Frasers Logistics & Industrial Trust (FLT SP) - UOB Kay Hian 2017-11-03: 4QFY17 Trading Off Rent Reversion For Tenant Retention

Frasers Logistics & Industrial Trust (FLT SP) - UOB Kay Hian 2017-11-03: 4QFY17: Trading Off Rent Reversion For Tenant Retention FRASERS LOGISTICS & IND TRUST BUOU.SI

Frasers Logistics & Industrial Trust (FLT SP) - 4QFY17: Trading Off Rent Reversion For Tenant Retention

  • Frasers Logistics & Industrial Trust (FLT)’s results are in line with expectations. Proactive lease renewals (31,947 sqm) consisted of two lease renewals in Victoria (with BIC Australia and DHL Global) and one lease replacement in South Australia (with Adelaide Packaging Supplies). This minimises lease rollover risk, with a mere 2.5% of portfolio leases due by Dec 18. However, the quarter saw negative rent reversion of 15.9% mainly due to the DHL lease (-22%). 
  • Maintain BUY and target price of S$1.20.



RESULTS

  • Results in line with our expectations, with annualised DPU representing 99.2% of our full-year forecast, even though 4QFY17’s DPU of 1.77 S cents exceeded FLT’s projections by 8.6%. 
  • The quarter’s gross revenue and net property income came in 4.8% and 4.7% above the company’s forecast respectively. 
  • Distributable income was 12.1% above forecast at A$26.5m boosted by four completed properties acquired in Augt 17, coupon interest income from the three development properties, and partially due to the recovery of an insurance claim provided for in the prior quarter. 
  • FLT also benefitted from interest cost savings (actual borrowing costs of 2.8% p.a. vs forecast of 3.4%), lower debt drawn compared with the company’s forecast, and hedging of its distributable income at an exchange rate higher compared with its forecast.


STOCK IMPACT

  • Portfolio occupancy improved to 99.4% in 4QFY17 (vs 99.3% in 3QFY17), with a WALE of 6.7 years. Tenant retention also remained high at 94.4% (since listing).
  • Well-spread out lease expiry profile, with no single financial year having more than 17% lease expiries up to 30 Sep 25, and hence, no concentration risk of lease expiry. The company has minimal lease expiries of 2.5% (by gross rental income) for FY18.
  • Proactive lease renewals of 31,947sqm in total this quarter, consisting of two lease renewals in Victoria (with BIC Australia and DHL Global) and one lease replacement in South Australia (with Adelaide Packaging Supplies). Some of the leases signed this quarter were also shorter than the typical FLT leases for various reasons. For instance, BIC Australia requested to extend its original lease only by two years to Jun 21.
  • Negative rental reversions in current quarter (-15.9%), mainly dragged by a single lease (-22%) to DHL. In making the deal with DHL, management’s motivation was to derisk the asset by putting it with DHL on another 7-year lease so that it expires in 2026.
  • The negative reversions were also in part, due to annual escalations (inbuilt in FHT leases) outpacing rental market growth, such that passing rents at FLT exceeded market rents.

Continued focus on Australian market. 

  • Management continued to emphasise its focus on Australia as its key market, and any expansions plans outside are too early to comment on.

Market outlook. 

  • According to JLL, rental growth has been nuanced in Melbourne, but is buoyant in Sydney (+4.7% yoy). However, management believes the tide may be changing in Melbourne, with increased accumulation of landbanks by developers.
  • Management believes that with developers’ participation in pushing higher priced developments (competing source), that will help support industrial market rents in general. 
  • Overall in Australia, management sees strong demand, with developments predominantly leased prior to completion. Ytd gross take-up levels are above 10-year average and the strong growth is due to population growth, increased public infrastructure, tenant consolidations, and activity driven by withdrawals from inner locations.
  • The portfolio transaction levels are strong too, with over a third of the national sales volumes recorded in 2017 occurring in Sydney. Given the limited pool of stabilised assets, some institutional investors are shifting up the risk curve focusing on land purchases and more secondary assets value-add opportunities. This has resulted in a tightening in the yields for secondary assets.


VALUATION/RECOMMENDATION

  • Maintain BUY and target price of S$1.20. 
  • Our valuation is based on DDM (required rate of return: 7.1%, terminal growth: 2.5%).


SHARE PRICE CATALYST

  • Depreciating S$ against A$.
  • Inorganic growth from yield-accretive acquisitions, with a healthy debt headroom (A$563m assuming a comfortable gearing level of 45%).




Vikrant Pandey UOB Kay Hian | Loke Peihao UOB Kay Hian | http://research.uobkayhian.com/ 2017-11-03
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.200 Same 1.200



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