SGReit goes shopping for Isetan's share of Wisma Atria

Singapore

YTL's Starhill Global Reit (SGReit) is done window-shopping: The manager of the Singapore-listed Reit has made a direct overture to acquire Isetan Singapore's share of Wisma Atria, a prime leasehold property smack in the heart of Orchard Road, says a source.

The Business Times understands that SGReit's manager, part of the YTL Group controlled by Malaysian tycoon Francis Yeoh, issued a letter of intent (LOI) to Isetan more than a month ago to open talks on acquiring the Japanese firm's share in the shopping mall.

As it stands, SGReit owns about 74 per cent of the Wisma Atria property's total share value of strata lots, with the remaining owned by Isetan Singapore, which is also listed on the Singapore Exchange.

It is also believed that, to close is grip on the property, YTL Starhill Global Reit Management has signalled that it is prepared to offer more than S$290.7 million - the fair value of Isetan's investment stake in Wisma Atria as at the end of 2018, as determined by an independent valuer.

S&P Global Ratings noted recently that the Reit is facing rental pressures amid gloomier economic conditions, particularly in relation to its key retail assets in Singapore's shopping belt.

SGReit's current 74 per cent stake in Wisma Atria's total share value of strata lots comprises 257 strata lots for retail and office use; this share was valued at S$978 million as at the end of June.

The Reit also counts Ngee Ann City among the assets in its portfolio of 10 assets valued at about S$3.1 billion as at mid-2019; its properties are also spread across Malaysia, China, Australia and Japan.

When contacted by BT, SGReit declined comment; queries put to Isetan also drew a blank.

The move by the Reit to close in on Isetan's stake can hardly be deemed a shocker. It has made no secret of its interest in Isetan's share; analysts note that the Reit manager's chief executive officer Ho Sing has been candid about the trust's interest in past briefings.

One analyst said: "I understand that the interest has been there for years, and they have been waiting for Isetan's response."

Another analyst said: "Mr Ho has always expressed SGReit's interest in Isetan's Wisma Atria space ... even before Isetan undertook its AEI (asset enhancement initiatives) several years ago."

But nothing had come of it thus far.

It is widely understood in the market that Isetan's parent company in Japan, Isetan Mitsukoshi, has been reluctant to part with the property, choosing instead to drag its feet - which has made it somewhat frustrating for SGReit, said observers.

Last year, Isetan hired Sandra Ng Hwee Choo as leasing and business development manager in a move that company watchers say marked a break from the tradition of delegating such tasks to its long-serving senior management.

Given Ms Ng's decade-long experience in leasing at property stalwarts HongkongLand Limited, City Development Limited and Far East Organization, observers say it signals Isetan's intent on improving its returns on the asset.

Isetan's 2018 annual report said as much; chairman Toshihiko Nakagome said that the company's investment property at Isetan Wisma Atria would remain a "strategic asset", and that the upcoming Orchard Station on the Thomson-East Coast MRT Line (to be completed in 2021) can be expected to bring in higher footfall.

Isetan's minority shareholders are putting pressure on the company to unlock the asset's value, chiefly because of its "sub-par" financial showing, and doubts over the retailer's move four years ago to end retail activities at Wisma Atria and convert the store into an investment property - this more so as Wisma Atria's fair value is far higher than Isetan's market capitalisation of S$197 million.

A group of long-time shareholders of Isetan, in an open letter to the company in April this year, wrote: "Since it is an investment property now, mainly used for rental income and with such a short lease left (42 years), is there a consideration by the management for a sale to YTL?

"Would that solve the issue of erosion of value over time ... and in turn, unlock value?"

It remains unclear whether SGReit's latest move to step up its courting of Isetan's share of Wisma Atria will open the door to talks on a potential sale, but the stock could be displaying hope that this may be the case.

On June 11, Isetan's stock jumped 4 per cent on an unusually high volume of trade, prompting a query from SGX RegCo.

Isetan responded then that it "constantly explores and reviews opportunities and strategic options regarding its assets".

On July 26, it hit a year's high of S$4.69, an advance of 4 per cent; on Monday, the counter once again drew great interest and shot up 30 Singapore cents or 6.7 per cent to a fresh year's high of S$4.78.

One observer said: "SGReit wants this asset bad. It has now made an actual advance."

The question is: Will the Japanese bite?