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Following turnaround, FCOT adjusts capital structure, launches asset enhancement plans

LOW Chee Wah, CEO of Frasers Commercial Trust's manager, says the real estate investment trust (REIT) that landed in financial trouble during the global credit crunch four years ago has fully recovered. And, it is now in a good position to boost its distribution per unit (DPU) by enhancing the revenue potential of its assets as well as by tweaking its capital structure.

"Even last year, the REIT was trading at a 40% discount to NAV [net asset value] because nobody had confidence this thing could be turned around," says the affable Low during a recent interview with The Edge Singapore. This year, units in FCOT have jumped more than 60% amid confidence in the REIT and a rush for high-yield plays. By comparison, the local REIT Index is up 30%. FCOT is now trading at an 18.9% discount to its NAV, and offers a forward yield of more than 6%.

FCOT was originally known as Allco Commercial REIT, and owned a slate of office properties in Singapore, Australia and Japan. In the wake of the global financial crisis, Frasers Centrepoint, the real-estate arm of Fraser and Neave, acquired the REIT's manager for S$75 million and a 17% stake in the REIT itself for a further S$104 million.

Low, who was appointed CEO around that time, knew that he needed to reduce the REIT's debt-to-asset ratio of more than 54% and reorganise its portfolio of assets. "We bought this REIT four years ago, in the midst of the financial crisis. When you buy a portfolio, some properties are good and some are not so good," he says. "We did a review and, two years ago, we embarked on a portfolio-reshaping strategy."

Low identified assets that were mature and unlikely to deliver any growth, and began preparing them for sale. Among theses assets was Keypoint. "We applied for rezoning from commercial to mixed commercial and residential and we managed to top up the lease to 99 years. [That made it] something that is more feasible to a developer," Low explains.

In September this year, FCOT completed the sale of Keypoint for S$360 million, with sale proceeds of S$358 million. The REIT plans to use some S$160 million of the proceeds to pay down its debt and a further S$170 million to redeem some of its Convertible Perpetual Preferred Units (CPPUs). The REIT may also use some of the remainder to buy back its units on the market.

Low says these moves will enhance FCOT's yield. The sale price of Keypoint was a 26% premium to its book-value-reflected property yield of 3.1%. FCOT is effectively reinvesting the proceeds in its CPPUs and units, both of which have higher yields. "If we can redeem our CPPUs at 5.5%, that's a spread of 2.1%," Low explains. "That is definitely yield-accretive, and that's what we plan to do."

Pang Ti Wee, an analyst at OSK-DMG, figures that the redemption of the CPPUs could lift FCOT's DPU for FY2013 and FY2014 by 12.1% and 16.8%, respectively. The redemption date is Jan 2, 2013.

According to Pang, F&N holds almost 90% of FCOT's CPPUs. FCOT has announced that 162.5 million CPPUs­ will be redeemed and 7.4 million will be converted into 6.3 million ordinary shares on Jan 2. Some S$342 million of CPPUs were issued at par in 2009, as part of a recapitalisation programme that also included a rights issue that raised S$213.9 million. As part of the exercise, FCOT acquired Alexandra Technopark for S$342.5 million from Frasers Centrepoint.

Reshaping the portfolio
Besides Keypoint, FCOT has also sold its Japanese assets for a nominal amount and divested its interest in the Australian Wholesale Property Fund. "[The fund] wasn't giving us any distribution, so it didn't make sense to keep it. We sold it for S$20 million and used the proceeds to pay down Aussie [debt]. So, it lowered our gearing and increased our distribution," Low says.

In April this year, FCOT acquired the remaining 50% stake in Caroline Chisholm Centre, a Canberra property that was part of FCOT's original portfolio. "We already own 50% and it made sense for us to consider increasing ownership. It's a good property, with a stable long lease to the Australian government and a remaining lease of 13 years," Low says of the 99-year leasehold asset.

The seller was a unit of the Allco Group, which has gone into liquidation. "We were able to acquire the stake at a 12% discount to valuation," Low says. "It's an attractive acquisition and yield-accretive."

Following these moves, FCOT's portfolio now consists of five properties: China Square Central, 55 Market Street, Alexandra Technopark, a 50% stake in Central Park in Perth, and Caroline Chisholm Centre. About 39% of the assets are in Australia and the rest, in Singapore. Its debt-to-asset ratio is down to 26.8%, less than half what it was in 2008.

According to Low, FCOT's portfolio has a relatively long-dated weighted average lease expiry (WALE) profile. That's partly because of its exposure to Australia, where office leases can run for as long as 10 years, with annual rent step-ups of 3% a year. In Singapore, Alexandra Technopark, which accounts for 20.5% of FCOT's portfolio, is on a master lease until 2015.

"We want to create a stable and sustainable DPU that is growing. More than 40% of leases will only expire in 2017 and beyond," Low says. He adds that FCOT's exposure to Australian properties helps balance its portfolio and makes it more defensive than other Singapore-focused office REITs. "Singapore leases are shorter, and office leases tend to be linked to the economy," he says. The Singapore economy is open and that creates greater cyclicality for the office sector. Besides, there's a lot more supply in Singapore, Low points out.

According to him, Australian office developments only get built if there is substantial pre-commitment because banks will not otherwise finance the construction. "There is less speculative build from a landlord's perspective," Low says. "We feel the Australian portfolio is more defensive and a good complement to the Singapore portfolio."

Asset enhancement initiatives
Now, Low is looking to enhance the revenue potential of FCOT's assets in order to grow its DPU. It has, for instance, launched an asset enhancement initiative related to China Square Central, the third-largest contributor to its net property income after Central Park in Perth and Alexandra Technopark. Together with owners of neighbouring properties, FCOT is upgrading the precinct and building a canopy and a linkway.

"This linkway will connect to the new Telok Ayer MRT station, which will open next year," Low says. The joint-venture upgrading works will cost S$14 million, to be shared equally by FCOT, Great Eastern and Far East Organization.

Separately, FCOT is also upgrading China Square Central itself. The initial renovation will involve upgrading the common areas such as lift lobbies and toilets. Subsequently, the trust will embark on an upgrade of the retail area, although no details have been announced.

"We hope to increase the rents for the whole area, whether office or retail, as we upgrade the building," Low says. "There is a lot of potential to improve. On completion, you will have a building with brand-new facilities and nice amenities in terms of retail and F&B and the MRT station. You will also have plenty of car-park lots, which are not available [elsewhere], and the building is just one station away from MBFC [Marina Bay Financial Centre]."

According to Low, rents at China Square Central are at S$6.50 to S$7.00 psf a month, more than 30% lower than at those at MBFC. Currently, occupancy at China Square Central is down to 86% following the departure of a large tenant. Low figures he can get occupancy to above 90% soon.

What about acquisitions? "If we do an acquisition, we need to see whether it makes sense, whether it is accretive," he says. The REIT will also have to judge whether it offers the best return versus other alternative uses for its cash, he adds. "Obviously, the redemption of preference shares is much more accretive than acquiring any Singapore property at this time. Singapore property is trading at very high prices." FCOT has the right of first refusal to two Frasers Centrpoint properties: Valley Point and Alexandra Point.

CIMB forecasts DPU of 7.9 cents for FY2013 (the trust has a September year-end) and 8.8 cents for FY2014. That translates into forward yields of 6.4% for FY2013 and 7.15% for FY2014. CIMB has an "outperform" rating on FCOT.

This story first appeared in The Edge Singapore weekly edition of Dec 10-16, 2012.

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