SINGAPORE (Dec 9): On Dec 2, during a media briefing, Robert Wallace, CEO of Frasers Logistics & Industrial Trust (FLT), said one of the benefits of merging with Frasers Commercial Trust (FCOT) was that the joint real estate investment trust (REIT) would have a larger free-float market cap and account for a larger weightage in important indices.

“We would have been ranked No 9 as at the last trading date (Nov 27, before the announcement) and we will have a higher weightage in the FTSE EPRA NAREIT Index. Our free float will increase by 1.5 times, from $1.9 billion to $3 billion,” Wallace elaborated.

FLT was included in the FTSE EPRA NAREIT Global Real Estate Index Series (Global Developed Index) on March 19. Separately, Frasers Centrepoint Trust (FCT), which was listed in 2006, was included in the FTSE EPRA NAREIT Index in September.

FLT’s and FCT’s sponsor and major unitholder, Frasers Property (FPL), has a free-float market cap of just $1.15 billion, clearly not sufficient to be included in the FTSE EPRA NAREIT Index. This is despite its total market cap’s placing the company among the five largest developers on the Singapore Exchange — after CapitaLand, Hongkong Land Holdings, City Developments (CDL) and UOL Group (see table).

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In terms of geography and asset classes, FPL is as diversified as CapitaLand, with much of the reshaping taking place in the past two to three years. It looks increasingly like a global real estate company with a growing REIT/fund management arm. More recently, Europe and Thailand are becoming more important as the group diversifies from the core markets of Singapore and Australia.

To be included in important indices such as the FTSE EPRA NAREIT Global Real Estate Index Series, FPL needs more liquidity. That would lift its share price, which is currently trading at a 33% discount to its net asset value (NAV) of $2.54. Could an inclusion in the FTSE EPRA NAREIT Index narrow this discount? FPL is 58.8% held by TCC Group and 28.2% owned by Thai Beverage (see Chart 1).

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One way to get more liquidity would be for ThaiBev to distribute FPL shares to ThaiBev shareholders through a dividend- in-specie. This would lead to a higher free float, but not enough to narrow the gap. As to FPL’s trading discount, as a dividend- in-specie, this could be narrowed to, say, $2.07 a share. To get into the FTSE EPRA NAREIT Index, FPL needs a free float of around $1.8 billion, or an additional $500 million of free float.

However, once FPL’s free float is raised, its share price would automatically rally in anticipation of getting into the index, and this could in turn prove self-fulfilling. At a market price of $2.07 — which is still a discount to NAV — FPL’s free- float market cap ex-ThaiBev’s stake (inclusive of the brewer’s stake held by the Sirivadhanabhakdis) would be well above $1.8 billion, and the developer would be well within the freefloat market cap range to qualify for inclusion into the FTSE EPRA NAREIT Index.

In 2013, TCC Group, owned by Charoen Sirivadhanabhakdi, acquired control of Fraser and Neave. TCC Group listed the property unit in 2014 as Frasers Centrepoint. Charoen’s son, Panote Sirivadhanabhakdi, took over as CEO of Frasers Centrepoint in 2016; in 2018, the company changed its name to Frasers Property, as Panote said at the time it had ambitions to be a global property brand.

F&N has a similar shareholding structure to FPL, with TCC Group holding 59.2% of the company and ThaiBev, 28.4%. The Sirivadhanabhakdis own 65.9% of ThaiBev.

“We’re not the same company we were five years ago. As at end-FY2014, the FPL group had total assets of $16.9 billion on its balance sheet. This has more than doubled to $37.6 billion as at end-FY2019,” Panote said during FPL’s results briefing on Nov 15.

Geographically, FPL now has a meaningful presence in Asia-Pacific and Europe. Thirty-nine per cent of its assets are in Singapore, followed by Australia (21%), Europe (17%) and others (15%). Frasers Property Australia is the former Australand, which FPL acquired in 2014. The Australian industrial and logistics portfolio was listed on SGX as FLT in 2016, and grew quickly from $2.2 billion in assets under management (AUM) to $3.44 billion.

FLT acquired more than $500 million worth of properties in FY2019 ended Sept 30. It has now proposed to acquire FCOT through a scheme of arrangement. If all approvals are given, FLT will quickly expand to an AUM of more than $5.5 billion.

FPL’s European presence is through its acquisition of Geneba Properties and Alpha Industrial — largely industrial and logistics assets acquired in 2017 — with the portfolio growing to $3.4 billion in value by FY2019, from $1.6 billion as at June 2016. This year, FPL announced the formation of Frasers Property Industrial with AUM of $5.2 billion.

Wallace said during the Dec 2 media briefing that the merged FLT would have a pipeline in excess of $5 billion, of which 63.7% by net lettable area comprised logistics and industrial properties, 30.9% office and business parks, and 5.4% CBD commercial. The bulk of these assets would be from Australia (30% by NLA), the UK (24.6%), Germany (21.1%), Singapore (6.5%) and the Netherlands (1.1%).

FPL also owns other asset classes such as hospitality and retail. In October this year, it formed Frasers Property Retail with AUM of $8.2 billion. As at Sept 30, FPL had $37.6 billion of property, spread across retail (26%), industrial and logistics (21%), business parks and offices (21%), development (17%) and hospitality (15%).

Following an initial investment in April this year, FPL and FCT have been increasing their stake in PGIM Real Estate AsiaRetail Fund (PGIM). As at Sept 30, FPL and FCT had jointly invested $1.4 billion for an 88% stake in PGIM.

“The profile of the malls in the fund’s portfolio is very similar to those in our group’s portfolio. The suburban malls are located at transportation nodes, offering location accessibility and convenience that underpin their relevance to shoppers,” Panote says.

DBS Group Research believes FPL is likely to benefit from its ownership of PGIM. “We remain positive on FPL’s potential to extract value from its recent investment in PGIM and asset monetisation that could lower its gearing in the medium term,” it says, referring to the higher gearing of 85.9% as at Sept 30, up 2.1 percentage points y-o-y, owing to the acquisition of PGIM. In fact, the monetisation of some of PGIM’s assets, such as the sale of Liang Court to CapitaLand and CDL for $400 million, helped mitigate the decline in FPL’s residential earnings.

Growth in investment properties

“Much of this growth [in assets] was in the form of a significantly larger portfolio of investment properties. It was a key strategy for us as we strove to enhance the stability and visibility of our earnings against a backdrop of shortening property cycles and growing macroeconomic uncertainties,” Panote says.

In FY2019, 75% of FPL’s profit before interest and tax (PBIT, excluding fair-value changes of joint ventures and associates) of $1.191 billion was from recurring income, and 25% from non-recurring income such as residential property development. (Total PBIT, including fair-value changes of joint ventures and associates, was $1.293 billion in FY2019.) Geographically, Singapore contributed 29% to PBIT, followed by Australia (24%), China (19%), Europe (15%) and others (13%).

Property development provides good margins for the group, but income stream is lumpy. “Our larger base of recurring income assets was not able to fully insulate us from the inherent lumpiness of development income,” Panote said. “Over the past five years, the group’s PBIT from recurring income sources has been increasing y-o-y. In FY2019, PBIT from recurring income was up 16% compared with FY2018 and provided a stable earnings base that helped to partially offset the effects of inherently lumpy development PBIT, which decreased 43% y-o-y.”

In FY2019, profit after tax and minority interests (Patmi) fell 25% y-o-y to $560.3 million. The weaker net profit was largely due to lower development profits mainly from Singapore and Australia, and higher net interest expense (+23% y-o-y), but it was mitigated by higher recurring income and higher share of results from joint ventures (JVs) and associates, arising largely from FPL’s share of the divestment of Liang Court by PGIM.

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Lower development profits

In Australia, the residential market has been subdued for the past 18 months, Panote said. Sales and earnings were booked from just 1,675 units for FY2019, lower than the 3,040 units booked in FY2018. A total of 1,014 units were sold in FY2019, compared with 1,622 units in FY2018 (see Charts 2 and 3). In Australia, FPL has $1 billion of unrecognised revenue (see Chart 4).

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“FPL derives an estimated 30% of PBIT from Australia, and returns could be impacted by the weakening AUD/SGD exchange rate,” warns DBS Group Research in a Nov 18 report.

In Singapore, FPL has $200 million of unrecognised revenue. It sold 118 units during the year on lower available inventory for sale against 625 units sold in FY2018.

However, FPL announced a write-down in the value of properties held for sale of $93.85 million. JP Morgan estimates that $39 million of this is from Singapore and $40 million from Australia. “In Singapore, with only one project, Riviere, currently largely (around 90% as at Sept 30) unsold, we believe the $39 million impairment may have been more of a prudent measure, given that the current selling price of $2,818 psf implies a healthy ~17% margin on our estimated breakeven of $2,400 psf,” it says. JP Morgan thinks the $40 million impairment for Australian residential units is due to a change in the trade mix of a residential project in Western Australia.

During the Nov 15 briefing, the Frasers Property Australia CEO said property prices in Sydney and Melbourne had stabilised, although demand continued to drop, owing to the introduction of various property measures to discourage purchases by foreigners.

During the past two years, FPL and TCC Assets, a unit of TCC Group that is a private company controlled by the Sirivadhanabhakdis, had been restructuring the Thai property companies. In 2018, FPL took controlof TICON Industrial Connection, an associate company, after a joint venture between subsidiaries of FPL and TCC Assets acquired shares in TICON from a third-party shareholder and via a mandatory tender offer. TICON was renamed Frasers Property Thailand. In August this year, FPT consolidated its holdings in Golden Land Property Development (which was 39.9%-owned by FPL), following a successful voluntary tender offer. FPT now holds 94.5% of Golden Land, which is in the process of being delisted from the Stock Exchange of Thailand.

FPT is the sponsor of two REITs: Frasers Property Thailand Freehold & Leasehold REIT (FT REIT) and Golden Ventures Real Estate Investment Trust (GV REIT), which is focused on commercial properties. FPT has also entered into JVs to expand into the data centre and co-working space segments.

“In addition to FPT, which will remain separately listed on the Thai Stock Exchange, we have a JV with the group’s majority shareholder, the TCC Group, to develop One Bangkok. We have unveiled the masterplan for One Bangkok to the public and are working to launch our first residential project for sale in the coming months,” Panote said.

Active recycling and REITs

In FY2019, FCT acquired FPL’s one-third stake in Waterway Point in Singapore for $240.52 million; FLT acquired 13 industrial and logistics properties in Germany, Australia and the Netherlands from FPL for $520.8 million; and FT REIT acquired 22 warehouses and 27 factories from FPT for $114.4 million.

“The group’s REITs play an important role in its capital management strategy. In FY2019, we continued our virtuous cycle of growth and value creation for the entire group with three of our REITs acquiring the sponsor’s assets over the course of the year,” Panote said.

FPL has also partnered with third parties to raise capital. It divested a 50% stake in Frasers Tower to an unrelated party for $442.74 million. FPT entered into a 51:49 JV with Mitsui Fudosan Asia (Thailand) Co to develop and manage warehouses and logistics facilities in Thailand. FPT also entered into a 75:25 JV with Sahathai Terminal to invest in, own, develop, operate and manage logistics parks, warehouses and industrial properties in Thailand.

“In addition to growing our REITs, we have stepped up our capital partnership initiatives with third-party investors,” Panote says.

“Recycling activities are perceived positively by investors, as FPL will be able to free up capital by selling its mature assets to its listed REITs, which will improve the group’s balance sheet position and recycle capital to projects with higher returns,” notes DBS Group Research.

FPL cut its dividend in FY2019 to six cents, comprising 2.4 cents interim dividend (1HFY2018: 2.4 cents) and 3.6 cents final dividend, which is lower than the final dividend in 2HFY2018 of 6.2 cents. This is because FPL’s strategy is to maintain a payout ratio of 50% of earnings, including distributions, to perpetual security holders and to have a payout ratio of 37% to 38% of earnings after distributions to perpetual security holders. Analysts had expected a lower dividend, but not as low as six cents. Total dividends in FY2018 was 8.6 cents.

The quarter to Sept 30 was challenging for developers in general, as the US-China trade war could not be resolved and the growth outlook across Asia slowed. The other large listed developers have also announced lower Patmi. CapitaLand’s Patmi declined 7.8% y-o-y, UOL Group’s 7% y-o-y and CDL experienced a double-digit drop of 33% y-o-y. The most dramatic drop was that of Hongkong Land, whose Patmi fell more than 60%. Hongkong Land is also trading at the highest discount to NAV, but the reason for that is peculiar to Hong Kong. If the Special Administrative Region experiences a recession, the net property income of Hongkong Land’s commercial properties could decline, which in turn would affect both earnings and valuations.

CLSA believes key catalysts for FPL could come from corporate restructuring and the acceleration of asset recycling. It has calculated a revalued NAV of $3.60 for FPL, and applied a 40% discount, valuing the company at $2.14.

JP Morgan expects “strong underlying performance of FPL’s investment properties”. Continued recycling into the REITs should also support value creation, it says. “However, FPL’s high gearing increases risks associated with macroeconomic headwinds and declining house prices in Australia, while higher interest costs and a weaker AUD are likely to weigh on earnings growth,” it cautions.

Analysts have been suggesting various scenarios in which FPL’s liquidity can be increased. Now, with TCC Group’s property holdings in Thailand consolidated under FPL, it may be only a matter of time before the company’s trading liquidity increases.

If FLT, with a market cap of $2.8 billion, can be included in the FTSE EPRA NAREIT Index, then surely inclusion for FPL, with a market cap closer to $5 billion, is within reach.

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