S-REITs Bi-Weekly - UOB Kay Hian 2020-09-17: S-REITs Embarking On Yield-Accretive Acquisitions


S-REITs Bi-Weekly - S-REITs Embarking On Yield-Accretive Acquisitions


UOBKH S-REIT Index gained 0.8% to reach 250.3 in the past two weeks.

  • There was a flurry of M&A activities.

Top outperformer:

Top underperformer:

SPOTLIGHT – Creating Value Through Yield Accretive Acquisitions

  • While outlook remains uncertain and financial markets remain choppy, S-REITs continue to create value through yield-accretive acquisitions:

Frasers Centrepoint Trust (SGX:J69U) (BUY/ Target Price: S$3.10)

  • Frasers Centrepoint Trust (SGX:J69U) has announced the proposed acquisition of the remaining 63.1% stake in AsiaRetail Fund (ARF) for S$1,057.4m from sponsor Frasers Property. Frasers Centrepoint Trust currently owns 36.9% of ARF. ARF’s Singapore portfolio includes five suburban retail malls, which are Tiong Bahru Plaza, White Sands, Hougang Mall, Century Square and Tampines 1, as well as one office property Central Plaza. NPI yields for the suburban retail malls were 4.9- 5.1% and office building at 3.5% in FY19.
  • Enlargement of scale. Frasers Centrepoint Trust’s retail portfolio will increase from seven to 11 suburban retail malls, while total NLA will expand by 64% to 2.3m sf. Frasers Centrepoint Trust’s portfolio size will increase 85% to S$6,650m, and Frasers Centrepoint Trust will expand its presence in Northeast and East regions, increasing its catchment population by 40% to 3m, which represents 52% of Singapore’s population. It would double Frasers Centrepoint Trust’s market share for suburban retail floor space to 10.2%, which is the second largest and a whisker away from CapitaLand Mall Trust’s 10.6%.
  • Higher weightage in key equity indices. The acquisition will propel Frasers Centrepoint Trust to becoming the 8th largest S-REIT by market capitalisation (assuming that the merger of CapitaLand Mall Trust and CapitaLand Commercial Trust (SGX:C61U) is completed), compared with its current ranking of 11th. Frasers Centrepoint Trust’s free float would increase to S$2.6b. The increase in market capitalisation and free float would lead to higher weightage in the FTSE EPRA/NAREIT Global Developed Index.
  • Efficient holding structure eradicates tax leakage. The existing effective tax rate for ARF is 13-14%. Upon completion of the proposed acquisition and restructuring to convert asset holding companies into a limited liability partnership, Frasers Centrepoint Trust will have full control over the properties and unitholders can enjoy tax transparency.
  • Funded through new equity. Frasers Centrepoint Trust has proposed an equity fund raising exercise to raise S$1.3b, comprising a private placement to institutional investors and a non-renounceable preferential offering to existing unitholders. The acquisition of the 63.1% stake in ARF and divestment of Bedok Point is estimated to be accretive to DPU by 8.6% and 4.7% respectively on a pro forma basis for FY19 and 9MFY20.
  • Maintain BUY. Our target price of S$3.10 is based on DDM (required rate of return: 6.5%, terminal growth: 1.2%).

Keppel REIT (SGX:K71U) (BUY/ Target Price: S$1.40)

  • Keppel REIT will acquire a 100% stake in Pinnacle Office Park, comprising three freehold Grade-A office buildings located in Macquarie Park in Sydney, at an agreed property value of A$306.0m (S$303.3m) or initial NPI yield is 5.25%.
  • Good location at Macquarie Park. Pinnacle Office Park is located at close proximity to Macquarie Park Metro Station and a major bus interchange. It is expected to benefit from the completion of the City and Southwest metro rail in 2024, which will reduce the commuting time between Macquarie Park and the CBD to just 20mins. It is close to Macquarie Centre, Sydney’s largest suburban shopping centre.
  • Macquarie Park is resilient despite COVID-19 pandemic. Macquarie Park is the only office market to register positive net absorption of more than 10,000sqm in 2Q20 due to demand from the pharmaceutical and technology industries. Vacancy rate has dropped 2.6ppt q-o-q to 5.2% in 2Q20. Macquarie Park is ideal for companies seeking cost-effective space at suburban business parks.
  • Funded by additional debt and is DPU accretive. The acquisition is targeted to complete in 4Q20. It will be fully funded with A$-denominated debt for natural hedging. On a pro forma basis, the acquisition is accretive to 2019 DPU by 4.5%. Post-acquisition, Keppel REIT’s leverage will increase from 36.3% to 38.7%.
  • Maintain BUY and target price of S$1.40, based on DDM (required rate of return: 5.5%, terminal growth: 1.5%).

Jonathan Koh CFA UOB Kay Hian Research | Loke Peihao UOB Kay Hian | https://research.uobkayhian.com/ 2020-09-17
SGX Stock Analyst Report BUY MAINTAIN BUY 2.900 SAME 2.900