Frasers Logistics & Industrial Trust (FLT SP) - 1QFY17: Running A Tight Ship
- Results are in line with expectations. There was a negative reversion of 1.1% due to a drag from a single lease.
- Despite a well-spread out lease profile, management is nevertheless also pro-actively looking to forward renew leases expiring in FY19.
- FY17 DPU is fully hedged at near parity to the Singapore dollar, while management could start hedging FY18 DPU next quarter.
- Maintain BUY with an unchanged target price of S$1.11.
DPU of 1.74 S cents for the period exceeded FLT's expectations by 6.1%.
- Frasers Logistics & Industrial Trust’s (FLT) gross revenue and net property income for 1QFY17 came in 1.5% and 0.6% lower respectively than the company's forecast, due to later-than-expected acquisition of FLT’s Last Call option property (Martin Brower).
- Lower interest costs and tax expenses led to both distributable income and DPU (in S cents) exceeding FLT's forecasts by 5.1% and 6.1% respectively.
- Results in line with our expectations, with DPU of 1.74 A cents for the period making up 26.6% of our DPU estimate. As this was hedged at S$1/A$1, DPU for the period stood at 1.74 S cents.
Pro-active management of well-spread out expiry profile.
- Dec 17 expiring leases are meagre at 0.5% of overall gross rental income (GRI) with pro-active forward renewals reducing Dec 18 expiring leases to 3.5% by overall GRI (8.3% last quarter).
- Marginally negative rental reversions in 1QFY17 (-1.1%) was mainly dragged down by a single lease (-12% reversion), While management has previously conceded that passing rents from these leases are slightly above market spot rents, they have also highlighted defensive measures like asset enhancements to boost overall rents and accepting shorter-term leases (around 1 year) to mitigate rental pressure.
FY17 distributable income hedged to mitigate forex risk.
- The remainder of FY17 DPU was likely hedged at rates near parity to the SGD, as the agreement was entered into around the IPO period (average exchange rate of S$1.005/A$). Management was keen to avoid downside risk from currency fluctuations, particularly during the Brexit referendum. FY18 income could be hedged next quarter (6-month rolling basis).
ROFR asset pipeline.
- This quarter saw an additional five sponsor assets, valuated at around A$130m, added into the existing ROFR pipeline of nine assets. These 14 assets could potentially increase overall asset value by about A$300m if collectively injected.
- While FLT’s debt headroom stands at an estimated A$310m (assuming 40% gearing limit), management has not ruled out the likelihood equity fund raising in future acquisitions.
- In the Sydney market, rental incentives generally range 12-15%. The Brisbane market has seen rental incentives of 8-15% for new leases, while incentives in the Melbourne market range 20-25%. In Australia, lease incentives also come in the form of fit-out allowances (especially for new leases), besides the typical rent-free periods.
Geographical diversification unlikely in the short run.
- Management continued to emphasise its current focus on the Australian market, pointing to the healthy pipeline of acquisition opportunities within the country. In the longer term, potential areas of expansion into Thailand and Malaysia have not been ruled out.
- Maintain BUY and target price of S$1.11, based on DDM (required rate of return: 7.1%, terminal growth: 1.9%).
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- Depreciating S$ against the A$.
- Inorganic growth from yield-accretive acquisitions fuelled by healthy debt headroom (A$310m assuming a comfortable gearing level of 40%).