Manager of Allco Reit changes owners

A unit of Fraser and Neave takes effective control of Singapore-listed Allco Commercial Reit and cancels plans to list its own commercial real estate trust.
Australia-based Allco Finance Group has sold its entire 100% interest in the manager of Singapore-listed Allco Commercial Real Estate Investment Trust, as well as its 17.7% stake in the Reit itself, for a total of S$180 million ($132 million). The deal, which will bring some much needed cash to the financially troubled seller, marks the first change of effective control of a Singapore Reit and follows speculation of potential acquisition activity within the sector in recent months.

The buyer is Singapore-based property company Frasers Centrepoint Limited (FCL), which sources say beat at least two other interested parties in a limited auction. In a release announcing the deal yesterday morning, FCL said the acquisition is part of a strategy to diversify its property development and investment income to also include fee-based income. It plans to use Allco Reit as the basis for its own commercial property activities.

This is an interesting development as FCL received an in-principle approval from the Singapore regulators to list a commercial property Reit of its own only two weeks ago. Assuming this acquisition goes through, those listing plans will be cancelled and the three properties that were initially meant for its own Reit will now be used as a pipeline of assets for Allco Reit. It will also change the name of Allco Reit to Frasers Commercial Trust û the name that it initially planned to use for its own commercial Reit.

FCL, which is already the sponsor of a Reit focusing on shopping centres (Frasers Centrepoint Trust), is a wholly owned subsidiary of Singapore-listed Fraser and Neave whose businesses include food & beverage and publishing & printing.

Given the expectation that FCLÆs three properties, which have a combined value of about S$700 million, will be injected into Allco Reit within the near future, FCL has effectively achieved a backdoor listing for its commercial assets, which seems a savvy move at a time when investors are turning their backs on initial public offerings. Singapore Reits have also been out of favour for the past year and are generally trading at deep discount to their net asset values.

Allco Reit has been one of the worst performers with a 40% decline in its unit price in the past 12 months, mainly due to the financial troubles of its Australian sponsor. The latter resulted in several of its own lenders declining to participate in the refinancing of a S$550 million loan that was coming due in July. After being downgraded twice by MoodyÆs in the space of less than two months, Allco Reit finally managed to refinance the loan in May, and while the lower rating of Ba2 hasnÆt been changed, its ratings outlook is now stable. Analysts said yesterday that it should be positive for Allco Reit to no longer be associated with the Allco name.

A 9.2% jump in Allco ReitÆs unit price in early trading yesterday after the takeover was announced suggested that investors agreed. However, yesterday turned out to be another dark day for the Asian stockmarkets with losses between 2.5% and 3.9% in several of the major indices and the Reit was unable to hold on to those gains. It finished the day a mere 0.7% higher at S$0.715, which is still below the acquisition price.

Lim Ee Seng, FCLÆs CEO, says the change of ownership of the Reit manager should also have a positive impact on Allco ReitÆs balance sheet. ôWe have clear plans to bolster and strengthen the financial position of Allco Reit. FCL, as part of the Fraser and Neave Group, will be able to assist Allco Reit in negotiating the refinancing of its existing loans, which will bring clear benefits to Allco ReitÆs unitholders,ö he says.

FCL will acquire 125.6 million units in Allco Reit at a price of S$0.83 apiece, which represents a 16.9% premium to MondayÆs closing price, but a 42.4% discount to its March 31 net asset value of S$1.44 per unit. Given that other Singapore Reits trade at an average discount of 10% to 20% versus their respective NAVs, it is hard to argue that FCL is overpaying, even if the price is above market. The value of two of Allco ReitÆs properties has also been written down following a revaluation by Colliers International Consultancy and Valuation that was done for the purpose of this acquisition, leaving the Reit with total property assets of S$2.05 billion.

According to an announcement issued yesterday by the Allco Reit manager, which is known as Allco (Singapore), the value of Cosmo Plaza in Osaka, Japan, has been reduced by 8.7%, while the value of Centrelink Headquarters in Canberra, Australia, in which Allco Reit owns 50%, has been reduced by 13.8%.

When it listed in March 2006, Allco Reit consisted of two properties in Singapore and Australia and an investment in a fund that gave it exposure to another three commercial and retail properties in Australia. Since then it has acquired another seven properties and expanded its geographical reach to include Japan. Its NAV per unit has increased by 55% from S$0.93 at the time of the IPO. Because of the slump in the share price û which has pushed the dividend yield above 9% û it has become increasingly difficult for the Reit to make yield accretive acquisitions, however. And this is where the pipeline of properties provided by FCL could come in handy, assuming it will be able to acquire these at a good price.

In an interesting twist, Fraser and Neave was advised by Credit Suisse, which was a joint bookrunner on Allco ReitÆs IPO two years ago. Allco Finance used no external advisers.

Assuming all necessary approvals are obtained, the transaction is expected to be completed on August 6.
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