On 31 July 2024, Frasers Logistics & Commercial Trust (“FLCT”) have announced their third quarter business update for FY2024. One good change this quarter is the disclosure by management that their commercial assets have seen an improvement in occupancy, which boosted the metric for their overall portfolio. This is a good sign if it is a reversal from the downtrend noted in the previous quarters.
Take note however that FLCT still has a debt maturity profile of 2.0 years. It has remained unchanged for the last few quarters. This may be an indication that management could be maintaining the profile at this level while waiting for potential future rate cuts to negotiate for better terms. This may be favorable as there may be significant changes to interest rates over the next few months.
Website: General Announcement::Business Updates For The Third Quarter Ended 30 June 2024
Photo source: https://fifthperson.com/2023-frasers-logistics-commercial-trust-agm/
Background
FLCT is a real estate investment trust (“REIT”) with a portfolio comprising logistic, industrial, and commercial properties diversified across five developed countries – Australia, Germany, Singapore, the United Kingdom (“UK”) and the Netherlands.
FLCT was listed on the Mainboard of Singapore Exchange Securities Trading Limited (“SGX-ST”) on 20 June 2016 as Frasers Logistics & Industrial Trust (“FLT”) and was subsequently renamed FLCT on 29 April 2020 following the completion of a merger with Frasers Commercial Trust (“FCOT”).
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 central business district (“CBD”) office space) or business park purposes (comprising primarily non-CBD office space and/or research and development space) located in the Asia-Pacific region or in Europe (including the UK).
Key Metrics
Distribution Per Unit (“DPU”)
| Metrics | Current | Previous |
|---|---|---|
| Distribution Per Unit | No Info | -1.1% |
Based on the announcement on 31 July 2024, DPU was not included in the business update for the third quarter of FY2024.
In the previous quarter, the metric was Unfavorable as DPU decreased by 1.1% for the first half of 2024 to SGD0.0348 per share from SGD0.0352 per share for the same period in the previous financial year. The main reason for the decrease was due to an increase in finance costs, partially offset by increase in adjusted net property income and an increase in capital distribution.
Occupancy
| Metrics | Current | Previous |
|---|---|---|
| Occupancy | 95.0% | 94.3% |
Occupancy rate as of 30 June 2024 became more utilized at 95.0%. This is contributed by 99.4% for the logistics and industrial assets and 87.6% for their commercial assets. There seems to be improvement for their commercial assets, and this metric has improved back to Favorable as the overall is at my expected healthy occupancy rate of 95%. Investors should continue to monitor for the commercial assets.
Gearing ratio
| Metrics | Current | Previous |
|---|---|---|
| Gearing Ratio | 33.2% | 32.7% |
Gearing ratio further increased to 33.2% as of 30 June 2024. The metric currently remains Favorable, as it is a distance away from the MAS limit of 50% and provides adequate headroom for FLCT to leverage on debt should there be an accretive acquisition in the short term.
Interest coverage
| Metrics | Current | Previous |
|---|---|---|
| Interest Coverage | 5.7x | 5.9x |
The interest coverage decreased slightly to 5.7 times as of 30 June 2024. This metric remains Favorable. The high interest coverage is attributable to their low cost of borrowings of 2.6% for the trailing 12 months and relatively low gearing ratio.
Debt maturity profile
| Metrics | Current | Previous |
|---|---|---|
| Debt Maturity Profile | 2.0 years | 2.0 years |
Weighted average term to maturity of their debt remained unchanged at 2.0 years as of 30 June 2024. This metric remains Neutral, as this indicates that at least half of their debt needs to be renewed soon and may be at the current high-interest rate environment, which will translate to higher cost of borrowings moving forward.
Price to Book Ratio
| Metrics | Current | Previous |
|---|---|---|
| Price to Book Ratio | 0.89 | 0.87 |
Based on the announcement on 31 July 2024, net asset value was not included in the business update for the third quarter of FY2024.
The Price to Book (“P/B”) ratio became more premium at 0.89. This is computed using the closing share price of SGD1.03 per share on 21 August 2024 and the net asset value per share of SGD1.16 as of 31 March 2024. The P/B ratio is Favorable as it is still a discount from book value.
Dividend
| Year | Yield | Total |
|---|---|---|
| 2024 | 3.38% | SGD 0.035 |
| 2023 | 6.83% | SGD 0.070 |
| 2022 | 7.40% | SGD 0.076 |
| 2021 | 7.46% | SGD 0.077 |
| 2020 | 6.91% | SGD 0.071 |
| 2019 | 6.80% | SGD 0.070 |
My expected dividend payout for the calendar year 2024 remains unchanged at SGD0.070 per share, annualized based on the amount paid out for the first 6 months of 2024.
With a closing share price of SGD1.03 per share as of 21 August 2024, this translates to a dividend yield of 6.80%. For my benchmark, a reasonable yield would be around an average of 5.75%. The dividend yield for FLCT is Favorable.
Website: Reasonable Dividend Yield 2024Q3 – 5.75%
Interest Rate Sensitivity
The Federal Reserve on 1 August 2024 kept its key interest rate at 5.25% to 5.50% ever since raising it on 26 July 2023. However, citing “some further progress” toward its 2% inflation goal, Fed Chair Jerome Powell at the press conference said a rate cut in September is “on the table,” provided the inflation data continues to be encouraging.
Website: Fed recap: Chair Powell gives the September rate cut signal traders were hoping for
In the event that interest rate should increase further, FLCT may be subjected to significant change in their cost of debt. The debt profile of FLCT is as below:
| Description | Amount (SGD’000) |
|---|---|
| Total Debt | $2,339,000 |
| Debt Not Hedged (%) | 27.4% |
| Debt at Floating Rate Exposed | $640,886 |
| Distributable Income FY2023 | $262,339 |
I have performed a sensitivity analysis using the information above as below:
| Change in Interest Rates | Decrease in Distributable Income (SGD’000) | Change as % of FY2023 Distribution |
|---|---|---|
| + 50 bps | -$3,204 | -1.2% |
| + 100 bps | -$6,409 | -2.4% |
| + 150 bps | -$9,613 | -3.7% |
| + 200 bps | -$12,818 | -4.9% |
Do note the above is my estimation which may be different from management’s estimation. Nonetheless, if the interest rates were to increase by the basis points above, FLCT may experience a fall in DPU accordingly.
Other metrics
Tenant profile
FLCT has an enlarged portfolio covering logistics and industrial properties, CBD commercial assets and office and business parks, FLCT has government related entities, well-established multinationals, conglomerates, and publicly listed companies among its tenants.
The high quality and diverse tenant base provide resilience to the FLCT portfolio across challenging events. The top 10 tenants accounted for only 17.5% and 15.2% of GRI contribution for the logistics & industrial tenants and commercial tenants respectively with no single tenant accounting for more than 4.6% during the period. This provides income diversity to the portfolio.
Summary
| Metrics | Financials | Rating |
|---|---|---|
| Distribution Per Unit | No Info | Unfavorable |
| Occupancy | 95.0% | Favorable |
| Gearing Ratio | 33.2% | Favorable |
| Interest Coverage | 5.7x | Favorable |
| Debt Maturity Profile | 2.0 years | Neutral |
| Price to Book Ratio | 0.89 | Favorable |
| Overall | Favorable |
Overall, the fundamentals of FLCT have improved and is Favorable. The key contributor is the improvement in occupancy of their commercial assets, which boosted the overall occupancy of their portfolio. Take note however that the debt maturity profile remains at 2 years and may be due for renewal over the next few quarters. Investors will need to assess their risk appetite.
Disclaimer: Not financial advice. All data and information provided on this site is for informational purposes only.
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