Frasers Centrepoint Trust (SGX: J69U), or FCT, is a retail REIT with a portfolio of nine suburban malls located in the heartland areas along with one office property.
The REIT manager had a busy year back in fiscal 2023 (FY2023) ending 30 September 2023.
FCT acquired a 25.5% interest in NEX Mall for close to S$530 million back in February last year while increasing its stake in Waterway Point by 10%.
Fast forward nearly a year later, and FCT just announced that it will acquire an additional 24.5% interest in NEX Mall for S$523.1 million.
This transaction will raise the retail REIT’s effective interest in the suburban mall to 50%.
Will this move benefit unitholders and should they rejoice?
An attractive asset with room for population growth
NEX Mall is a fully occupied mall located at Serangoon Central comprising seven levels of retail space including two basement levels.
The property boasts an attractive net property income (NPI) yield of 4.8% based on its agreed property value for FY2023.
This NPI yield is higher than FCT’s cost of debt of 4.3% as of 31 December 2023.
NEX Mall is also well-connected to transport links via a direct connection with the Circle and Northeast MRT lines and a bus terminal.
The future Cross Island Line Phase I (completed in 2030) should further enhance the connectivity of this asset.
Management also pointed out that new residential units to be completed in the next five years should increase NEX’s population catchment by 8.1%.
Furthermore, a new 14,500 gross floor area polyclinic is under construction near NEX and is slated for completion in 2025.
Once completed, this polyclinic is expected to bring in additional footfall to the mall.
A good fit within FCT’s portfolio
NEX also snuggles nicely into FCT’s portfolio and will enable the REIT to become the largest prime suburban retail space owner in Singapore.
With a stable of malls under its belt, the addition of NEX enhances FCT’s ability to attract and retain tenants by offering them a wider choice of locations to expand.
The addition of NEX will also further diversify FCT’s revenue base as the mall will make up 14.7% of revenue post-acquisition, higher than the current 8.1%.
In addition, FCT’s retail portfolio should also see an uplift in its NPI margin from 73.6% to 74%.
The proportion of essential trades by gross rental income for NEX stood at 48.6%, fairly close to FCT’s portfolio’s 51.1%.
Further growth through AEI and reconfiguration
Aside from population growth, management has also identified asset enhancement initiatives (AEIs) that can unlock value and improve the performance of the asset.
First, around 60,000 square feet of non-commercial carpark space can be redeployed for retail and office use.
The REIT can also reconfigure existing areas to improve space efficiency and optimise rental potential.
Elsewhere, management will also refresh and improve the retail offering to cater to a wide range of shoppers.
Around S$80 million to S$100 million has been earmarked for these AEI which should generate a target return on investment of above 7%.
There is also further room to increase gross revenue per square foot of net lettable area along with annual shopper traffic, as these two metrics are both below the average of comparable malls.
The acquisition adds to DPU
Most importantly, unitholders will be pleased to know that this acquisition adds 0.4% to FCT’s FY2023 DPU of S$0.1215.
FCT’s aggregate leverage will end at 37.8% after the divestment of units in Hektar REIT (KLSE: 5121) and the sale of Changi City Point.
Get Smart: Approval required at an EGM
Unitholder approval for this transaction is required at an extraordinary general meeting to be held in due course.
With management making a compelling case for increasing its stake in NEX Mall, investors should be pleased and vote for this transaction to go ahead.
There is not only future potential population growth around NEX Mall, but the slate of AEIs and reconfigurations should also enhance the asset’s value and attractiveness over the long term.
Disclosure: Royston Yang does not own shares in any of the companies mentioned.
