Den of The Lion Investor

The consolidation of REITs in Singapore have started with the sale of Allco Commercial REIT and the manager, Allco (Singapore) Limited to Fraser and Neave.

Frasers Centrepoint Limited, a wholly-owned subsidiary of F&N, will buy over 17.7% of Allco Commercial REIT and 100.0% of Allco (Singapore) Limited from Allco Finance Group.

Based on the offered price, Allco REIT is valued at $0.83, which is a discount of 42.3% to the unaudited NAV of $1.44 as at 31 March 2008, and a premium of 16.9% to the closing price of $0.71 on 7 July 2008.

With the purchase, Frasers Centrepoint Limited will terminate the planned listing of their commercial REIT and will instead use Allco REIT as a vehicle for its further commerical property activities.

Upon completion of the purchase, Allco REIT will be renamed Frasers Commercial Trust.

The sale of Allco REIT at such a huge discount to its NAV is probably due to the need of their parent, Allco Finance Group, to raise funds. This sale takes place before the proposed strategic portfolio focus of Allco REIT mentioned a few months ago can be completed.

The latest announcement to come out from Allco REIT is that they have received in-principle approval for the extension of the maturity date for their $550 million loan. It was originally due on 31st July 2008; now the new date is set for 31st December 2009.

There is another $70 million dollar debt which is due on 22nd November 2008. This will be paid from the divestment of Allco Wholesale Property Fund (AWPF). AWPF will be liquidated with the net proceeds returned to unitholders in the 3rd quarter of 2008.

And with that, the short term financing problems of Allco Commercial REIT has been resolved. This is a good thing since it does remove one obstacle for any potential buyer.

I don’t expect any acquisitions for Allco REIT in the near future as funding it will be a problem. At the current share price, issuing equity is also out of the question.

The troubles for their parent company, Allco Finance, still continues though. It remains to be seen how much value they can extract from their holdings in Allco REIT if they decide to divest it. When a company is in trouble, you can always count on predators to be around for any firesale.

This morning, Allco Commercial REIT requested for a trading halt. This comes in the light of recent developments in the listed entity.

• 19th March 2008 - Resignation of 3 non-executive directors linked to the parent company, Allco Finance Group, and appointment of 1 new executive director. The reason provided by the company is that the board of directors have decided to have a majority of independent directors “in the interest of good corporate governance”.
• 18th March 2008 - Downgrade of Allco REIT’s corporate family credit rating by Moody from Ba1 to Ba2. This followed a previous downgrade on 31st Jan 2008.
• An attempt made last week by Allco to prevent or delay the Moody downgrade via a court injunction. A downgrade could hurt a $620 million financing deal sought by the company which is needed to repay some short term debts.
• 9th March 2008 - Announcement of strategic portfolio focus. According to the manager, Allco REIT is trading at a sustantial discount to its net asset value and the manager is evaluating ways to close this gap. This includes the possibility of divesting their Australian assets.

The trading of the shares is currently suspended pending a further announcement from Allco.

The timing of the resignation of the executive directors could mean that there will be sort of restructuring happening.

The parent company of Allco REIT, Allco Finance Group is not in very good financial shape. Since this news one month ago, their share price has dropped further by 90%. Allco Finance owns Rubicon Holdings, the manager of Rubicon Japan Trust. The trust said on Tuesday it would not be able to meet an expected A$30 million ($28 million) margin call due on Wednesday.

Allco Finance had also announced in late February that it will be disposing of non-core assets to raise funds. A divestment of Allco REIT might be one of those.