• Lower management fees in units
• Occupancy almost full at 99.4%
• Expecting market rental growth

1QFY18 Results Within Our Expectations

Frasers Logistics & Industrial Trust (FLT) reported its 1QFY18 results which met our expectations. Gross revenue and NPI of A$42.4m and A$34.8m were 6.9% and 4.3% higher YoY, respectively, and both formed 24.2% of our FY18 forecasts. DPU in AUD terms was 1.70 A cents, down from 1QFY17’s 1.74 A cents as management opted to take 78.1% of its management fees in units versus 100% in 1QFY17.

We believe this is a prudent approach to limit the impact of longer term dilution to unitholders. DPU in SGD terms rose 3.4% and this was attributed to the healthy currency hedge rate of A$1: S$1.0583 which FLT entered into (1QFY17: A$1: S$1). This formed 25.1% of our full-year forecast.

Defensive Portfolio Metrics

Operationally, FLT’s occupancy remained nearfull at 99.4%, while portfolio WALE was extended slightly to 6.79 years, as at 31 Dec 2017. Three lease renewals with a total GLA of 66,737 sqm were signed during the quarter. Although there was an average negative reversion of 5.1%, we believe this was largely due to rents reverting back to market levels as built-in annual rental escalations for FLT’s leases typically outpace market rental growth. FLT has only 2.4% of its gross rental income due for renewal for the remaining three quarters of FY18.

Strong Pipeline of Acquisition Targets

Looking ahead, FLT has a robust pipeline of potential acquisition targets from its sponsor. The right-of-first-refusal assets include 16 properties in Australia (~407,000 sqm) and 25 properties in Europe (~970,000 sqm). According to management, industrial yields in the European market are approximately 4.5%-6%.

For Australia, we note from FLT’s FY17 annual report that Jones Lang LaSalle has projected 2018 rental growth of 4% in South Sydney and 2% in the Sydney Outer Central West precinct; 2.5% growth in Melbourne’s South East and 2% in Melbourne’s West precinct; and 0.5% growth in Brisbane’s Southern precinct. Australia’s Victoria, New South Wales and Queensland states formed 39.2%, 30.0% and 28.2% of FLT’s portfolio value, respectively. We maintain our forecasts and S$1.25 fair value estimate on FLT.

Source: OCBC Research - 29 Jan 2018