Results First Take: 3Q22 – Organic growth from positive rental reversions and CPI-link escalations
- Strong positive rental reversions of 9.9% across the board
- Leases in Europe that are CPI-linked are expected to benefit from strong rent reviews
- Close to S$300m of proceeds from the CSE divestment has been redeployed; low gearing to allow for more accretive acquisitions
- Maintain Buy with TP of S$1.75
(+) Higher portfolio occupancy rate of 96.5%
- Portfolio occupancy improved by 0.4% q-o-q to 96.5%
- L&I portfolio remains 100% occupancy
- Commercial portfolio occupancy improved to 91.3%
- Higher occupancies at Alexandra Technopark and Farnborough Business Park
- c.173,000 sqm of leases renewed and signed in 3Q22, mainly for the L&I portfolio
- Only 0.9% of leases due for renewal in 4Q22
- All from the commercial portfolio (Australia and UK)
(+) Positive rental reversions of 9.9%
- Mainly coming from the L&I portfolio where the bulk of leases were signed in 3Q22
- L&I portfolio reported positive rental reversions of 10.1%
- Netherlands: +17.7%
- Australia: +6.1% to +7.2%
- Commercial portfolio reported positive rental reversion of 8.5%
- UK: +11.3%
- Singapore: +9.2%
- Australia: +5.5% to +9.2%
- Leases signed in Europe has annual CPI-linked escalations, while leases signed in Australia has annual escalations of 3.0%-4.0%
- Growth in spot rents for L&I portfolio in Australia has been exceptionally strong over the past quarter
- Sydney: +15.1%
- Melbourne: +3.8% to +9.6%
- Brisbane: +3.2% to +5.4%
- CPI-linked leases in Europe/UK are also benefiting from high inflation
- Although there are some lease with caps on rental increase, there are also some leases where a rent review has been triggered (rent reviews will be triggered if CPI exceeds 5% in a given year)
- CBA’s lease at 357 Collins Street (Melbourne) is set to expire in 6-months and we understand that renewal negotiations are progressing well
(+) Redeployed c.S$291m of capital following divestment of Cross Street Exchange
- CSE was divested for S$810.8m in March 2022
- Proceeds have mostly been utilised; repaid c.S$490m in borrowings and the rest used to fund recent acquisitions
- S$290.5m has since been redeployed into higher yielding assets
- S$188.8m of acquisitions in Australia, comprising of 1 suburban office and 3 L&I properties
- S$171.7m forward funding acquisition of a L&I property in UK
- Long WALES of up to 15 years with built-in rental escalations
(+) Healthy gearing of only 29.2%
- Very healthy gearing of only 29.2%
- Debt headroom of c.S$1.25bn before gearing goes up to 40%
- Low all-in financing cost of c.1.6%
- 80.6% of loans are hedged to fixed rates, ensuring stability in financing costs
- Expect all-in cost to gradually creep up but it will still but increase will not be significant
- Only S$10m of loans due to expire in 4Q22, and a further S$164m due in FY23
- Every 50bps increase in interest rates will have a less than 0.7% impact to DPU
(-) Weaker foreign currencies has some impact to earnings
- Weakening AUD, EUR, and GBP against SGD will have some impact to earnings
- FLCT continues to maintain their 6-month forward hedging of foreign income
- Weakening foreign currency impact to be partially mitigated by onshore borrowings interest repayment
Our thoughts
FLCT’s portfolio continues to perform well operationally with higher occupancy rates and positive rental reversions. With spot rents for L&I properties across Australia, Europe and UK continuing to increase strongly, we believe FLCT will continue to report healthy positive rental reversions. The strong growth in CPI in Europe also benefits FLCT as majority of its leases are CPI-linked. In addition, the strong CPI growth has also triggered the rent reviews for several leases that have built-in mechanisms that will allow FLCT to review their rents if CPI goes above 5% in any single year. Although cap rates in some markets have started to expand, FLCT believes that its portfolio valuations should remain relatively stable as the higher rental rates will help offset the cap rates expansion.
Looking ahead, we expect some negative impact from the weakening foreign currencies against the SGD. However, we believe that the impact will be partially mitigated as part of the income earned will be used to pay interest for onshore loans, and recent acquisitions will continue to drive earnings growth.
We will be maintain our BUY recommendation with a TP of S$1.75.