On 10 November 2022, Frasers Logistics & Commercial Trust (“FLCT”) have announced their full year result. In general nothing seem to have changed significantly, although DPU have dropped by a bit. Not unexpected given how SGD have continued to appreciate against other currencies. It is up to the managers to see how they want to hedge it.
Website: REPL::Financial Statements and Related Announcement::Full Year Results
Background
FLCT is a real estate investment trust (“REIT”) with a portfolio comprising 105 logistic, industrial and commercial properties, worth approximately SGD6.7 billion, diversified across five developed countries – Australia, Germany, Singapore, the United Kingdom (“UK”) and the Netherlands as at 30 September 2022.
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 10 November 2022, DPU for the full financial year dropped by 0.8% to SGD0.0762 per share from SGD0.0768 per share in 2021. The decrease was due to the Cross Street Exchange (“CSE”) divestment and the weaker exchange rates. This was partially offset by the full year effect of the 2021 acquisitions and the effect of the 2022 acquisitions.
The decrease in DPU was not significant and not unexpected given the strengthening of SGD against other currencies. Thus this metric is Neutral.
Occupancy
Occupancy rate as at 30 September 2022 stands at a total of 96.4%. This is contributed by 100% for the logistics and industrial assets and 91.2% for their commercial assets as at 30 September 2022.
The commercial property arm is worth a second look, as the as it was at 91.2% in the prior year as at 30 September 2021. The commercial properties makes up 31.7% of their total portfolio. Investors should take note in the near future should occupancy for commercial properties continue to decrease. However, as the commercial assets do not make up the significant portion of their assets, this metric is Favorable as it is above my expected healthy occupancy rate of 95%.
Gearing ratio
Gearing ratio stands at 27.4% as at 30 September 2022. The significant decrease in gearing was due to repayment of SGD505 million of borrowings using their net divestment of CSE. This to me is Favorable, as it is a distance away from the MAS 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 13.0 times at 30 September 2022 respectively. This is Favorable in my opinion. However interest rates may easily rise as the world looks to tackle inflation. The Federal Reserve has hiked interest rates to 4.0% recently and is looking to hike to 5.0% by end of 2022.
Website: Fed Seen Aggressively Hiking to 5%, Triggering Global Recession
As the interest rate may potentially increase further, FLCT may be subjected to significant change in their cost of debt in the near future. In their presentation they have mentioned that 81.7% of their interest rate have been hedged. Furthermore a portion of their debt is also on fixed rates.
I have thus performed a sensitivity analysis using the information as at 30 September 2022:
Interest rate sensitivity analysis as below:
Do note the above is my estimation which may be different from management’s estimation. Nonetheless, if the interest rates were to increase by the basis points above, FLCT may experience a fall in DPU accordingly.
Debt maturity profile
Weighted average term to maturity of their debt stands at 2.7 years as at 30 September 2022. 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 0.91. This is computed using the closing share price of SGD1.18 on 11 November 2022 and the net asset value per share of SGD1.30 as at 30 September 2022. The P/B ratio is Favorable for a well managed asset.
Dividend yield
At 11 November 2022, with a closing share price of SGD1.18 and dividend payout of SGD0.076 for the full calendar year 2022, this translates to a dividend yield of 6.46%. The dividend yield is Favorable. For my REIT’s benchmark, a general reasonable range would be around an average of 6.0% to 7.0% in the current environment, and FLCT have been fairly consistent throughout the years.
However, interest rates have been continuously increasing the last few months. This have prompted for multiple safer assets to increase their bond and interest rates to more than 3%, causing the previous yields of FLCT to become unfavorable. FLCT saw a decrease in their share price from SGD1.46 in my last article on 26 August 2022 to SGD1.18 on 11 November 2022 to provide higher dividend yields.
Website: Reasonable Dividend Yield Changes
If using dividend yield of 7% as a benchmark, based on the dividend of SGD0.076 there is potential for FLCT to see its share price drop by another 8.0% to SGD1.09. Given that FLCT usually trades at a higher yield, investors may require the dividend yield to be at 8.0% if interest rates for safe assets in Singapore approaches to cross 4%. Investors will thus need to be mentally prepared that the share price might further fall
The current dividend yield of 6.46% is thus Neutral.
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 2022.
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 16.6% and 18.3% of FLCT’s Logistic & Industrial and Commercial portfolio with no single tenant accounting for more than 5.0% during the period. This provides income diversity to the portfolio.
Key Things to Note
Australia Property Market
Similar to the rest of the world, Australia is also affected by inflation and interest rate rises, which is a key factor underpinning the property market downturn. The Reserve Bank of Australia has increased rates for seven consecutive months since May 2022, lifting the cash rate to 2.85%, its highest level in nine year s and is the most rapid increase in the cash rate that Australia has seen since the early 1990s.
This have led to this correction in property values so the key element that drove the property market upswing has essentially been reversed. With another 0.25% increase in interest rates likely to be announced in December and further rate rises to follow next year, property prices are set to continue to fall further.
With 51.3% of FLCT’s assets located in Australia, it may be possible to see significant downward adjustments to the valuation of FLCT’s Australia assets, which may in turn have an adverse effect on the financial position of the REIT.
Website: Is The Australian Property Market Going To Crash?
Summary
Overall, the metrics indicate that it is favorable to invest in FLCT. Despite the drop in share price over the last few months, the fundamentals of FLCT did not worsen significantly during this financial year. This suggests that the current share price is due to overall market sentiment, especially as safe assets have seen their yield rise considerably with rising interest rates.
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 reliance on e-commerce, there is still demand for logistic properties. 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.
Disclaimer: Not financial advice. All data and information provided on this site is for informational purposes only.
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