Considerations for FCT Preferential Offering

Considerations for FCT Preferential Offering
Frasers Center-point Trust took an aggressive stand to expand its portfolio of retail focused malls by divesting the under performing Bedok Mall, and raising capital for the purchase of a 63.1% stake in AsiaRetail Fund Limited. Due to the limited cash position of the REIT structure, a private placement (For accredited investor) and preferential offering (for existing shareholders) is conducted to raise capital to pare down its gearing and also complete its acquisition. Despite the creative naming of private placement / preferential offerings used by the investment bankers, the deal is essentially a dilution to the existing unit-holders, as the REIT manager seek to issue units to raise capital for the REIT to expand its portfolio base.

Impact from Covid on the sub-urban malls
There will be a lot of casualties in the vanilla shopping malls. I have first hand seen shop closures in some of the malls around Singapore. The short term WALE is a feature and NOT a bug of the retail malls. Low utility goods like detergents / groceries may face significant distress as e-commerce directly decrease the cost of operations of wholesale distributors and unbranded good and services may be switching to e-commerce distribution or face extinction. However, I am bullish on the outlook of the Singapore retail shopping mall industry (on site experiential sub-urban malls) and believe it cannot be displaced by eCommerce.

Bullish Case for SG retail REITS
Based on my analysis and scuttlebutt of the retail shopping trends, dining and shopping / exploratory experiences, love for Instagram posting and social validation from office workers, general hangout location from Singapore students, Singapore humid climate, and the tendency to celebrating festivities in air-conditioned malls, are still a mainstay of the Singapore lifestyle. When shopping for expensive / utility driven goods, on site experiences are not displaced despite the accessibility of e-commerce, as seen by the fanfare in the launch of the Apple Orb.

The elongated halt in international tourism is still a significant tailwind to the cash flows / domestic tourism of the retail REITS. I also believe partial WFH is a possible long-stay feature / employee perk in the future. The limited land space of Singapore and limited land allocation from the government towards the private sector, still provides huge replacement costs to the REITs. For the purpose of the Singapore stock market (no dividend tax), the REIT structure will still prove to be a favored asset class that can unlock strong cash flows from property investments (illiquid asset class).

I am bullish towards the management as they are raising capital in a period of extraordinary low interest rates and possible sour market sentiment, allowing them to possible snap up assets at reasonable prices. They have a strong track record in execution of <experiential malls> from my trips in CWP and Northpoint. I also like the fact that the acquisition is projected to be yield ac-creative, and the projection should be reliable considered the static/contractual nature of cash flows from rental income. The larger market capitalization will provide liquidity and lowered cost of capital when raising debt capital to expand in the future, and diversify location and tenant risk compared to its present portfolio.

However, I still believe there will be significant volatility after the corporate action event closes on 19 Oct (Close of the preferential offering). Although FCT may not see the same conglomerate discount as seen in the Capitaland (Office - Retail portfolio) stock correction post merger, the geopolitical risks may still invite short term overreactions to the long term valuation.

Options avaliable for retail investors
The placement offering is only avalaible for high Net worths / institutional investors. For the average retail investor, the preferential offering issue price was likewise fixed at the low end of its range, at S$2.34 per new unit. This is at a 7 per cent discount to the VWAP and, for illustrative purposes, a 5.3 per cent discount to the adjusted VWAP. 

Closing Date : 19 Oct
Current Share Price : 2.36 (Subject to change)
Preferential Price : 2.34

1) Top up current position to multiple of 10,000 shs, then apply for preferential offering to get round lot of shs.
2) Top up current position, as the current share price has corrected due to an artificial placed number.
3) Apply for the preferential offering and get odd lots.
4) Do nothing

Option 1 applies for investors with deep pockets with a larger portfolio, that is comfortable with at least multiples of 10,000 shares of the REIT in his portfolio, and is confident in the long term outlook despite the rights issue / possible dilution. I do not yet fit this criteria due to my limited portfolio size.

Option 2 is most probably the direction I am taking if I want to take up a larger position, as there is no significant discount between the preferential offering and the ordinary share.

Option 3 should only be considered when there is significant divergence between the price of the preferential offering and ordinary share. There are other scenarios whereby it may become relevant, but not for this current offering.



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