Results First Take: 1Q22 – Value creation on all fronts
- Commencement of development at Blythe Valley Park to drive value creation; generating an additional NLA of 10,800 sqm
- Key positives: i) commenced development at Blythe Valley Park, ii) unlocking value through the 2 recently announced divestments that will generate total divestment gains of c.S$200m, iii) ample debt headroom to embark on more accretive acquisitions and fund development projects
- Key negatives: i) slight dip in overall portfolio occupancy rates caused by commercial portfolio, ii) negative rental reversions due to weakness in the Western Australian market
- Maintain BUY with a TP of S$1.85
| Key operational data (S$’m) | 1Q2022 | 4Q2021 | %q-o-q | 1Q2021 | % y-o-y |
| Portfolio occupancies | 95.9% | 96.2% | -0.3% | 97.2% | -1.3% |
| WALE (years) | 4.7 | 4.8 | -0.1 | 4.8 | -0.1 |
| Rental reversion | -1.6% | -2.3% | 0.7% | -6.9% | 5.3% |
| Aggregate leverage | 34.4% | 33.7% | 0.7% | 36.2% | -1.8% |
| Interest Coverage Ratio | 8.4x | 7.3x | +1.1x | 6.5x | +1.9x |
| All-in borrowing cost | 1.6% | 1.6% | 0.0% | 1.9% | -0.3% |
(+) Unlocking value by selective divestments of c.S$852.5m
- Announced divestment of leasehold property in Port Melbourne for A$42.5m on 2 Dec 2021
- A$21.5m premium to book value
- Announced divestment of Cross Street Exchange in Singapore for S$810.0m on 25 Jan 2022
- S$178.8m premium to book value
- Exit yield of only c.2.5%
- Total capital gains of cS$199.9m from both divestments
(+) Value creation through forward funding acquisition and development project
- Announced the forward funding acquisition in the UK for a total of GBP28.3m
- Estimated NPI yield of 3.85%
- Long term cash flow from pre-committed 15 year lease; rent reviews every 5 years
- Expected completion in 1Q23
- Announced the commencement of development at Blyth Valley Park in the UK (Connexion II)
- Estimated value of GBP23.3m; 10,800sqm of logistics and industrial space across 3 buildings
- Expected completion in 4Q22
(-) Commercial portfolio continue to cause a slight drag on portfolio performance
- L&I portfolio continue to maintain its 100% occupancy with c.62,700 sqm of leasing done in 1Q22
- Negative rental reversion of -10.2% for L&I portfolio mainly due to renewal of leases in Australia
- Rental rates in Western Australia continue to face pressure and 1 leases was renewed at a -30.5% rental reversion
- Commercial portfolio reported a positive 4.0% rental reversion
- Positive rental reversion for the commercial portfolio has been partially offset by the -37.2% rent reversion in Central Park, Perth
- Although leasing activity in Perth has picked up, rental rates continue to face pressure
- Farnborough Business Park reported a strong positive rental reversion of 21.7%
(+) Minimal lease expiry of 4.8% remains for FY22
- Only 4.8% of leases will be due to expire in the 3 remaining quarters in FY22
- 2.6% from Commercial portfolio and 2.2% from L&I portfolio
- Slight dip in commercial portfolio occupancy rate of 0.8% q-o-q
- Commercial portfolio occupancy rate of 91.0% in 1Q22
- Mainly due to a 1.0% and 1.7% dip in occupancy at Cross Street Exchange and Alexandra Technopark respectively
- Farnborough Business Park, Central Park, and 357 Collins Street reported an uptick in occupancy rates
- Commercial portfolio occupancy rate of 91.0% in 1Q22
(+) Very healthy capital management metrics
- Low aggregate leverage of 34.3% in 1Q22 that will be mor than sufficient to fund development projects and acquisitions
- Will further improve once the 2 divestments are completed
- Debt headroom of more than S$2.3bn
- Cost of borrowings maintained at a low of 1.6%
- Only S$269m of loans due in FY22; refinancing discussions have commenced
Our thoughts
Despite the slight dip in portfolio occupancies and negative rental reversions, we believe that FLCT’s portfolio metrics will improve once the divestment of Cross Street Exchange is completed. With an occupancy of only 83.6% at Cross Street Exchange, FLCT overall portfolio occupancy will improve by c.1.0% once the leasehold property is divested. In addition, the divestment at a 28.3% premium to book value will also improve FLCT’s aggregate leverage to c.29.8%, providing it with ample headroom to fund ongoing developments and further acquisitions.
In Australia, the Western Australian market continue to create a slight drag on FLCT’s L&I and Commercia portfolios. However, the increase in leasing momentum in Perth has enabled FLCT to report a 0.3% improvement in occupancy rate at Central Park. Farnborough Business Park which has been reporting declining occupancy rates over the past few quarters has buked the trend in 1Q22, reporting a 1.0% increase in occupancies and a very strong positive rental reversion of +21.7%.
FLCT has also just announced the commencement of the development at the vacant plot at Blythe Valley Park. The GBP23.3m project will create an additional 10,800 sqm of L&I space which we believe will generate healthy demand and complement the existing precinct once completed in 4Q22.
We continue to remain positive on FLCT as it continues creating value through the repositioning of its portfolio and look forward to the completion of the 2 ongoing development projects that will drive further growth to earnings. We will be maintaining our BUY recommendation with a TP of S$1.85.