Frasers Centrepoint Trust: Divesting Changi City Point at Premium; Maintain Fair Value Estimate

We maintain our fair value estimate for Frasers Centrepoint Trust J69U, or FCT, at SGD 2.38 following the divestment of its retail asset, Changi City Point to an unrelated third party for SGD 338 million. The selling price is 4% above its July 2023 independent valuation of SGD 325 million and 11% above its original 2014 purchase price of SGD 305 million. We are positive on this transaction as we think that Changi City Point is the weakest retail asset within FCT’s portfolio and it does not command an efficient scale moat source due to its location and positioning. Management expects the divestment to improve its portfolio metrics with occupancy rates improving to 99.3% from 98.7% as of June 2023. We also think the premium achieved in this transaction is commendable given the profile and relatively short remaining leasehold of the asset.

In addition, we like that management plans to use the net proceeds to reduce FCT’s aggregate leverage to 37.1% from 40.2% as of June 2023. Management also expects a 10-basis-point reduction in its borrowing cost given that the average cost of debt being repaid is currently at 5.04%, higher than the exit yield of 4.3% based on fiscal 2022 (ending September) net property income. Overall, we think that the decision to sell a lower-quality asset at a lower yield than the current cost of borrowing is a wise decision as it shores up the trust’s balance sheet and credit metrics at a small hit to its bottom line.

After updating our model to factor in the loss of income contribution from the completion of the divestment in November 2023 and slightly offset by the reduction in interest expense due to debt repayment, our distributions per unit for fiscal 2023 and fiscal 2024 are reduced by 3.3% and 1.6%, respectively, to SGD 0.119 and SGD 0.1288. Based on current price, we think the trust is slightly undervalued and continue to like its portfolio of high-quality suburban malls that are resilient through economic cycles.