On 4 May 2023, Frasers Logistics & Commercial Trust (“FLCT”) have announced their half year result for FY2023. DPU have decreased significantly during this period, which is something investors should take note of and be concerned if it is a continued downtrend. Considering that there may be further hike rates for the rest of 2023, we may see share price continue to decrease to compensate for the risks.
The other financial position results however still 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.
Website: Financial Statements And Related Announcement::Half Yearly Results
Background
FLCT is a real estate investment trust (“REIT”) with a portfolio comprising logistic, industrial and commercial properties diversified across five developed countries – Australia, Germany, Singapore, the United Kingdom (“UK”) and the Netherlands.
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 | -8.6% | No Info |
It was noted for the first half of FY2023, DPU have decreased by 8.6% to SGD0.0352 per share as compared to SGD0.0385 per share for the first half of FY2022.
This mainly arose from lower revenue and adjusted net property income due to the divestment of Cross Street Exchange, Singapore on 31 March 2022, effects of lower average exchange rates (of AUD, EUR and GBP against the SGD) in the first half of FY2023 relative to the first half of FY2022, and absence of early surrender fee from Farnborough Business Park.
The metric was Unfavorable as the DPU have decreased due to organic reasons and likely to continue for the next few quarters.
Occupancy
| Metrics | Current | Previous |
|---|---|---|
| Occupancy | 95.9% | 95.9% |
Occupancy rate as at 31 March 2023 stands at a total of 95.9%, unchanged from the end of the previous quarter. This is contributed by 100% for the logistics and industrial assets and 89.8% for their commercial assets as at 31 March 2023.
This metric is Favorable as the overall is above my expected healthy occupancy rate of 95%. Investors should continue to monitor for the commercial assets.
Gearing ratio
| Metrics | Current | Previous |
|---|---|---|
| Gearing Ratio | 27.8% | 27.9% |
Gearing ratio stands at 27.8% as at 31 March 2023. 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 | 8.4x | 13.6x |
The interest coverage stands at 8.4 times at 31 March 2023. There has been significant decrease this quarter, due to the exclusion of the Cross Street exchange divestment gain. Given that the gain was recorded on 31 March 2022, the ICT for 31 December 2022 would have been 8.9 times if this gain was excluded from the computation and is relatively comparable.
This metric is still Favorable in my opinion. The high interest coverage is attributable to their low cost of borrowings of 1.8% and low gearing ratio. However interest rates may continue to rise as the world looks to tackle inflation. The Federal Reserve on 22 June 2023 have hinted to continue hiking interest rates, after their last rate hike in 3 May 2023 have brough the interest rates to a range between 5.00% and 5.25%.
Website: US Fed official says more rate hikes necessary
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 76.2% 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 March 2023:
| Description | Amount (SGD’000) |
|---|---|
| Total Debt | $1,980,000 |
| Debt Not Hedged (%) | 23.8% |
| Debt at Floating Rate Exposed | $471,240 |
| 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 | -$2,356 | -0.8% |
| + 100 bps | -$4,712 | -1.7% |
| + 150 bps | -$7,069 | -2.5% |
| + 200 bps | -$9,425 | -3.3% |
| + 250 bps | -$11,781 | -4.2% |
| + 300 bps | -$14,137 | -5.0% |
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 | 2.4 years | 2.7 years |
Weighted average term to maturity of their debt stands unchanged at 2.4 years as at 31 March 2023. 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 | 0.98 | 1.05 |
The Price to Book (“P/B”) ratio currently stands at 0.98. This is computed using the closing share price of SGD1.25 on 28 June 2023 and the net asset value per share of SGD1.27 as at 31 March 2023.
The P/B ratio is Favorable for a well managed asset.
Dividend yield
| Year | Yield | Total |
|---|---|---|
| 2023 | 2.82% | SGD 0.035 |
| 2022 | 6.10% | SGD 0.076 |
| 2021 | 6.14% | SGD 0.077 |
| 2020 | 5.70% | SGD 0.071 |
| 2019 | 5.60% | SGD 0.070 |
| 2018 | 5.75% | SGD 0.072 |
With DPU on a downtrend for 2023, it is likely that the expected dividend yield for the calendar year 2023 will be lower than 2022. My expected dividend payout for calendar year will therefore be based on an extrapolated of the current 2023 dividend instead of the 2022 dividend amount. With a dividend payout for SGD0.035 per share for the first half of 2023, the expected total dividend for 2023 will be SGD0.070 per share.
With a closing share price of SGD1.25 as at 28 June 2023 and expected dividend payout of SGD0.070 for the full calendar year 2023, 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 2023Q2
If using dividend yield of 6.5% as a benchmark, based on the dividend of SGD0.070 there is potential for FLCT to see its share price drop by another 13.8% to SGD1.08. Investors will thus need to be mentally prepared that the share price might further fall.
| Yield | Share Price | Downside |
|---|---|---|
| Current (5.60%) | 1.25 | – |
| 6.50% | 1.08 | -13.8% |
| 7.50% | 0.93 | -25.3% |
| 8.50% | 0.82 | -34.1% |
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.
The high quality and diverse tenant base provides resilience to the FLCT portfolio across challenging events. The top-10 tenants accounted for only 17.3% and 17.6% of GRI contribution for the logistics & industrial tenants and commercial tenants respectively with no single tenant accounting for more than 4.9% 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 a significant portion 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: One in 10 Sydney and Melbourne property sellers cop losses as rate hikes bite
Summary
| Metrics | Financials | Rating |
|---|---|---|
| Distribution Per Unit | -8.6% | Unfavorable |
| Occupancy | 95.9% | Favorable |
| Gearing Ratio | 27.8% | Favorable |
| Interest Coverage | 8.4x | Favorable |
| Debt Maturity Profile | 2.4 years | Favorable |
| Price to Book Ratio | 0.98 | 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.
Nonetheless, with DPU continued to be on a downtrend, there may be share price depreciation to obtain a favorable dividend yield. Coupled with the expected rising interest rates for the rest of 2023, we may see safe haven assets continue to increase their yield, which may cause FLCT to experience a further share price depreciation to compensate for the risk. Investors should therefore take note and assess their risk profile.
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): 2023 First Quarter Business Update
