Frasers Logistics & Commercial Trust - DBS Research 2020-06-09: Positioned For Further Growth & Enhancement

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FRASERS LOGISTICS & COMMERCIAL TRUST (SGX:BUOU)

Frasers Logistics & Commercial Trust - Positioned For Further Growth & Enhancement

• Post-merger, Frasers Logistics & Commercial Trust remains a key capital recycling vehicle for its Sponsor.
• Enhanced growth trajectory with up to S$5.0bn of properties to be acquired, potentially doubling its AUM.
• Increased debt headroom and capacity to take on value-accretive deals; debt-funded headroom of over S$830m.
• Target Price of S$1.40 offers 16% upside.

Maintain BUY and Target Price of S$1.40.

• We maintain our BUY call and Target Price of S$1.40 for Frasers Logistics & Commercial Trust (SGX:BUOU). Post-merger, Frasers Logistics & Commercial Trust is among the Top 10 largest S-REIT but with a robust pipeline of acquisition possibilities.
• We like Frasers Logistics & Commercial Trust for its resilience in income, steady organic growth profile of c.3.3% CAGR over the next two years, driven by
  1. enlarged portfolio through the accretive merger with Frasers Commercial Trust (SGX:ND8U),
  2. contribution from the more than S$777m worth of acquisitions over the past 12 months, and
  3. annual rental escalations in leases.

Positioned for further growth and enhancement

Successful merger with Frasers Commercial Trust in April 2020

• Frasers Logistics & Industrial Trust has been renamed to Frasers Logistics & Commercial Trust to reflect the REIT’s broadened investment mandate to include commercial properties.
• Enlarged portfolio of c.S$5.7bn includes commercial properties in Singapore, Australia and the UK -
  • Office and Business Parks, and CBD Commercial properties make up c.41% of Frasers Logistics & Commercial Trust’s portfolio.
  • Frasers Logistics & Commercial Trust’s revised top three geographical allocation are Australia (48%), Singapore (22%) and Germany (20%).
• Portfolio WALE of 5.3 years and overall occupancy rate of 97.6%
  • Robust logistics and industrial portfolio that reported 100% occupancy with a WALE of more than six years; average annual rental escalations of 3.1% for Australia and CPI-linked for Europe.
  • Commercial portfolio relatively healthy with 95% occupancy and WALE of 4.5 years; slightly weaker occupancy of 93.7% in Australia and 95.2% in Singapore.
  • Since the completion of AEI works at China Square Central, occupancy has been ramped up to more than 90% currently.
• S$23m AEI at Central Park is expected to complete in 3Q20; better amenities will help strengthen the office building’s premium-grade positioning.
• Reduced tenant concentration risk with an enlarged tenant base of 326 and a 50:50 split between multi-tenancy and single-tenancy assets.
  • Top-10 tenants include the likes of Commonwealth of Australia, Rio Tinto, Commonwealth Bank of Australia, CEVA, BMW, etc.

Enlarged ROFR pipeline in excess of S$5.0bn.

• ROFR pipeline from sponsor worth more than S$5.0bn with an NLA of 1.9m sqm.
  • Logistics and industrial (63%), Office and Business Parks (32%), CBD Commercial (5%).
  • Australia (30%), UK (26%), Germany (21%), Others (24%).
• With a leverage of approximately 37%, the enlarged portfolio provides Frasers Logistics & Commercial Trust with a debt headroom of more than S$830m (based on gearing of 45%).
• The enlarged asset base, coupled with the larger headroom, gives Frasers Logistics & Commercial Trust the financial strength to pursue pipeline assets from the Sponsor
• Assuming an acquisition of A$200m (funded by debt and equity on a 50:50 ratio), DPU will increase by c.3.0%

Potential weakness in newly consolidated commercial portfolio.

• Due to the Circuit Breaker measures in Singapore, many retail and commercial businesses faced up to two months of closure.
• The rental waiver bill could also require landlords to provide retail tenants with up to two months of rental waivers, in addition to the two months that have been subsidised by the government.
• Given the weaker economic landscape, occupancy and rental rate could come under pressure in FY20.
• However, retail and ancillary services only account for approximately 2% of Frasers Logistics & Commercial Trust’s revenues currently.
• Moreover, only c.93,000 sqft of retail and commercial space will be due for renewal in FY20.

Logistics and industrial portfolio remain very robust.

• Logistics and industrial portfolio remain robust with 100% occupancy and long WALE of 6.07 years.
• Annual rental escalations will also help mitigate potential negative rent reversions for the year.
  • Logistics and industrial leases have an average annual rental escalation of 3.1% or linked to the CPI.
  • More than 50% of commercial leases have an average rental escalation of 2.8% in FY20 and FY21.

Improved trading liquidity with higher market cap.

• Market cap increased by approximately 50% to c.S$4.2bn; the 8th largest S-REIT by market cap.
• Free float increased by more than 70% to c.S$3.3bn.

Our views

• We remain positive on the merger of Frasers Logistics & Industrial Trust and Frasers Commercial Trust to form one of the largest integrated S-REITs with logistics and commercial properties in the developed markets of Singapore, Australia, the UK and Europe. With the consolidation, Frasers Logistics & Commercial Trust’s broadened investment mandate allows it to invest in business park properties that are currently going through a structural growth trend. In addition, Frasers Logistics & Commercial Trust has the ROFR to c.1.9m sqm of office and business park assets from the enlarged pipeline.
• With a majority of Frasers Logistics & Commercial Trust’s leases on annual rental escalations of up to 3.1%, it should help abate potential weakness in rental rates. Moreover, Frasers Logistics & Commercial Trust’s portfolio occupancy remains healthy at 97.6% and only c.2.1% or leases are due to expire for the rest of FY20.
• See Frasers Logistics & Commercial Trust Share Price; Frasers Logistics & Commercial Trust Target Price; Frasers Logistics & Commercial Trust Analyst Reports; Frasers Logistics & Commercial Trust Dividend History; Frasers Logistics & Commercial Trust Announcements; Frasers Logistics & Commercial Trust Latest News.
• Frasers Logistics & Commercial Trust’s increased market cap and relatively high forward yields of 6% makes it very attractive at current valuations. The S$5.0bn of quality assets in the pipeline also put Frasers Logistics & Commercial Trust in good stead to grow inorganically.
• We maintain our BUY call with a Target Price of S$1.40, representing 16% upside potential to the current share price.

Dale LAI DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-06-09

SGX Stock Analyst Report BUY MAINTAIN BUY 1.40 SAME 1.40