Frasers Logistics & Industrial Trust - CIMB Research 2017-05-08: 2QFY17 Steady Results, Acquisition Plans Still Vague But This Is What We Would Do

FRASERS LOGISTICS & IND TRUST BUOU.SI

Frasers Logistics & Industrial Trust - 2QFY17 Steady Results, Acquisition Plans Still Vague But This Is What We Would Do

2QFY17 DPU of 1.75 Scts (25% of our full-year forecast) was in line with our expectations and 6.7% above IPO forecast.
We highlight that the bulk of the ROFR properties have been fully leased, with more than two years lease tenure.

2QFY17 DPU of 1.75 Scts (25% of our full-year forecast) was in line with our expectations and 6.7% above IPO forecast.
The positive deviation sprang from lower weighted average interest rate of 2.8% p.a. compared to forecast 3.4% p.a. Also, the trust used A$20m of internal funds for the Martin Brower acquisition.
Cash NPI (excluding straight lining adjustments) of A$30.9m was in line with our projections.
FLT was granted an Absentee Landlord Tax by the Victorian State Government for 2017, resulting in A$0.5m favourable variance. However, this was partially offset by provisions for repair and maintenance expenses.
All-in cost of borrowings was maintained at 2.8% p.a. (flat qoq). Gearing stood at 28.9% (1QFY17: 29.7%). We estimate that FLT has available debt headroom of A$339m/A$537m to reach 40%/45% leverage.

Portfolio occupancy was maintained at 99.3% with 0.2% expiries (by GRI) up for renewal for the remaining FY17 and 3.6% for FY18.
During the quarter, 13,111 sq m of new lease and lease renewals were completed, including a new lease to Tailored Packaging at 32 Gibbon Road, NSW (lease expiry in Apr 2025) and lease renewal for Boeing Defence at 25-29 Jets Court, VIC (lease expiry in Dec 2022).
Tailored Packaging is the replacement tenant for Australian Geographic, which surrendered its lease. Since listing to 31 Mar, FLT achieved a high 92.4% tenant retention rate. Excluding Australian Geographic, the rate was 100%.
As forewarned, FLT’s portfolio is slightly over-rented. The new/renewal leases resulted in an average negative rental reversion of 4.85% (1HFY17: c.-1.7%).

Industrial supply has been increasing, although management deems that it is demand-driven.
According to JLL, Sydney prime grade has improved 4% yoy to A$129 psm (as at Mar 17). In Melbourne, rents are expected to remain flat in the near term due to elevated backfill options and increased speculative supply. In Brisbane, rents remained under downward pressure.
Net-net, we view that the potential entry of Amazon Fresh into Australia will expand the market pie, although we also acknowledge that it could curb incumbents’ (i.e. Coles, Woolsworth, Costco, Aldi, etc.) expansion plans.

We highlight that there are 15 existing properties in the ROFR pipeline with value of c.A$350m. The bulk of the properties have been fully leased, with more than two years lease tenure. Understandably, management is vague on acquisition plans but has stated its preference for Sydney and South East Melbourne assets.
As the ROFR assets would be IPT transactions, we believe that management’s preference would be for a bulk deal. However, that could entail funding considerations.
To placate the market’s appetite for growth, we would undertake a smallish debt-funded deal this year and give time for the ROFR asset base to grow before undertaking a bulk transaction next year. We believe that management should strike while the iron is still hot.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2017-05-08

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