Tailwinds for inorganic growth
? Frasers Logistics & Commercial Trust’s (FLCT’s) portfolio occupancy improved in 1QFY9/22, moderated by negative reversions.
? Financial metrics improved post asset divestments.
? We reiterate our Add rating with a lower DDM-based TP of S$1.56.
1QFY9/22 business update highlights
In its 1QFY9/22 update, FLCT indicated that its overall portfolio occupancy was 96.9% at end-1QFY22, with the logistics/industrial (L&I) portfolio remaining fully occupied. The take-up rate for the commercial segment dipped slightly to 91%, due to lower occupancy at Alexandra Technopark and Cross Street Exchange (CSE). In 1QFY9/22, FLCT renewed 69,274 sq m of leases at a negative rental reversion of 1.6%, dragged by expiry of long leases at higher rents in Australia that are now re-contracted at lower market
levels. It granted S$0.2m in Covid-19-related rental rebates/waivers for 1QFY22. FLCT has another 4.8% of gross rental income expiring for the rest of FY9/22F and another 16.5% in FY23F. Management remains upbeat about leasing prospects as market rents in Australia and Europe are trending upwards.
Negative rental reversion in L&I segment
1Q rental reversions in the L&I portfolio averaged -10.2%, due to negative reversions in Australia and Germany (-1.2%). Management guided that as the remaining leases at higher rents in its Australia portfolio roll off, the impact on negative reversions should also moderate. Meanwhile, within the commercial segment, the UK and Singapore enjoyed positive reversions of 21.7%/4.3% in 1Q. Take-up rate at the Farnborough Business Park (FBP) also improved to 87.2%. FLCT has commenced the development of Connexion II at Blythe Valley Park in the UK and is also undertaking asset enhancements at 357 Collins St and Central Park in Australia. We believe that these activities should be earnings and value-accretive when completed from end-FY22F onwards.
Lower gearing post divestment provides headroom for acquisitions
FLCT recently announced the sale of 2-24 Douglas Street, Port Melbourne for A$42.5m and divestment of Cross Street Exchange for S$810.8m or at a sub-2.5% exit yield. Gearing stood at a healthy 34.3% at end-1Q and management expects this ratio to trend down to 29.8%, post the divestment of CSE. This puts FLCT in a strong position to tap inorganic growth including new acquisitions, particularly logistics/industrial assets in Germany and Australia. As the trust continues to evaluate new opportunities,
management indicated it could provide some top-up from divestment gains during the income vacuum period. In terms of impact from rising interest rates, with 71.6% of its debt in fixed rates, management indicated that for every 1% pt rise in average funding cost (1.6% at end-1Q), DPU could be affected by 2.4%.
Reiterate Add rating
We cut our FY22-24F DPU estimates by 1.7-5.2% to bake in income vacuum from the two asset divestments, to be completed by 1H22F, partly offset by interest cost savings from utilising divestment proceeds to pare down debt in the near term. We have not assumed recycling of divestment proceeds into new acquisitions. Accordingly, our DDMbased TP is lowered to S$1.56. We like FLCT’s visible inorganic growth potential and income resilience. Potential re-rating catalyst: accretive new acquisitions. Downside risks: inability to make accretive purchases and slow global macro outlook.