First look at Frasers Logistics and Industrial Trust
Frasers Logistics & Industrial Trust (FLT) caught my eye this quarter. I felt that FLT was cheap in the current bull market conditions and purchased 3,500 units at S$1.01.
To aid in monitoring the progress of the stock, and to track my thoughts in making this investment, my analysis points of FLT are set out below. I aim to use this as a reference point for further analysis as I monitor FLT's development
Background Information
FLT is a Singapore REIT, with an initial portfolio comprising of 54 Australian Properties, focused on logistics and industrial properties. While its current portfolio is located in Australia, it is not restricted from investing in other countries.
Results
The financial results look generally promising. Dividend yield seems likely to be around 6%, and the price is close to NAV.
The debt position is also healthy. They have a good buffer from the gearing limit, and have a safe interest cover of 9.3 times. No debt is due to expire in FY2017 and 2018. 79% of debt is on fixed interest rates, which will mitigate the likely increase in interest rates this year.
FLT had exceeded its forecasts for the latest quarter. Distributable income was 5.9% above the forecast, and DPU was 6.7% above the forecast. However, I think there is no need to be overly excited, as property income was largely consistent with the forecast, and the forecasts were exceeded due to a lower interest rate.
Properties and tenants
FLT currently has 54 properties (Melbourne - 26, Sydney 13, Brisbane - 10, Adelaide - 4, Perth - 1). All of these properties are located in major Australian cities. The properties are relatively young, with an average age of 6.1 years, which may mean less requirement for capital expenditure in the future. 89.6% of the properties are also owned on a freehold or long leasehold basis.
These properties are presently 99.3% occupied by a mix of logistics companies such as DHL and Schenker (32.9%), consumer companies including supermarkets like Woolworth and Coles (41.7%), and several manufacturing tenants (18.2%). Most of the tenants are large MNCs/Australian Listed Companies (other examples includeUnilever, Mazda, Boeing) which give some assurance that they will be able to maintain their tenancy.
Besides Coles, no other tenant accounts for more than 5% of FLT's rental income. But, the top 10 tenants also account for 47% of rental income. There is a measure of concentration risk. Most properties are also single-tenanted, and loss of that tenant could be significant to income.
FLT has a WALE of 6.7 years (vs Mapletree Logistics - 4.5 years), which is better than other industrial REITS in Singapore, and also gives them a longer term revenue stream. The latest results state that none of the next 9 years see 15% of FLT's leases expiring in a single year. In FY2017 and FY2018, only 3.8% of its leases will expire.
Leases tend to be on fixed rates, with average rental escalation of 3.2% per annum. This contributed to a promising forecast. However, it was noted by a broker that 3.2% is above market rate and the rent may thus drop back to market rates upon renewal of leases.
Management / Sponsor
The Sponsor is Frasers Centrepoint Limited, which is well known in Singapore and has experience in sponsoring various REITS. Based on the prospectus, Frasers has been operating in Australia through Frasers Property Australia for over 90 years. There is also a potential pipeline of new properties from the Sponsor, as FLT has a ROFR over 15 other properties in Australia.
The REIT fees include a base fee (0.4% value of the portfolio), a performance fee (5% of distributable income), and an acquisition fee (1%,0.5% for related party transactions). However, the REIT holds its Australian properties through a separate australian trust (fees paid out of reit manager's fee), it then also pays its Australian Property Manager a portion of net income per property, marketing fees, and management fees (for development/refurbishment works).
I am not sure how this compares with the structure of other REITs, especially when it comes to holding offshore properties, so will reserve my thoughts on thus until I have had the chance to study others.
The major unitholders of the REIT, besides Fraser Centrepoint, are the children of Charoen Sirivadhanabhakdi, the founder of Thaibev.
With little investment experience, assessing management is still challenging for me. I can take some comfort that Frasers is a large and established player, so management is unlikely to fall off the mark. Going foward, I will look at these factors to evaluate management:
Execution of strategy (to engage tenants proactively before lease expiry) - look out for lease renewals and rent reversions
How fast and cheap management is able to effect AEI (to reduce the downtime)
Debt management - in the latest results, interest costs were low and this contributed greatly to the strong profit in the quarter.
Observations
I liked FLT due to its stable portfolio. Besides its large portfolio size, it also has a base of strong tenants from other large businesses. With most of its properties on freehold/long lease basis, and also having a longer WALE than other industrial reits, it feels like a comfortable portfolio to invest in at a good price.
However, my own understanding of the logistics industry is limited, and I may be wrong about the true value of these logistics based properties. My impression is that the logistics industry is in better shape than the retail sector, while also cheaper than premium sectors like healthcare.
Australian Focus
FLT is only concentrated in Australia at the moment. As such, the value of the investment is also closely linked to the economic situation of Australia. I think the following factors in Australia might be worth watching to get a sense of FLT's potential growth:
Australian currency movements
Australia's move from a mining based economy to a more commercial/consumer focused one.
If this is successful, there will be an increased demand in industrial properties, and FLT is well placed to get a headstart in this market. Will have to monitor the Australian economy to see if this plays out well.
Import/export economy in Australia, which will need greater logistics support
I think this has potential for growth. Firstly, Australian exports are well regarded, there have been recent news reports of Chinese snapping up Australian goods. Also, my impression is that Australia is quite affluent, which would boost consumer demand for imports or for consumer goods in general.
Also, since Australia is further away from the rest of the world, I expect they may see increased e-commerce and import activity.
But, aside from consumer goods, I am not sure if Australia will see growth in other imports or exports. Their location also gives limited potential as a shipping hub.
It is good news that the Australian government is also supportive of this shift, as it recently announced a A$75bn infrastructure plan. (see here)
I think FLT is a good chance to get some exposure to the Australian market, especially with the greater instability in the rest of the world now, and to add some diversity to my portfolio which is weighted in the Singapore market at the moment. It also requires close watching of developments in Australia. There is also a measure of uncertainty as my own knowledge of Australia is limited.
Disclaimer
The above are merely my own personal thoughts for general interest purposes only and does not constitute any form of financial/investment advice or recommendation of any kind, and is not intended to be relied on for any form of financial or investment decision making.