Frasers Logistics & Industrial Trust - DBS Research 2018-11-07: Solid Portfolio With Resilient Income

FRASERS LOGISTICS & IND TRUST (SGX:BUOU)

Frasers Logistics & Industrial Trust - Solid Portfolio With Resilient Income

In-line 4Q18 results.
Long WALE of 6.8 years offers strong income visibility and certainty.
Gearing of c.35% while optimal, empowers the REIT with > S$500m in potential debt-funded acquisitions.
Maintain BUY and Target Price of S$1.20.

We like Frasers Logistics & Industrial Trust (FLT) for its resilience in income and largely FH portfolio in Australia and Europe.
With an expected 25% total return underpinned by a growing distribution yield of c.6.8%, we maintain our BUY call.

Our estimates are more conservative than consensus. Portfolio gearing level is more optimal at c.35% but this still gives the Manager with flexibility to execute on more acquisitions. With the Manager now eyeing targets in Europe and Australia, we see greater opportunities to grow.
The Sponsor has a pipeline of close to 1.2m sqm of industrial properties which can be injected in the medium term.

The REIT has a weighted average lease expiry of 6.8 years, which is longer than peers'. FLT has renewed most of its expiring leases in FY19F and has only 2.5% of its income up for renewal, implying strong cashflow visibility.

Currency risk. As the Manager pays its distributions in SGD but earns in AUD, the REIT is exposed to currency fluctuations. The Manager attempts to reduce foreign fluctuations by hedging distributions regularly.

Frasers Logistics & Industrial Trust (FLT) reported a 43.2% and 55.5% rise in revenues and net property income (NPI) to A$60.4mm and A$50.2m respectively. Adjusted NPI (reducing impact from straight-lining) rose by 52.6% to A$49.3m. This mainly was on the back of an enlarged portfolio:
1. acquisition of European Acquisition (S$13.2m),
2. acquisition of 103-131 Wayne Goss Drive and a leasehold property in 3 Burida Close, Australia which collectively contributed A$0.3m of the increase,
3. acquisition of acquisitions completed in FY17 (A$2.7m), and
4. fixed rental escalations and early surrender fee from Lot 105 Springhill, NSW of S$2.0m).
Frasers Logistics & Industrial Trust also recorded a 71.6% rise in interest expenses incurred to part fund acquisitions resulting in a 35.6% rise in distributable income to S$35.9m. This translates to a DPU of 1.78 Scts, which is 0.6% higher compared to a year ago due to an enlarged share base.
On a full-year basis, Frasers Logistics & Industrial Trust’s distributable income came in 16.6% higher y-o-y at S$118.3m, on the back of a 20.1% and 24.6% rise in revenues and adjusted NPI of S$195.8m and S$155.4m respectively.
A DPU of 7.19 Scts or 6.94 Australia cents is 2.6% higher y-o-y and -0.7% lower y-o-y respectively.

Frasers Logistics & Industrial Trust (FLT) reported a net revaluation gain of A$72.4m in FY18 (A$56.0 fair value gain on remeasurement of fair value for its portfolio in Australia and A$16.4m for its European portfolio). This was largely due to a slight compression in cap rates in Australia with cap rates ranging 5.55%-9.04% in key cities in Australia, while gross yields in Germany and Netherlands remained stable at 4.10%-7.54% and 5.22%-6.37% respectively.
As a result of the portfolio fair value gain, gearing dipped slightly to 34.6%, leaving Frasers Logistics & Industrial Trust with significant debt acquisition headroom of A$585m to reach its 45% gearing limit.
The Manager has also hedged in 82% of its interest costs into fixed rates, mitigating the impact of potential interest rate fluctuations on distributions. Average borrowing costs remained stable at 2.5% with a weighted average debt maturity of 2.9 years.

Frasers Logistics & Industrial Trust (FLT) signed and renewed two leases in 4QFY18, at an average rental reversion of -5.1%, with the dip largely driven by a -19.8% negative rental reversion at 115-121 South Centre Road, Melbourne Airport where the Manager entered in a 10-year lease with Alternative Freight Services. The Manager also secured a 5-year extension at 55-59 Boundary Road, Queensland with Goodyear at a rental reversion of 3.9%. As of Sep 2018, FLT has a long WALE of 6.87 years (6.72 years in Australia and 8.17 years in Europe).
Looking ahead, the Manager continues to see inorganic growth opportunities to build up its portfolio.

Overall demand has remained robust, supported by infrastructure spending and growth of e-commerce in Australia. FLT’s key markets Sydney and Melbourne remained robust with Industrial Prime Grade Net Face rents increasing by 4.4% and 2.0% to A$136 psm p.a. and A$93 psm p.a. respectively, supported by declining vacancy rates below historical levels, according to JLL and Urbis.
The high rents in Sydney have led to developers taking on speculative developments which will taper the rent growth momentum going forward. Similarly in Melbourne, as demand for industrial space continue to outstrip supply, developers are also taking on speculative developments, especially in the West. This is also expected to taper off in the medium term.

The Brisbane industrial market saw minimal completions with total annual supply below the long-term average. According to JLL, the market is stabilising given the falling vacancy rates. Rents started to stabilise at A$111psm p.a., a slight increase from 3Q17.

In Germany, take-up remains resilient with take-up rates rising 26% y-o-y in 9M18, with rents inching higher to EUR 84 psm p.a. and users have turned to built-to-suit solutions. Given the strong demand, logistics assets continued to attract capital and this resulted in a compression in cap rates.
In Netherlands, take-up rate dropped 35% y-o-y in 9M18 but rents continued to climb to EUR 9 psm p.a., driven by domestic demand and industrial output.

Derek TAN DBS Group Research | Carmen TAY DBS Research | Mervin SONG CFA DBS Research | https://www.dbsvickers.com/ 2018-11-07

SGX Stock Analyst Report BUY MAINTAIN BUY 1.200 SAME 1.200