"While the building is well-situated, it has seen a steady decline in occupancy over recent years due to the ongoing remote work trend in Melbourne," says DBS, noting that since the building was bought in April 2020, occupancy has dropped by over 30ppt to 63.9% recently following the departure of major tenant, Service Stream.
The estimated exit yield on the transaction is around 4%, estimates DBS.
"Despite the divestment price being below the original purchase price, it appears reasonable when considering the property's declining valuation trend, driven by weakening Melbourne office fundamentals, rising vacancies, falling rents, and the depreciation of the AUD against the SGD," says DBS.
Also, DBS figures that the decline in valuation of 357 Collins Street could have also been due to asset-specific issues, as Keppel REIT’s and Suntec REIT’s properties in Melbourne have a reported occupancy of between 90% - 100% in contrast.
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"In light of the current high vacancy and challenging leasing market, the exit yield is deemed fair," adds DBS.
The transaction will result in a slight annualised DPU dilution of 1% and negligible impact to NAV, the divestment is expected to improve FLCT’s gearing by 1.5ppt to 34.6%. This would also increase FLCT’s debt headroom to around $1.27 billion before gearing reaches 45.0%.
In addition, with the sale, FLCT's overall portfolio occupancy will increase by 130bps to 95.2%, while also extending its WALE from 4.6 to 4.8 years.
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"Although some may question the timing of the divestment given that valuations appear to be near the bottom, the high vacancy and fair exit yield justify the decision in our view," says DBS.
"Moreover, the slight DPU dilution could be offset if FLCT successfully redeploys the proceeds into higher-yielding opportunities. The key focus going forward will be how swiftly and effectively FLCT can utilise its expanded debt headroom for accretive acquisitions," adds DBS.
FLCT units dropped 0.58% to trade at 85 cents as at 9.32 am.
