A Little Bargain Buy 4: Frasers Logistics and Commercial Trust

When the share prices of REITs retreated in the early days of November, I made a total of 5 purchases.  After buying MapleTree Logistics Trust, Ascendas Reit (2 tranches), and Ascendas India Trust, I entered the market for Frasers Logistics & Commercial Trust.  

Amid the COVID-19 pandemic, Singapore has strengthened its status as a global logistics hub by optimising on its competitive advantages such as the efficiency, reliability and resilience of its network.  

Just how important is the logistics sector to Singapore’s economic growth?  Very important.

The logistics sector contributed SGD6.8b or 1.4% of Singapore’s GDP in 2019.  This sector is set to grow by leaps and bounds in the years ahead, and investing in logistics REITs is a way to ride this growth wave.

Deputy Prime Minister, Mr Chan Chun Sing, wrote thus on his FB after a visit to DB Schenker Singapore’s Red Lion facility on 27 October:

“The logistics sector is critical to Singapore’s position as a global business hub, allowing us to connect key supply chain nodes to facilitate efficient trade flows, both domestically and internationally.  The sector has been undergoing changes caused by the reorganisation of global supply chains and digitalisation.  COVID-19 further exacerbated these trends but our logistics companies have stayed agile and managed to capitalise on new opportunities, resulting in an overall positive outlook for 2020 and beyond … we saw how the logistics sector has transformed and moved towards higher-value products and services, servicing supply chains … So long as we build on our advantages, I am confident that the logistics sector will remain a bright spark in the Singapore economy.”*

In addition, Singapore is also a member of the Regional Comprehensive Economic Partnership (signed 15 November).  Trade openness is a good thing for the movement of goods, the essence of the logistics industry.  As suggested in a Business Times report, “the clear sector winners for Singapore will be linked around the shipping and logistics ecosystem.”**

So, if now is not the time to invest in Singapore logistics REITs, then when?  

Indeed, now is the time and I’m glad to be able to pick up FLCT when its share price showed some weakness the first week of November.  

Here’s the link to Vince’s latest analysis on FLCT: https://www.reit-tirement.com/2020/11/frasers-logistics-commercial-trust.html

Introduction

Following a merger with Frasers Commercial Trust (FCT), Frasers Logistics & Industrial Trust (FLT) was renamed Frasers Logistics & Commercial Trust.  FLCT appeared on the Singapore stock market on 4 May 2020.

This enlarged REIT, sponsored by Frasers Property Limited, is now the 8th largest S-REIT.  FLCT has a market cap of approximately SGD4.4b.

Circular dated 14.02.2020

FLCT’s investment strategy is to invest globally in a diversified portfolio of income-producing properties used predominantly for logistics or industrial purposes located globally, or commercial purposes (comprising primarily CBD office space) or business park purposes (comprising primarily non-CBD office space and/or research and development space) located

Key Highlights

1. A diversified portfolio: Well-diversified footprint in Singapore, Australia, Germany, the UK, and the Netherlands.  100 properties in different asset classes that will help FLCT ride through good and bad times and generate steady returns.

FY 2020 Q4 report

2. Gross revenue: SGD332m for FY 2020 [no meaningful comparison on YoY basis as FLCT was only formed in 2020).  UP 5.69%, SGD109.6m (4Q 2020) vs SGD103.7m (3Q 2020).

3. Net property income (adjusted): SGD258.3m for FY 2020.  UP 6.92%, SGD83.4m (4Q 2020) vs SGD78m (3Q 2020).

4. Occupancy rate: 97.5% (as at 30.09.2002); logistics and industrial portfolio: 100%, commercial portfolio: 94.3%.

5. Interest coverage ratio: 6.4x.

6. Gearing ratio: 37.4%.  FLCT has SGD1651m of debt headroom to utilise for property acquisitions and become more competitive against its peers.

7. WALE: 4.9 years (as at 30.09.2002); logistics and industrial portfolio: 5.5 years; commercial portfolio: 4.2 years.  Lease expiry profile is well spread out with only 7.9% of gross rental income due for renewal in FY2021. 

8. Net Asset Value per unit: UP 5.77%; SGD1.10 (4Q 2020) vs SGD1.04 (3Q 2020).

9. Distribution per unit: CONSISTENT; SGD0.0712 (FY2020) vs SGD 0.07 (FY2019) vs SGD0.0715(FY2018).

10. Current yield distribution: 5.56%. 

11. Rental Reversion: IMPROVED; -0.1 (4Q 2020) vs -3.9 (3Q 2020).

12. Current PB Ratio: 1.16, just slightly overvalued (share price at SGD1.28 on 16 November).  At my entry price of SGD1.24, it was a 17% drop from its peak price at SGD1.49 … just a small bargain. Buying FLCT at its March low at SGD0.67 would have been a tremendous steal!  I calculated, based on DCF, the fair value of FLCT to be between SGD1.22 to SGD1.31.  

13. Weighted average interest cost:  1.9% per annum

14. Debt Maturity Profile: 3.0 years.

15. Free Cash Flow: UPTREND; 214.81m (4Q 2020) vs 181.781m (3Q 2020) vs 149.492m (2Q 2020).

FY 2020 Q4 report

Why did I buy Frasers Logistics & Commercial Trust?

A. Just too good a REIT to Ignore: A prominent investment guru (not revealing name here) has ranked FLCT the top REIT in Singapore (I use his paid service).  And I find myself not disagreeing with that ranking.

By all accounts, from examining the essential metrics, FLCT does look like a worthy REIT to invest in, if one can look beyond the slightly overvalued 1.2 PB.  FLCT’s performance during the pandemic period has been excellent in spite of the challenging business environment and operating conditions across global markets: improved DPU, revenue, NPI etc.  

I really like it that FLCT is well-positioned to face the continuing uncertain global environment with its resilient portfolio, strong balance sheet and financial flexibility.

B. Portfolio Expansion:  FLCT’s predecessor, FLT, has a proven track record in executing value-accretive acquisitions.  Since its IPO in June 2016, FLT has completed SGD4.4b worth of accretive acquisitions.  This track record looks set to be perpetuated by FLCT.  

What has FLCT done to expand its portfolio thus far?

As of August 2020, FLCT has completed the acquisition of 2 properties: a logistics property in Melbourne (IVE Facility) and a business park in the UK (MAXIS), with the respective initial NPI yields being 5.85% and 6.3% respectively.  Both properties together have a property value of approximately SGD143.2m.

  • THE IVE Facility (Melbourne)

1. A modern and prime freehold logistics property.

2. Entrenches FLCT in Melbourne’s South East Industrial suburb which is popular with investors due to strong market fundamentals, low levels of vacancy, limited supply and favourable demographics.  The eastern seaboard cities of Sydney, Melbourne and Brisbane form a lucrative and much sought-after industrial area by both domestic and global players.  The investment volume in this area remained strong despite the COVID-19 pandemic, generating transacted sales amounting to some AUD1.7b during the first half of 2020.  

3. Lettable area: 14,263 sqm.

4. WALE: 4.9 years (as at 30.06.2020).

5. Occupancy: 100%.

6. Only 1 main tenant (Beware of tenant risk here): IVE Group Ltd, Australia’s leading holistic marketing company.  IVE derives revenue from the provision of marketing services and print communications. Rent from IVE is fixed at an increment of 3% per annum.

  • Maxis Business Park (Bracknell, UK)

1. A freehold high quality business park comprising two office buildings.

2. Anchors FLCT in the Thames Valley, the largest regional economy outside London and a high-tech region in the UK.  This business park benefits from excellent connectivity to key motorways and direct train service to Waterloo Station, London.  In spite of the current very exceptional health crisis, the overall UK business park market continues to have active leasing taking place with approximately 63,000 sqm of “take up” in the first half of 2020.  As such, the UK business park sector is expected to remain an attractive and resilient asset class within the commercial space in the long run.

3. Lettable area: 17,859 sqm.

4. WALE: 6.7 years (as at 30.06.2020).

5. Occupancy: 100%

6. 10 tenants such as Panasonic UK, Allegis Group, Blue Yonder, Cadence Design Systems.  More than 60% of the tenants of the UK Property are in the technology and telecommunication sectors, which adds to the resilience of this UK Property.

Both acquisitions are expected to be accretive and will contribute to stable and regular distributions to the unitholders of FLCT.

Earlier in May this year, FLCT completed the acquisition of 50% interest In Farnborough Business Park.

  • Farnborough Business Park (UK)

1. A freehold aware-winning business park that spans 46.5 hectares.  The business park comprises 14 commercial buildings, including 9 office buildings, two car showrooms, an office-cum-industrial building and two cafes.  The business park has approximately 18,000 sqm of development potential.

2. Farnborough business park is also situated in the Thames Valley area.  It is at the heart of connections, strategically situated minutes from the M3 motorway and the vibrant town centre.

3. Lettable area: 51,006 sqm. 

4. WALE: 5.8 years (as at 30.09.2020).

5. Occupancy: 99.3%

6. More than 10 tenants, and is home to British businesses such as Fluor, Aetna, Redhat, National Westminster Bank and the Royal Aeronautical Society.

FY 2020 Q4 report

C. Unlocking value through divestment: In August, FLCT announced the divestment of the remaining 50% stake in the Cold Storage facility in Queensland at a sale consideration amounting to about SGD150.5m (AUD152.5M), a 12.2% premium above its July 2020 book value. FLCT expects to record a net gain of A$8m from this sale. 

D. Diversified ROFT Pipeline from Sponsor:  FLCT has access to a sizeable ROFR pipeline of more than SGD5b granted Frasers Property.  This is by far the largest ROFR pipeline among the major REITS in Singapore.

What is ROFR?  ROFR is short for right of first refusal (also known as first right of refusal) and is a contractual right to enter into a business transaction with a person or company before anyone else can.  So if Frasers Property decides to sell any of its properties, then FLCT holding the ROFR gets the opportunity to buy the for-sale property(ies) on the same terms first.

What is FLCT looking at in this pipeline from Frasers Property?  In this pipeline which comprises about 2m sqm is a good mix of assets in Australia (36.9%), Europe (27.5%), the UK (24.4%), Singapore (6.6%) and the rest of Asia (4.6%).  In this pipeline, approximately 75% (by NLA) is logistics and industrial properties, while the rest is made up of commercial buildings and business parks. As a high portion of the pipeline are logistics/industrial properties and located overseas, their yields are expected to be accretive for FLCT.

FLCT is also able to leverage on the Frasers Property’s integrated development and asset management capabilities 

E. In Spite of Some Concerns:  

  • Trade Tension between China and Australia

In recent months, China has entered a trade dispute with Australia.  This all began when Australia started to sing the same tune as the USA that China, which is on the rise, must be contained. On 17 November, after weeks and months of trading spats, the Chinese Foreign Ministry spokesman Zhao Lijian made it clear that some in Australia “tend to regard China’s development as a threat”, and that this was “the root cause” of the problems between the two countries.  

Considering FLCT has 57.3% of its revenue from Australia alone, any trade dispute between China and Australia is a case for concern.

Here’s what FLCT has to say in the latest quarter report on this matter: “There are also concerns relating to the deterioration of relationships between both the Australian and Chinese governments and any implications that may arise as a result of any trade restrictions implemented by China. In October 2020, the Australian Government reported a record 7.0% decline in GDP for the June quarter, and anticipates national GDP growth for the September quarter to remain subdued. According to Reserve Bank of Australia in August 2020, the full-year 2020 GDP is expected to contract by around 6.0% given the resurgent outbreak of the virus in the state of Victoria in July 2020 and the associated reintroduction of restrictions on activity, as well as the impact that uncertainty and diminished confidence have on household spending and business hiring and investment plans.”

The operating environment in Australia for FLCT is expected to remain challenging in the months and even years ahead in the midst of deteriorating relationship between Australia and China (Australia’s largest trading partner).  

It is hoped that the signing of the RCEP will lead China and Australia towards settling their escalating trade conflict quickly. 

  • The Pandemic.

Let’s also hope that COVID-19 will not surge in Australia or anywhere else in the world.

In general, FLCT’s industrial and commercial properties have experienced little impact from the spread of the pandemic.  Its retail properties, on the other hand, expect some near- to mid-term impact from any infection resurgences.

  • Foreign Currency Volatility.

FLCT faces foreign exchange risks associated with remitting the various currencies to Singapore for distribution.  Singapore only accounts for 12% of FLCT’s total portfolio revenue.  Nevertheless, FLCT manages foreign exchange volatility on its distributable income with hedging instruments and targets to hedge distributions on a rolling six-month basis. 

Conclusion

So this is it, my last purchase of a SG REIT during market weakness which lasted just about 2 days the first week of November.  

FLCT has been impressive this year in spite of the pandemic and I hope it will continue to impress by generating market-beating returns year after year, and adapt and seize opportunities to grow its portfolio in today’s changing and challenging circumstances.

I’m satisfied, for now, that FLCT is a relatively safe investment that pays a steady dividend.  It will be icing on the cake if this bet on FLCT maintains the potential for share price escalation.

I plan on going long on FLCT and thus any price drop is welcome.

Every second, minute you refuse to invest is a second farther away from your greatness.

Sunday Adelaja, No One is Better than You

** https://www.businesstimes.com.sg/government-economy/rcep-a-shot-in-the-arm-for-singapore-asean-economies

___________________

Disclaimer: I am only an amateur investor and nothing you read here on my blog constitutes financial advice.  I write here to detail my investments, strategies, and analyses.  Feel free to read at your own risk.  Should you need financial advice, consult a licensed financial advisor.

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