Significant debt headroom given healthy divestment premium
• Commercial portfolio occupancy declined to 91.0% but Logistics & Industrial assets remained 100% occupied
• Overall portfolio rental reversions of +4.3% (average to average)
• Proposed divestment of Cross Street Exchange at healthy premium of 28.3% to book value
1QFY22 operational updates – Frasers Logistics & Commercial Trust (FLCT) provided an operational update for 1QFY22. Overall portfolio occupancy stood at 95.9%, a slight decline of 0.3 percentage points (ppt) QoQ. The drag came from its Commercial portfolio, which registered a dip in occupancy from 91.8% (as at 30 Sep 2021) to 91.0%, and this was in turn driven by Cross Street Exchange (CSE) (-1.0 ppt to 83.6%) and Alexandra Technopark (-1.7 ppt to 94.8%) in Singapore, as well as Blythe Valley Park (-2.7 ppt to 87.8%) in the UK, but partially offset by Farnborough Business Park (+2.0 ppt to 87.2%), Central Park (+0.3 ppt to 84.7%) and 357 Collins Street (+0.1 ppt to 95.8%). On the other hand, FLCT’s Logistics & Industrial portfolio maintained its 100% occupancy.
Overall positive rental reversions of 4.3% – Based on average gross rental of new/renewed leases to average gross rental of expiring leases, FLCT’s overall portfolio rental reversions came in at +4.3% in 1QFY22. This was underpinned by its Commercial portfolio (+8.1%) but partially offset by its Logistics & Industrial portfolio (-1.5%). Weakness in rental reversions was due to Western Australia for both its Commercial and Logistics & Industrial portfolios, as the leases were signed back in 2012 when the market was still strong. Excluding Western Australia leases, FLCT’s Logistics & Industrial assets clocked in positive rental reversions of 4.6% (average to average). Overall industrial market rental growth remained positive in Australia, with prime grade net face rents increasing 2.7%, 1.0% and 0.8% QoQ in Sydney, Melbourne and Brisbane, respectively, in 4QCY21. FLCT only has 4.8% of its leases expiring for the remaining three quarters of FY22 (based on gross rental income).
Capital recycling in motion – FLCT announced on 22 Jan 2022 its proposed divestment of CSE for SGD810.8m, representing a healthy premium of 28.3% to the property’s book value of SGD632.0m and an attractive exit yield of 2.5%. FLCT expects to record a net divestment gain of SGD170.7m after the completion of this sale, which is estimated to take place on 31 Mar 2022. Besides the healthy divestment premium, we note that CSE had been struggling with its occupancy rate (-1.0 ppt to 83.6% as at 31 Dec 2021). Following this divestment, and assuming 49% of the divestment proceeds are used to repay its debt, FLCT’s aggregate leverage would decline from 34.3% (as at 31 Dec 2021) to ~29.8%. Currently 71.6% of its debt is on fixed rates, and this is likely to increase as a portion of the divestment proceeds would be used to repay its floating debt. This also leaves FLCT with significant debt headroom to pursue acquisitions, which would likely be in the logistics and business park subsectors, in our view. After factoring in recently announced acquisitions and divestments, we lower our FY22F and FY23F DPU forecasts by 2.0% and 3.0%, respectively. Consequently, our fair value estimate declines from SGD1.71 to SGD1.66.
ESG Updates
FLCT’s ESG rating was double upgraded on 17 Sep 2021. FLCT has made improvements in its governance practices relative to peers, and its framework is well-aligned with sustainable shareholder interests. This has helped to drive the rating upgrade. Furthermore, FLCT’s green investment focus has led to a bigger proportion of its portfolio being certified to green building standards relative to its peers set. FLCT also
continued to retain the highest 5 Star rating under the Global Real Estate Sustainability Benchmark (GRESB) 2021 assessment, and came in second amongst all participants in the Asia-Pacific region
In Australia, FLCT has obtained the highest Green Star performance-rated industrial portfolio. BUY. (Research Team)