The Properties
FLIT has 60 industrial properties. By value:- 2/3rds are in Australia. 2/3rds of those are in Sydney & Melbourne. Minimal exposure to Perth (1 property, or about 7% of the Australian properties' value).
- 1/3 are in Germany and the Netherlands
The Australian buildings seem to be mostly small, generic light industrial buildings, with a few large warehouses (5-6 buildings).
The European buildings are large Logistics or Industrial buildings.
None of the buildings seem highly specialised.
70% of the properties by value are freehold, and another 21% have a lease of over 80 years.
70% of the properties by value are freehold, and another 21% have a lease of over 80 years.
The Australian Property Cycle
Varies by city and within parts of a city.- A 2019 Moodys Report expects Western Sydney Industrial property prices to rise, due to online shopping and new infrastructure.
- A Centuria Industrial REIT (ASX:CIP) presentation shows available space declined up to Oct 2018.
To know about the cycles, you really have to be an expert on the land supply in different parts of the cities. And predicting future demand is just guesswork.
Tenant Quality
Generally good.
FLIT lists all their tenants (how many REITs do this?). I categorised each tenant, trying to guess their ability to pay rent in a recession:
FLIT lists all their tenants (how many REITs do this?). I categorised each tenant, trying to guess their ability to pay rent in a recession:
- Reliable: Is either part of an oligopoly (eg: Coles, Woolworths), government (eg: Australian Post), or listed (showing profits for the last 2 years and reasonable debt). In essence, no way that they would not pay rent.
- Unknown: Private companies (eg: BAM Wine Logistics, Caprice, Broetje Automation). Even though some of them sound interesting, there's no way of knowing how profitable they are. Most companies in the world are going to be here.
- Dodgy: Currently loss making. So when times go bad, we can expect the company to go under.
Each category, by gross revenue (Sept 2018):
Overall, this is a pretty high level of 'reliable' companies. If you pick a random street or industrial park to walk through, you are not going to see such a high proportion of 'reliable' companies.
The two dodgy companies are CEVA Logistics: a merger of two loss making companies which is still loss making, and Constellium: an aluminium product manufacturer with borderline profits/losses and large debt.
CEVA is a worry: they are one of FLIT's top 10 clients. They are renting a massive warehouse in the middle of nowhere - this may be difficult to lease out again, and buildings like this are valued by their lease (...no lease, no value).
But overall, tenant quality seems quite high.
Management Quality
Sponsor Holdings: Frasers Property, holds 20% of the trust. I haven't looked at enough REITs to see how this compares.
Management Fees (p146): 0.4% of property value as base fee, plus 5% of distributable income.
Seems reasonable. Would be better if the fee was based on DPU.
Most management fees are paid in units: at least 85% in 2018 (note 5) and 91% in 1H19 (p10).
Trust expenses were very high in 2017, but lower in 2018 (p158). They were 8.6% and 1% of distributable income, respectively. I found no explanation on what these expenses were.
Pipeline: ROFR for 17 Australian properties and 29 European properties.
Past Acquisitions have been OK:
Management Fees (p146): 0.4% of property value as base fee, plus 5% of distributable income.
Seems reasonable. Would be better if the fee was based on DPU.
Most management fees are paid in units: at least 85% in 2018 (note 5) and 91% in 1H19 (p10).
Trust expenses were very high in 2017, but lower in 2018 (p158). They were 8.6% and 1% of distributable income, respectively. I found no explanation on what these expenses were.
Pipeline: ROFR for 17 Australian properties and 29 European properties.
Past Acquisitions have been OK:
- In July 2017, 7 Australian properties were acquired. A small number of units were issued, plus debt (pp 53-54).
- In May 2018, there was a large surprise acquisition of 21 European properties. Funded by issuing 484m new units (an increase of 31%), mostly by private placement with some preferential offering. Borrowings doubled, and leverage increased from 29% to 35%. Accretive to those who subscribed.
- In November 2018, a single European property was acquired.
The numbers
Gearing Ratio is now at 35.1%. No perpetual bonds.
Debt Expiry: They have a large chunk of debt due in 2021:
They did mention their intention to refinance the (grey) European debt (currently at 2% interest) with a lower rate later. But I think they should space out their debt a bit more.
79% of their loans are fixed rate (p5), or protected by swaps for the lifetime of the loan.
Unencumbered buildings: (In Sept 2018 AR, footnote 10) The secured bank loans are secured over investment properties with a total carrying amount of A$969,554,000 (2017: A$Nil). So out of AUD 3bn worth of property, 2bn is unencumbered.
They have always had 100% dividend payout ratio.
They have always had 100% dividend payout ratio.
Valuation
Other Risks:- Kyith Ng highlighted that many of their Australian rents were above market rate during hte IPO (June 2016). I am factoring in a AUD 3-4m income to be lost because of this.
- AUD has dropped a lot recently, I am factoring in a rate of 1 SGD to 0.9 AUD. Same as the global financial crisis. Assume no change in EUR/SGD exchange rate.
For a target 6% yield, I would value the stock at SGD 1.10.
