It has been awhile since Frasers Logistics & Commercial Trust (“FLCT”) merged and formed a combined trust for Fraser’s logistic and commercial arm. Recently they have announced their results for the full financial year ending 30 September 2021 and would be worth having a look to see how they are doing.
Background
Frasers Logistics & Commercial Trust (“FLCT”) is a real estate investment trust (“REIT”) with a portfolio comprising 103 industrial and commercial properties, worth approximately $7.3 billion, diversified across five developed countries – Australia, Germany, Singapore, the United Kingdom (“UK”) and the Netherlands as at 30 September 2021.
FLCT was listed on the Mainboard of Singapore Exchange Securities Trading Limited (“SGX-ST”) on 20 June 2016 as Frasers Logistics & Industrial Trust (“FLT”) and was subsequently renamed FLCT on 29 April 2020 following the completion of a merger with Frasers Commercial Trust (“FCOT”).
FLCT’s investment strategy is to invest globally in a diversified portfolio of income-producing properties used predominantly for logistics or industrial purposes located globally, or commercial purposes (comprising primarily central business district (“CBD”) office space) or business park purposes (comprising primarily non-CBD office space and/or research and development space) located in the Asia-Pacific region or in Europe (including the UK).
Key Metrics
Distribution Per Unit (“DPU”)
Based on the announcement on 11 November 2021, DPU grew by 7.9% to SGD 0.0768 per share (FY2020: SGD 0.0712 per share) for the full financial year ending 30 September 2021. This metric is Favorable as FLCT has been able to grow their DPU via accretive acquisitions, with their revenue having increases by 41.4% to SGD 469 million (FY2020: SGD 332 million).
It is worth noting that FLCT is operating in an industrial and commercial industry, and these assets tend to be more resilient to the direct impact of Covid-19 relative to the retail industry. Thus being able to improve their DPU is something that did not come as a surprise. It adds resilience to an investor’s portfolio.
Occupancy
Occupancy rate as at 30 September 2021 stands at a total of 96.2%, 100% for the logistics and industrial assets and 91.5% for their commercial assets.
While the overall occupancy rate is decent, the fall in occupancy for commercial properties, is a bit concerning, as it was at 94.3% in the prior year as at 30 September 2020. The commercial properties generates SGD 203 million revenue for FY2021, which is 43% of their total revenue. Investors should take note in the near future should occupancy for commercial properties continue to decrease.
This warrants an overall rating of Neutral as while it is above my expected healthy occupancy rate of 95%, the commercial property arm is worth a second look.
Gearing ratio
Gearing ratio stands at 33.7% as at 30 September 2021. This to me is Favorable, as it is still a distance away from the MAS raised limit of 50% and also provides adequate headroom for FLCT to leverage on debt should there be an accretive acquisition in the short term.
Interest coverage
The interest coverage stands at 7.3 times (FY2020 : 6.4 times). There is a drop in financing costs and this is Favorable in my opinion. However, recent fears of inflation resulted in the United States (“US”) playing with the idea of increasing interest rates to combat inflation. While FLCT have no properties in the US, other countries may follow the US if they should increase rates. Something that investors should take note of.
Debt maturity profile
Weighted average term to maturity of their debt stands at 3.4 years as at 30 September 2021. This is Favorable and it allows them sufficient time to refinance their debts as they fall due.
Price to Book Ratio
The Price to Book (“P/B”) ratio currently stands at 1.21. This is computed using the closing share price of SGD1.51 on 12 November 2021 and the net asset value per share of SGD1.24 as at 30 September 2021. The P/B ratio is Favorable for a well managed asset.
Dividend yield
At 12 November 2021, with a closing share price of SGD1.51 and dividend payout of SGD0.077 for the full calendar year 2021, this translates to a dividend yield of 5.09%, an increase from the previous calendar year.
The dividend yield is Favorable. For my REIT’s benchmark, a general reasonable range would be around an average of 4.5%, and FLCT have been fairly consistent throughout the years.
Other metrics
Tenant profile
FLCT has an enlarged portfolio covering logistics and industrial properties, CBD commercial assets and office and business parks, FLCT has government related entities, well-established multinationals, conglomerates and publicly listed companies among its tenants as at 30 September 2021.
The high quality and diverse tenant base provides resilience to the FLCT portfolio across challenging events, as evidenced during the ongoing COVID-19 pandemic. The top-10 tenants accounted for only 23.5% of FLCT’s portfolio with no single tenant accounting for more than 4.7% during the period, providing income diversity to the portfolio.
Key Things to Note
Commercial Properties
Since before merger in 2020, the commercial properties of FCOT have been thought to be of lower grade within the commercial industry as compared to their logistics arm. This has been further exacerbated by Covid-19, where there are visible shifts towards work-from-home and scaling back on office rentals. The fall in occupancy rate of the commercial segment is also a good indicator of what may come.
Summary
Overall, the metrics indicate that it is favorable to invest in FLCT. Thus, I believe that the current share price of SGD1.51 is Under Valued. This is a good stock that is poised for growth, and is currently one of the cheapest large cap logistic REITs in SGX. With the continued rise of e-commerce, there is an increasing need for logistic properties which is Covid-19 proof. Furthermore, while commercial properties are expected to face lowered demand with work-from-home schemes, the commercial properties are unlikely to be affected in the short term.
Its peers, such as Mapletree Logistic Trust and ARA LOGOS Logistics Trust, are trading at a P/B ratio of approximately 1.5 times. Granted however, their discount compared to their peers is due to FLCT having a mix of logistic and commercial properties. Thus I would lower the expected minimum share price support to be at a P/B ratio of 1.3 times. Given the net book value per share of SGD1.24, translates to an reasonable target price of SGD1.61 per share, an upside from the current share price.
