DBS Group Research is keeping its ‘buy’ call and $1.55 target price on Frasers Logistics & Commercial Trust, following news that Google, a significant tenant, is giving up space at Alexandra Technopark (ATP), part of the REIT’s portfolio.
However, DBS warns of potential trimming in its distribution per unit projections if Google gives up more space.
According to FLCT on Feb 22, Google Asia Pacific will vacate “a portion” of its lease at ATP on Feb 2024. The US internet giant takes up 40% of the space at ATP.
Google has an existing five-year lease on the space with effect from Jan 2020 to cater for potential expansion. However, by and large, Google’s employees are still working out of the Mapletree Business City and had not spill over to the adjacent to ATP
According to DBS, with Google’s partial surrender, ATP will have a 15% increase in vacancy.
“Although this is a significant vacancy risk for the property, we believe that given the ample notice of a year away, FLCT will be able to backfill some of the space to be vacated,” says DBS in a research note on Feb 23.
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“Moreover, new leases signed could generate some positive rent reversions given that Google probably pays a relatively favourable rent as they currently occupy such a large space at ATP of around 450,000 sq ft,” DBS adds.
If the space surrendered is left empty, FLCT might suffer a 0.9% downside to its projected FY2024 distribution per unit says DBS.
From DBS’ perspective, the more critical issue is whether Google will renew the remaining space upon expiry in Dec 2024.
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DBS warns that Google has recently extended its lease at Mapletree Business City. “We believe there is a risk of Google not renewing its lease at ATP as it continues to rationalise and consolidate its office space,” says DBS.
If so, that’s an additional 250,000 sq ft of space at ATP, giving a total of 450,000 sq ft that will be returned to ATP in a year. That will potentially lead to a 3.5% to 4.5% downside to DBS’ FY2025 and FY2026 DPU estimates for FLCT.
“We will be keeping a close eye on this lease and will provide further updates once available,” says DBS.
Separately, DBS notes that Robert Wallace, FLCT’s CEO since 2016 and his replacement has yet to be announced. “We believe that this could create some overhang in the near term.”
FLCT shares as at 10.14 am were changing hands at $1.25, up 0.81%.
