Update on Frasers Logistics and Industrial Trust

I looked at FLT 10 months ago, but it never reached my buy price.  With REITs starting to fall, I look again.

July 2019 Acquisition

They acquired another 12 properties.  9 in Germany, 3 in Oz.  Its a significant acquisition, adding 21% to FLT's existing assets.

The numbers look good.  All freehold.  8.6 years WALE.  Slightly DPU accretive.  Better lease expiry profile (p4).

But the one of the tenants may not be so reliable.  Hermes Gmbh is now a top ten tenant, leasing two buildings.  Its a large logistics company that claims to handle 1 in 3 B2C packages in Germany.  Couldn't find any financial info.  But they are owned by Otto Group, which has 177m in profits, zero cashflow from operations vs 172bn in debt (pp 104-106).

Grading the new tenants as reliable, unknown or dodgy (weighted by property price): 37% would be reliable, 44% unknown, and 18% dodgy (just Hermes Gmbh).

FCOT Merger

Just evaluate this as another acquisition.  Its actually 2 acquisitions: the FCOT merger, and an acquisition of (the remaining) Farbourough Business Park. 

Gearing will be 37.4% after the 2 acquisitions.  A bit high.

FCOTs properties are quite big compared to FLTs:

Lets look at the larger ones individually.

China Central Square

This is a is a Grade B office building in the Singapore CBD, with a small retail component.  90.8% occupied (93.9% for the office tower).  WALE is slightly short at 3.7 years (p4).

For grade B offices in general, you need to wait for Grade A rents to rise, after which there is a lagging spillover effect onto Grade B    (1) (2).  The company expects Singapore office rents to be capped in the next 6-12 months (p35).

WeWork is a tenant.

Alexandra Technopark

A technology park building in Singapore outlying area.  WALE 3.5 years.  97% occupied.

FCOT noted (p36) that Singapore Business parks have a 12% vacancy rate , so not expecting positive rent revisions.

Farnborough Park

A business park.  Wale of 6.6 years, 99% occupied.  Long WALE.

The others

Both buildings where WeWork is a tenant have above average vacancy rates (7% for China Square, 18% for Perth).  May not be easy to replace them if they go bust.

Conclusion

The buildings don't seem so good as FLTs existing portfolio.  The Singapore buildings have short WALEs, and don't seem to have potential for rent increases.  The Australia buildings look OK, hopefully Perth is at the low point in the cycle.

How would I value this?

First, I expect the AUD to remain at a low level of SGD 90c.  The Australian Government shows no sign of wanting to raise rates, due to housing prices.

So if the merger fails, I expect DPU of SGD 6.8c.  At a 6% yield, I would pay SGD 1.13.

If the merger goes ahead, they project DPU of 7.38c:

But this is proforma (going back in time, as if the acquisition had been done earlier).  I adjust for a my lower AUD exchange rate, to get 7.14c.  I also deduct WeWork's contribution to get around 7c per share.  So at a 6% yield, I would pay SGD 1.16.