• 1QFY20 DPU -2.2% YoY in SGD terms
• Rental reversions -0.9% but 100% occupancy rate
• Market trends remain largely firm

1QFY20 Results Met Our Expectations

Frasers Logistics & Industrial Trust’s (FLT) 1QFY20 results came in within our expectations. Gross revenue rose 8.2% YoY to A$64.4m while NPI was up 10.3% to A$55.4m. Adjusted NPI, which is a better reflection of cash NPI, increased 8.1% YoY to A$52.9m. Growth was driven largely by acquisitions and annual rental step-ups in most of FLT’s leases, but partially offset by divestments.

DPU grew 1.1% YoY in AUD terms to 1.83 A cents, but was down 2.2% in SGD terms to S$1.74 S cents as a result of a lower hedged exchange rate of A$1.00: S$0.9502, versus A$1.00: S$0.9820 in 1QFY19. This formed 24.5% of our FY20 forecast.

Portfolio Fully Occupied, But Slight Negative Rental Reversions

As highlighted during FLT’s previous 4QFY19 results announcement, it had secured a 5-year lease agreement (9,539 sq m) with Amazon for its property at 60 Paltridge Road in Perth post quarter. Hence physical portfolio occupancy was 100%, as at 31 Dec 2019. There was, however, a slight overall negative rental reversion of 0.9% registered in 1QFY20, mainly due to a renewal in Melbourne (- 12.1% reversion but lease comes with 3.5% annual increment). That said, this Melbourne lease forms only 0.17% of FLT’s portfolio GLA.

Industrial Market Trends Remain Largely Firm in Australia and Europe

Looking at Australia’s industrial market trends, overall prime grade net face rental growth came in flat QoQ for Sydney, Melbourne and Brisbane in 4QCY19. However, on a YoY basis, rental growth was 2.2%, 1.1% and 2.7%, respectively. FLT’s Australian properties have also not been affected by the bushfires as they are located away from the affected areas.

In Europe, take-up in Germany remained firm although it was lower in some of the main hubs due to a lack of modern space; while there was an uptick in prime rents for warehouse space in The Netherlands in 2019.

After lowering our cost of equity assumption from 7.4% to 7.1% to align with our recent reduction in discount rates for the larger industrial REITs under coverage, we derive a higher fair value estimate of S$1.37 (previously S$1.28).

We like FLT for its portfolio defensiveness. Besides its portfolio being fully occupied, average tenant retention is high at 80-90%, while WALE of 6.23 years is one of the highest within the S-REITs sector. The main bugbear for us remains the weak AUD, but we believe the negative currency impact would be less pronounced in FY20 than in FY19.

Source: OCBC Research - 10 Feb 2020