Frasers Logistics & Industrial Trust - CIMB Research 2017-06-07: Strengthening Its Core

Frasers Logistics & Industrial Trust - CIMB Research 2017-06-07: Strengthening Its Core FRASERS LOGISTICS & IND TRUST BUOU.SI

Frasers Logistics & Industrial Trust - Strengthening Its Core

  • We view Frasers Logistics & Industrial Trust (FLT)’s maiden acquisition positively. The acquisition price is decent and the properties’ characteristics would strengthen FLT’s core.
  • Based on c.45:55 equity:debt funding mix, the manager estimates 0.9% accretion to pro-forma DPU.
  • We continue to like FLT for its pure exposure to the favourable Australian industrial market as well as its strong sponsor support.

Makes first portfolio acquisition

  • FLT has announced the proposed acquisition of seven industrial properties in Australia from sponsor for A$169.3m or 6.4% initial NPI yield. Total acquisition cost including stamp duty and fees is c.A$179.6m. 
  • FLT’s maiden acquisition is earlier than we expected, and is a positive surprise. We believe the accretive acquisition could catalyse FLT’s unit price, and narrow its valuation gap vs. big-cap industrial S-REITs. The acquisition is expected to be completed in end-Jul.
  • We deem the acquisition price tag decent (c.1.2% discount to aggregate independent valuation), and in line with recent market transactions. Although the acquisition’s NPI yield of 6.4% is lower than its existing portfolio yield of c.7%, we note that the properties are underpinned by long-term weighted average lease expiry (WALE) of 9.6 years, and will increase the enlarged portfolio’s WALE from 6.7 years to 6.9 years.
  • The seven properties comprise four completed properties (which were in the ROFR pipeline) and three properties under development. We understand that the properties were negotiated under a willing buyer and willing seller basis, and not because the sponsor initiated a sale. Hence, FLT managed to cherry-pick assets which it believes would enhance the portfolio.
  • Also, we deem that the development properties were acquired under attractive terms.
  • First, the acquisition cost is lower vs. acquiring a completed asset, and the assets are near completion. Second, the developer would bear the construction costs overrun.
  • Third, FLT would receive coupons on initial payment equivalent to the NPI yield during development. Fourth, the properties are fully pre-committed.

Manager estimates c.0.9% accretion to pro-forma DPU 

  • We maintain our estimates (Rating: ADD, Target Price: S$1.10), pending the finalisation of the funding structure, which would be a combination of equity and debt. Based on c.45:55 equity:debt mix, the manager estimates c.0.9% accretion to pro-forma DPU. This could raise our FY18F DPU growth forecast to c.4.4% yoy, which is at the higher-end for industrial S-REITs.
  • The cost of debt to fund the acquisition is likely to be higher vs. the current all-in costs.

Enhancing FLT’s core; remains one of our sector’s preferred picks 

  • We like the quality of the acquisition portfolio. Predominately freehold, four of the properties are located in the state of Victoria, two in New South Wales and one in Queensland. The seven properties are fully-leased or pre-committed, and are 2.4 years old, on average. Leases of the new properties have annual rental step-up of 3.1%, consistent with the existing portfolio’s annual step-up. c.75% of the properties' GRI is underpinned by MNCs and major consumer and logistics industry players.
  • The acquisition would increase FLT's portfolio value by 9.7% to A$1.91bn and will enlarge portfolio GLA by 10.1% to 1.35m sqm. 
  • We note that sponsor has entered into incentive reimbursement arrangements with FLT for four of the properties.
  • We continue to like FLT for its pure exposure to the favourable Australian industrial market as well as strong sponsor support. 
  • Key downside risk is a turn in the Australia market.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2017-06-07
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