On 1 February 2023, Frasers Logistics & Commercial Trust (“FLCT”) have announced their first quarter business update for FY2023. In general the results implied a strong and stable portfolio of property assets, as there are no significant change in their metrics from the last quarter and are in favorable territory.
The fixed deposits of banks have already started to decrease in 2023. This could well be the good reason for FLCT to see their share price increase over the last few weeks, as their dividend yield and portfolio of assets are seen to be attractive to be held for the long term.
Website: General Announcement::Business Updates For The First Quarter Ended 31 December 2022
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 31 December 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”)
| Metrics | Current | Previous |
|---|---|---|
| Distribution Per Unit | No Info | -0.8% |
Based on the announcement on 1 February 2023, DPU was not included in the business update for the first quarter of 2023.
As at 30 September 2022, the metric was Neutral as there was a slight decrease in DPU.
Occupancy
| Metrics | Current | Previous |
|---|---|---|
| Occupancy | 95.9% | 96.4% |
Occupancy rate as at 31 December 2022 stands at a total of 95.9%. This is contributed by 100% for the logistics and industrial assets and 89.8% for their commercial assets as at 31 December 2022.
The commercial property arm is worth a second look, as the occupancy rate was at 91.2% as at 30 September 2022 and have decreased this quarter. 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 the overall is above my expected healthy occupancy rate of 95%.
Gearing ratio
| Metrics | Current | Previous |
|---|---|---|
| Gearing Ratio | 27.9% | 27.4% |
Gearing ratio stands at 27.9% as at 31 December 2022. 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
| Metrics | Current | Previous |
|---|---|---|
| Interest Coverage | 13.6x | 13.0x |
The interest coverage stands at 13.6 times at 31 December 2022 respectively. This is Favorable in my opinion. The high interest coverage is attributable to their low cost of borrowings of 1.7% and low gearing ratio. However interest rates may continue to rise as the world looks to tackle inflation. On 1 February 2023, the Federal Reserve has hiked interest rates to a range between 4.5% and 4.75%, and gave little indication it is nearing the end of this hiking cycle.
Website: Fed raises rates a quarter point, expects ‘ongoing’ increases
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 78.7% of their interest rate have been hedged. Furthermore a portion of their debt is also on fixed rates.
The sensitivity analysis using the information as at 31 December 2022:
| Description | Amount (SGD’000) |
|---|---|
| Total Debt | $1,994,000 |
| Debt Not Hedged (%) | 22.3% |
| Debt at Floating Rate Exposed | $444,662 |
| Distributable Income FY2022 | $281,753 |
Interest rate sensitivity analysis as below:
| Change in Interest Rates | Decrease in Distributable Income (SGD’000) | Change as % of FY2022 Distribution |
|---|---|---|
| + 50 bps | -$2,223 | -0.8% |
| + 100 bps | -$4,447 | -1.6% |
| + 150 bps | -$6,670 | -2.4% |
| + 200 bps | -$8,893 | -3.2% |
| + 250 bps | -$11,117 | -3.9% |
| + 300 bps | -$13,340 | -4.7% |
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
| Metrics | Current | Previous |
|---|---|---|
| Debt Maturity Profile | 2.7 years | 2.7 years |
Weighted average term to maturity of their debt stands unchanged at 2.7 years as at 31 December 2022. This is Favorable and it allows them sufficient time to refinance their debts as they fall due.
It is worth noting however that a significant portion of their debt is due for refinancing over the next few years. FLCT may have to renew their borrowings at higher rates which may result in a fall in interest coverage as the average cost of borrowings increase.
Price to Book Ratio
| Metrics | Current | Previous |
|---|---|---|
| Price to Book Ratio | 1.05 | 0.91 |
Based on the announcement on 1 February 2023, net asset value was not included in the business update for the first quarter of 2023.
The Price to Book (“P/B”) ratio currently stands at 1.05. This is computed using the closing share price of SGD1.36 on 3 February 2023 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
| Year | Yield | Total |
|---|---|---|
| 2022 | 5.60% | SGD 0.076 |
| 2021 | 5.65% | SGD 0.077 |
| 2020 | 5.24% | SGD 0.071 |
| 2019 | 5.15% | SGD 0.070 |
| 2018 | 5.29% | SGD 0.072 |
No dividend was declared for 2023Q1. With a closing share price of SGD1.36 as at 3 February 2023 and dividend payout of SGD0.076 for the full calendar year 2022, this translates to a dividend yield of 5.60%. For my benchmark, a general reasonable range would be around an average of 5.5% to 6.5% in the current environment, and FLCT have been fairly consistent throughout the years.
Website: Reasonable Dividend Yield 2023Q1
If using dividend yield of 6.5% as a benchmark, based on the dividend of SGD0.076 there is potential for FLCT to see its share price drop by another 14.0% to SGD1.17. Investors will thus need to be mentally prepared that the share price might further fall.
| Yield | Share Price | Downside |
|---|---|---|
| Current (5.60%) | 1.36 | – |
| 6.50% | 1.17 | -14.0% |
| 7.50% | 1.01 | -25.5% |
| 8.50% | 0.89 | -34.3% |
Nonetheless, it is worth noting that interest for long-term safe assets are on a downtrend. The February 2023 Singapore Savings Bond being issued with a 10-year average interest rate of 2.97%, which is lower than the previous few months. There is a chance with the continued decrease interest rates, the required dividend yield of investor required may not be as high as before.
Website: SBFEB23 GX23020X Bond Details
Furthermore noted by the Beansprout community, banks in Singapore have started to lower their interest rates on fixed deposit accounts in February 2023, following the fall in yields in recent T-bill auctions. This means that the overall expectation of fixed deposits is a downtrend. The expected returns of safe assets is thus lower than the last few months.
Website: Guide to best fixed deposit rate in Singapore [February 2023]
The dividend yield of 5.60% is 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 31 December 2022.
The high quality and diverse tenant base provides resilience to the FLCT portfolio across challenging events. The top-10 tenants accounted for only 25.4% of GRI contribution 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 have continued to increase interest rate rises, which is a key factor underpinning the property market downturn.
With 50.9% 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: Property prices sink ‘quite rapidly’ as market awaits interest rates peak
Summary
| Metrics | Financials | Rating |
|---|---|---|
| Distribution Per Unit | No Info | Neutral |
| Occupancy | 95.9% | Favorable |
| Gearing Ratio | 27.9% | Favorable |
| Interest Coverage | 13.6x | Favorable |
| Debt Maturity Profile | 2.7 years | Favorable |
| Price to Book Ratio | 1.05 | Favorable |
| Overall | | Favorable |
Overall, the metrics indicate that it is favorable to invest in FLCT. 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 severely affected in the short term.
With the interest rates of safe assets continue to decrease, FLCT may see further capital gains as their 5.60% dividend for a stable REIT may be considered attractive for the longer term.
Disclaimer: Not financial advice. All data and information provided on this site is for informational purposes only.
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Website: Frasers Logistics and Commercial Trust (SGX: BUOU): 2022 Full Year Result
Dear Vires
Thanks for your excellent write up
Agree with your thoughts. I added to my holdings late 2022 at below book and intend to monitor this. Australia is its strength as well as weakness. I am a bit anxious about the low gearing, although it is rare nowadays to see anything under 30%!
This is because they have indicated an intention to acquire assets. This might be difficult in the current climate as interest rates are high
There is a possibility of a rights issue as well
Overall, in the context of falling SSB and SGS yields, adding at circa BV and ideally below is my plan
Regards
Garudadri
Dear Garudadri,
Thank you for sharing. It is good if they want to acquire assets during this period as high interest rates will also mean valuations are lowered due to discounting. When the interest rates drop we may see more capital appreciation.
Best Regards,
Vires
You helped me a lot by posting this article and I love what I’m learning.
I really appreciate your help
Thank you for reading my blog. Glad you enjoyed it.
Best Regards,
Vires
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Thank you for reading and your kind interest in my blog. I have enabled the subscribe option at the side bar. Do let me know if you are able to find it.
Best Regards,
Vires