Other factors that came up during the analysts’ briefing were borrowing costs of "high 3s" for existing loans, 100% asset management fees in units assumed for the acquisition and tax transparency in the existing structure.
“From client feedback, the key positives include (a) 2.0% pro forma DPU accretion, (b) removal of equity fund raising (EFR) overhang, given this is the largest asset in FCT’s pipeline, (c) advanced distribution of 6.15 cents (2.3% above Street estimates), upside to Northpoint South Wing’s 8,000 sq ft of additional net lettable area (NLA) and 1.5 ppts NPI margin improvement,” the JP Morgan report says.
Notably, FCT is likely to be affected by dilution to existing unitholders because the placement of $2.09 is below the book value of $2.23 per unit and the prior placement for the Nex acquisition of $2.18. Some investors could also take issue with the lower acquisition NPI yield compared to recent acquisitions by itself and other REITs.
Then there is FCT’s exposure to Northern Singapore. With Northpoint City South Wing, 47% of FCT’s assets are in this region.
On March 25, FCT’s manager announced the proposed acquisition of Northpoint City South Wing. The agreed value of the property is $1,133.0 million, which translates into $3,757 per sq ft of NLA.
FCT’s total cost of the acquisition is approximately $1,172.9 million, comprising $375.2 million for the acquisition price, the bank loans owed of approximately $785.0 million, the acquisition fee payable to the manager of approximately $11.3 million, and other acquisition-related fees and expenses of approximately $1.4 million. The NPI yield based on the property’s NPI for the financial year ended Sept 30, 2024 and the NPI yield based on the agreed property value is 4.5%, the FCT announcement said.
FCT has announced the launch of an EFR of no less than $400 million, comprising a placement of $200 million which was launched at $2.07; and a preferential offer of $200 million with unit prices ranging from $2.03 to $2.07, representing a discount to VWAP of 3.8% to 5.7%. The placement is reported to be several times covered. The placement was well received and upsized to $220.0 million, which was 4 times covered. The placement issue price of $2.090 represents a discount of 2.9% to the Adjusted VWAP of $2.1521.
FCT also plans to raise $200 million in perpetual securities.
The acquisition will exceed 5% of the audited NTA of FCT and of the audited NAV attributable to unitholders as at Sept 30, 2024. Hence, the acquisition is subject to the approval of unitholders at an EGM where, as it is an interested party transaction, the Sirivadhanabhakdi family and Frasers Property cannot vote.
Based on the fund raising plan and on an FY2024 pro forma basis, the DPU accretion is 2% and aggregate leverage rises to 39.8% compared to 38.5% as of end-FY2024. Excluding the perpetual securities, the pro forma DPU accretion based on FCT’s DPU for FY2024 post-acquisition would be 1.6% and the pro forma aggregate leverage of FCT as at Sept 30, 2024 post-acquisition would be 42.2%.
For its part, FCT’s manager points to a larger catchment population, which is expected to grow by about 93,400 or approximately 18%, over the longer term, according to an independent market research consultant.
The primary catchment population of Northpoint City is expected to grow by 21% ias approximately 11,300 new residential units are expected to be completed across Chencharu and Canberra in the next five to six years, which will increase catchment population by approximately 35,200.
"While Northpoint City’s proximity to Johor Bahru may result in a loss of sales once the Johor Bahru–Singapore Rapid Transit System is completed, we think that this will be offset by the expected expansion of its primary catchment population, with 11,300 residential units set to be completed in Chencharu and Canberra, Singapore over the next five to six years," says Xavier Lee, equity analyst, Morningstar.
The growth of the population across the catchment areas, particularly supported by the significant growth in the primary catchment area, will contribute to the potential increase in shoppers footfall and spending at Northpoint City in the longer term.
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"Management shared the potential for asset-enhancement initiatives to unlock value across the North Wing and South Wing. This includes removing secondary corridors and converting noncommercial floor areas into retail space. Additionally, management plans to remix tenancies and harmonise duplicate operations and equipment, which should reduce operating expenses and improve the NPI margin by 1.5 percentage points," Lee adds.
Northpoint City is the largest suburban mall in Northern Singapore. It is linked to Yishun Integrated Transport Hub and has a 100% committed occupancy.
“Overall, we are incrementally positive on the acquisition, given this increases FCT’s suburban retail exposure although this is not as exciting as FCT’s acquisition of a 24.5% stake in Nex at a 4.8% yield or CICT’s 50% ION acquisition at a 4.9% yield, where there was upside from tax transparency. The acquisition also comes ahead of our expectation, although we believe FCT may be leveraging the window of opportunity ahead of the upcoming completion of the Singapore-Johor RTS,” cautions JP Morgan.
“Nonetheless, the 5.8%-5.9% annualised FY2025 yield on the placement price of $2.07 is attractive versus S-REIT peers at the 5.7% current yield,” the JP Morgan report adds.
