project dividend per unit is 9.97 cents, that means they will hit it.
As FCOT becomes more diversified geographically, as an investor you have to take the volatility in currency fluctuations, interest rates, and government policies in as well.
The charts above show the historical yield spread and price to book value of FCOT.
These are 2 common valuation metrics of REITs. It gives the investor an idea of how 2 valuation metrics currently looks versus the historical.
The yield spread is the difference between the dividend yield of FCOT and the interest yield of the 10 year Singapore government bonds. A large/high spread means attractive value is appearing possibly.
The price to book is the price per unit of FCOT divided by the book value or equity per share of FCOT. A lower figure shows attractive value is appearing.
From both indicator, FCOT is trading at slightly above historical valuation.