4 Things I Learned from Frasers Commercial Trust’s Proposed A$237 Million Acquisition

Frasers Commercial Trust (FCOT) has proposed to acquire a new commercial asset, 357 Collins Street, worth A$237.7 million in Melbourne, Australia. This new investment will enlarge FCOT’s portfolio by 14.2% to approximately S$2 billion.

To avoid overextending its financial gearing that currently stands at 37.2%, the manager decided to use a combination of equity and debt financing to fund the acquisition. For the equity financing, they opted for a private placement instead of the typical rights issuance which is usually offered at discount to current unitholders.

If the plan sounds reasonable to you, it was not in the case one unitholder who made her disgruntlement known during the recent extraordinarily general meeting.

“Why don’t you give the chance to unitholders via a rights issuance? I’m sure a lot of shareholders would like to take up the new shares issued [at a discount]. I think it is unfair for us if you only make this available via a private placement. It dilutes our shares!”

Humorously, Chairman Chua Yong Hai was quick pass the baton to his CEO and quipped:

“I’ll ask the CEO to answer this question.”

CEO Low Chee Wah took over and addressed the question:

“One of the main considerations when raising funds is take into account the cost of capital. For an acquisition to be accretive, the cost of capital has to be low. In the case of equity financing, the lowest cost of financing is achieved when shares are issued at its highest price.”

He continued to patiently educate his unitholders:

“For right issuances, the process would usually take two months and the discount to share price is typically around 20-30%. Whereas, a private placement can be done overnight and the typical discount is less – below 10%.”

He then explained why he opted for a private placement:

“FCOT’s yield is around 5.7% currently and if rights were issued at a 20-30% discount, it would make the transaction no longer yield-accretive since the cost of capital is around 7-8%. It is a short-term perspective as you get the discounted shares now but your DPU would be diluted. It is always a question of wanting growing distribution per unit or discounted shares. At FCOT, our main objective is to ensure distribution per unit is growing and sustainable.”

Other than the acquisition of its Australian asset, FCOT also plans to lease a plot of its under-utilized asset at China Square Central in Singapore to its sister trust, Fraser Hospitality. Fraser Hospitality would then build a new hotel development project on the area by the fountain square.

According to two independent valuers Colliers and Savills, the price to own a hotel room in Singapore is around a million dollars per key. Therefore, the valuation of China Square Central Hotel with 306 rooms is estimated to be $306 million. FCOT says the new spaces created will provide better frontage and visibility that will benefit China Square Central in the long run.

Several questions were posed during the EGM and here are the three other main points:

  1. FCOT is increasing its exposure in overseas market such as Australia (i.e. the acquisition of 357 Collins Street). Only 32% of net property incomes were derived from Australia four years ago. Last year, the percentage contribution from Australia increased to 49%. As overseas investments may expose the REIT to foreign exchange risk and complex tax systems, a unitholder rightly pointed out that this may change the investment criteria of existing unitholders affecting some to sell their shares. However, FCOT believes its Australian investments will provide higher income and stability with step-up rents (fixed annual rent increments) and longer lease expiries compared to Singapore. If a new opportunity came along, FCOT would not hesitate to acquire the asset.
  2. 50% of the acquisition of 357 Collins Street is to be funded by bank loans. Half the loan is denominated in Singapore dollars while the rest is in Australia dollars. The bank loan denominated in Singapore dollars will be subjected to currency risks. FCOT intends to pay down the Singapore-dollar loan quickly using the $44 million proceeds from the realized value of the additional gross floor area of China Square Central. In other words, no special dividends are expected this year despite the unlocking of this value.
  3. With FCOT’s share price ranging between $1.45-1.55, the acquisition of 357 Collins Street is yield-accretive with yields expected to 0.5-1.2% higher than the REIT currently. However, should the share price take a sharp plunge (for any reason whatsoever), FCOT has to reconsider proceeding with the acquisition as it may no longer be yield accretive.

(Photo: Frasers Commercial Trust)

Rusmin Ang

Rusmin Ang is an equity investor and co-founder of The Fifth Person. His investment articles have been published on The Business Times and Business Insider. Rusmin has appeared on Channel NewsAsia and on national radio on Money FM 89.3 for his views and opinions on how to invest successfully in the stock market. He believes that anyone, even with a regular job, can achieve more financial peace-of-mind by investing intelligently and safely for the long term.


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