UOB Kay Hian’s Jonathan Koh has maintained his "buy" call on Frasers Logistic & Commercial Trust (FLCT) but with a lowered target price of $1.52 from $1.65. While the REIT enjoys positive exposure for its assets in Australia and Germany, the loss of a key tenant in Singapore is a negative.
Citing CBRE, growth in net rents for prime logistics space in Australia has slightly moderated but remains significant at 22%, 25% and 11% y-o-y for Sydney, Melbourne and Brisbane respectively in 4QFY2023. Although vacancy rate has risen marginally, it remains tight at 1.1% in 2HFY2023, which is the “lowest globally”, notes Koh.
Notably, FLCT’s supply pipeline in Australia, which will grow 28% y-o-y to reach a new record-high of 3.7 million square metres (sqm), is already 40% already pre-committed, adds Koh.
Meanwhile, the REIT’s German assets continue to operate in a market that is suffering from a structural shortage of logistics space, which Koh says has been “further aggravated” by developers reducing construction due to the high prices of land and construction costs.
With impending rate cuts, FLCT might enjoy lower cost of debt with refinancing of some $529 million required in June and August. Overall, it has a “sizable” debt headroom of $1.1 billion to support acquisitions, with aggregate leverage remaining low at 30.7% as of December 2023.
On March 15, FLCT announced it is acquiring an 89.9% stake in four logistics properties in Germany for EUR129.5 million ($188.9 million) in an accretive deal from sponsor Frasers Property TQ5 , with a robust pipeline of further acquisitions down the road.
For example, in Australia, FPL has 37 properties with an NLA of 11.2 million sq ft valued at $2.03 billion as of September 2023. In Germany and the Netherlands, FPL has 22 properties with a NLA of 6.6 million sq ft valued at $771 million.
However, FLCT’s Singapore portfolio is facing some stress. Google, FLCT’s second largest tenant generating 4.1% of gross income, is further reducing its space it now takes at Alexandra Technopark (ATP). Besides 152,000 sq ft vacated in February, Google will give up another 218,000 sq ft by December, leaving 35% of ATP’s net lettable area empty.
“Downtime could be significant due to competition from a huge impending supply of 1.95 million sq ft from Punggol Digital District, which is due for completion end-2024, and 1.13 million sq ft from Geneo at Science Park, which is due for completion in 2QFY2025,” warns Koh, adding that FLCT intends to reconfigure the available space at ATP into smaller spec suites.
In sum, Koh has trimmed his FY2024 DPU forecast by 9% due to lower net property income margin and higher cost of debt. The lowered target price of $1.55 is based on a dividend discount model with cost of equity at 7% and terminal growth rate of 2.8%.
