• Frasers Logistics & Commercial Trust (SGX:BUOU)’s 1QFY22 business update indicates vacancies remain tight and rents for logistics space stay firm in Australia, Germany and the Netherlands. Its logistics properties in Australia, Europe and the UK have maintained full occupancy of 100%.
• Frasers Logistics & Commercial Trust plans to redeploy half of the proceeds from the divestment of CSE to logistics properties in Germany, the Netherlands and the UK.
• Frasers Logistics & Commercial Trust's distribution yield is attractive at 5.5% for FY22 after the stock corrected 9% year-to-date. Maintain BUY.

Frasers Logistics & Commercial Trust (FLCT) Provided a Business Update for 1QFY22

• Benefitting from embedded fixed annual rental escalation. Frasers Logistics & Commercial Trust has completed 20 new/renewed leases for 69,274sqm of space in 1QFY22. Rental escalation for logistics properties was negative at 10.2%, based on signing rent excluding step-ups divided by preceding terminating rents. Based on mid-point rent of the new/renewed leases, rental escalation is marginally negative at 1.5%. Market rents have not kept up with the compounding annual escalation of 3.1%, which resulted in the negative rental reversion. Rental escalation for commercial properties was positive at 4%.
• Stability from long WALE. Frasers Logistics & Commercial Trust’s portfolio of 102 properties has weight average lease expiry (WALE) by gross rental income of 4.7 years (logistics & industrial: 5.3 years and commercial: 4.1 years). Only six industrial leases and 38 commercial leases are up for renewal for the rest of FY22, which represents 4.8% of gross rental income.

Positive Outlook for Logistics Properties in Australia, Germany and Netherlands

• In Australia, vacancy rates remain tight at 0.4% in Sydney, 1.3% in Melbourne Park in UK improved 2ppt q-o-q to 87.2% due to backfilling of space vacated by Fluor. Occupancy for Alexandra Technopark in Singapore eased 1.7ppt q-o-q to 94.8%.

Well Spread-out Debt Maturity Profile

• Frasers Logistics & Commercial Trust's aggregate leverage edged higher by 0.7ppt q-o-q to 34.3% due to weakness in the Euro. Interest coverage ratio is healthy at 8.7x. Borrowings of S$269m due in FY22 will be repaid utilising proceeds from the divestment of Cross Street Exchange (CSE). Weighted average debt maturity is 3.1 years. 71.6% of its borrowings are hedged to fixed rates.

Divestment of Cross Street Properties in Line With Pivot Towards Logistics

• Frasers Logistics & Commercial Trust has entered into a sale and purchase agreement for the sale of the leasehold property at 18, 20 and 22 Cross Street every five years. The property is expected to be completed in 1QFY23.

Commenced Development of Connexion II

• The newly-acquired Blythe Valley Park located near Birmingham and within UK’s Golden Triangle has a 3-hectare vacant land. Frasers Logistics & Commercial Trust will invest £18m to develop the site into three standalone logistics warehouses with lettable area of 10,800sqm. The development is expected to be completed in 4QFY22. Frasers Logistics & Commercial Trust is also looking at partnering sponsor Frasers Property (SGX:TQ5) to develop logistics properties in Australia and Europe.

Earnings Revision & Recommendation for FLCT

• We kept our DPU forecast for Frasers Logistics & Commercial Trust unchanged pending completion of DDM (cost of equity: 6.25%, terminal growth: 2.0%).
• Catalysts:
  • Continued growth and expansion by tapping on sponsor pipeline of logistics and business park properties.
  • Development projects at Blythe Valley Park and Farnborough Business Park. Partnering sponsor Frasers Property to develop logistics properties in Australia and Europe.

Source: UOB Kay Hian Research - 9 Feb 2022