Wednesday, June 10, 2015

Fraser Commercial Trust (FCOT) - Beware This Is Coming‏

Shareholders of Fraser Commercial Trust (FCOT) should already receive a circular notice stating their intention to purchase the 357 Collins Street at an estimated price of AU$200 Million. These development gets interesting because of certain situations that draw parallel to the recent case of Lippo Mall Trust (LMIRT) for their acquisition of Kemang mall, which I am familiar with and will bring more attention to it later. 

As we know, the management of FCOT has stated that the acquisition will increase its forecasted NPI by 14.7% as well as increase its DPU by 0.8% on the enlarged portfolio. The main reason for this is because the acquisition is supposedly meant to be yield accretive which would be funded through internal cash, debt and private placement of equity. This calculation was done when the share price of FCOT was languishing at the top of somewhere around $1.58, when the yield was at 6.2%. Obviously, these acquisitions usually take time to conclude as they needed to conduct an EGM for shareholders’ approval but this also means that they will be subject to the unpredictability of the market forces when it materialize. 

The circular has provided more information regarding the estimated NPI yield of the proposed acquisition and on page 53 of the circular, it was calculated to be at 6.3% yield. When the proposed acquisition was being made, it was still yield accretive because FCOT was trading at 6.2%. Things get interesting now because the recent fall in the share price of FCOT (and the whole Reits in general) to $1.48 means that they are now yielding 6.4% and assuming all funding terms and conditions remain the same, this will no longer be an accretive acquisition anymore for FCOT. Since private placement is usually offered at a discount to the current market share price, it becomes key to how much FCOT can receive from the placement should the share price continues to fall downwards.  

Think about it this way. If the proposed share price during the calculation is $1.58 at that point in time and FCOT is offering 5% discount for private placement (which translates to $1.50), they cannot do it now because the share price has fallen to $1.48. In other words, they will either receive less funding from the placement (which then means that they have to use more internal funds or take more debts) or increase the number of issued equity which means more potential dilution if the yield becomes not accretive. Either way, this is not a good sign for the existing shareholder. 

I wanted to draw parallel to the same incident of what happened to LMIRT not too long ago in their recent acquisition of Kemang mall. I blogged about this in detail at that time (original article here). What we do see is exactly similar to what I have described above. The share price of LMIRT continues to languish low for a period of time, causing the management to lower the issuance price for the placement than expected. The result of this, as what we’ve witnessed from LMIRT, is a drastic fall in share price, which could happen the same to FCOT if the share price continues to fall further. This is a classic case where a value proposition becomes a value destroyer to shareholders.

Final Thoughts 

If you are vested in this Reit counter and are thinking of getting out after reading this article, I think it’s probably a little too late now. The share price is already dropping from the recent high.

What this lesson taught us is that probably any acquisitions that companies made needs to be fairly compensated by sufficient yield increment of the enlarged portfolio, especially if the funding is done via equity. This is because we are taking into factor certain market forces that are not within our control and could go in the direction against our favor.

Things could still pick up from here and the share price could rise up before the EGM is being made.  Alternatively, the management can still make this an accretive acquisition by revising the funding capital structure by taking on more debts, which increases the gearing. Until then, I can only pray that the odds be in my favor.

Vested with 11,000 shares as of writing.


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    1. Hi Daryl

      I personally think it yields quite decently even though the NAV is somewhere at around $1.58. If you are not needing the money for anything else, I think it's ok to leave it as vested. The management has shown some great records and they have a lot of pipeline from the parents.

    2. Hi B,

      Agreed. Personally, I think the Frasers property wing is undervalued. I like their strategy for retail (heartland strategy) and the ability of the management to turn things around from the tough times. I'll remain vested despite this potential hiccup.

  2. hi would u do a portfolio update for the month of may?

    saw your portfolio page only updated as of mid april


    1. Hi Felix

      Yea, I missed updating it for May.

      I would do one for the month of Jun shortly.

  3. Situated just off the Bruce Hwy in Queensland, Hervey Bay is the gateway to World Heritage listed Fraser Island. Known as the world's largest sand island stretching over 123km in length. The annual migration of humpback whales from Antarctica, shelter to the waters of Platypus Bay after calving to relax and play before returning to the rich feeding grounds of the Antarctic.


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