Commercial Office REIT rises from the ashes under the hands of Frasers.
I updated my Dividend Stock Tracker by furnish Frasers Commercial Trust information. The profile of this office REIT have changed totally from the days when it was managed under Allco REIT.
This and the decisions undertaken by Frasers Centerpoint Trust have indicated that perhaps sponsors can really work their magic.
For an office REIT
- Market Yield of 6.8%
- Debt to Asset of 36%
- EV/EBITDA of 12 times
- PTB of 0.5
Against K-REIT Asia and CapitaCommercial Trust it is starting to look on par.
The transformation is not over yet, and this is where we see a manager work its magic rather than just buy something from its sponsor.
Sale of Keypoint
Fraser decide to sell off KeyPoint a local office asset that makes up 10% of its net property income (NPI). The net selling price was at S$357m at a yield of 3.1%. The profit on cost is a gain of $72 mil.
The rational of the sale is that the build is 34 years old and faces design and structural obsolescence with only 62 years of leasehold remaining. To AEI this would take much capital in Frasers opinion.
The sale of this makes up almost 17% of FCOT assets. This cash could come handy in their efforts to further restructure.
CIMB have a good table showing some of the decisions they can do with this money and how it impacts the eventual DPU
The likely decision could be a combination of redemption and I think on the whole it puts them in a position where they remain strong and is yield accretive. The CPPU is competing with the equity holders at 5.5% yield. Paring it down is beneficial but will reduce the equity base.
How does a 9% yield sound to you?
Acquisition of 50% interest in Caroline Chrisholm Centre
Now this is an interesting purchase. FCOT is to acquire the remaining 50 per cent interest in Caroline Chisholm Centre, an Australian office complex for A$83 mil (S$113 million). They basically bought this at a 12.6% discount to current valuation of A$95 mil. To put this into perspective, Allco first bought the other 50% at A$108.75mil (S$136 mil).
This will add S$10 mil more to the NPI of FCOT, yielding 8.9%. This compare to a yield of only 7.3% on the other half bought in 2007.
There are many upsides to this purchase
- Property is strategically located in the core of the Tuggeranong Town Centre, one of four town centres within the city of Canberra, Australia’s capital city and the location of the Federal Parliament House
- 89 year lease left
- This will boost DPU by 5.6% base on pro forma financial effects
- Fully leased to the Commonwealth Government of Australia with approximately 13.4 years balance lease term and 3% annual rent increment
- This will increase master leases plus blue chip tenants with long leases from 43% of portfolio to 48% of portfolio
The amazing thing I find is this: FCOT sold a S$10 mil yielding KeyPoint for S$360 mil and bought a S$10 mil yielding Caroline for S$113 mil!
Why is it that they can get it at such a cheap price? Record, which was own by Allco have been put on receivership and these property are to be sold to pay down the debts.(See article here)
Departure of Marsh and McLennan
About 31% of its underlying leases at China Square Central (Big NPI contributor) are due for renewal this year. Since China Square Central’s master lease lapsed, the impact to bottomline is borne directly on FCOT.
Prevailing rents are higher at S$6-7 psf versus expiring S$5.8 psf. FCOT indicated that there are leasing enquiries from non-financial industries such as shipping and commodity companies.
FCOT is one REIT that I am keeping watch. If the management continues their good decisions this can be a REIT I will get invested in. For generic property rental plays, a good manager is something you want to factor into your decision making and the way to tell is evaluating all the actions they make a long the way.
It is even better when they are put in a situation that is as bad as the one they took over. Timing, tapping capital markets, evaluating which capital management to use, keeping an eye for good assets, selling and buying at prices that benefit the shareholders. Those are what we judge them by.
Monday 25th of June 2012
I use DCF with a 7% WACC/Discount rate 2% growth rate for 20 years and got a value of 0.84 cents.
with XIRR to get a 7% XIRR at 2% growth rate, I have to calculate 26 years of consistent returns.
It doesn't look cheap
Sunday 24th of June 2012
FCOT is a good REIT but is it undervalued at current price?