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


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.

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 -
  • 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

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