UOB Kay Hian’s Jonathan Koh has maintained his “buy” call and an unchanged target price of $1.79 for Frasers Logistics and Commercial Trust (FLCT).
This is due to the REIT recognising a fair value gain in investment properties at $483.6 million for its 2HFY2021 results, due to capitalisation rate (cap rate) compressions for its logistics properties in Australia and Europe
Koh elaborates that according to commercial real estate services company CBRE, cap rates have compressed by 46, 57 and 50 basis points y-o-y respectively to 4.25% in Sydney, 4.43% in Melbourne and 5% in Brisbane in 1QFY2021.
He also notes that ESR Australia Logistics Partnership, a 20:80 JV between ESR Cayman and GIC, has acquired Blackstone’s Milestone Logistics with 45 logistics properties in Australia for A$3.8b (US$2.9b) in Apr 2021, thus setting a benchmark cap rate of 4.5%.
Similarly, prime yields have hit a record low of 3.35% for Germany and 3.00% for the Netherlands.
In light of this, he expects cap rates for FLCT’s Australia portfolio to compress by 80 basis points from 5.9% to 5.1% as of Sep 2021, and expect cap rates for the Europe portfolio to compress by 34 basis points from 4.74% to 4.4%.
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Thus, FLCT is expected to be able to recognise gains in fair value of $392.4 million for Australia and $91.2 million for Europe.
Koh expects FLCT’s net asset value per unit to increase by 13 cents or 12% to $1.24 as of Sep 2021, and he estimates that aggregate leverage would be lowered by 2.3% from 36.4% to 34.1% in 4QFY2021.
Based on a regulatory limit on aggregate leverage of 50%, he estimates that debt headroom for acquisitions will also increase by $244 million or 20% to $1.45 billion
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Separately, Koh notes that a “sizeable sponsor pipeline supports future growth” for FLCT.
He says the REIT has right of first refusal to acquire logistics properties with NLA of 2.0m sqm in the Asia Pacific region and Europe from sponsor Frasers Property (FPL).
The acquisition pipeline is valued at more than S$5b as of Jan 2021, according to Koh. FPL is also actively developing more logistics properties and the sponsor pipeline expands at a rate of about S$200m per year.
“We expect FLCT to pursue strategic acquisitions of logistics properties in Europe and business park properties in the UK. In particular, FLCT could leverage on low cost of euro- denominated loans to finance acquisitions in Europe.”
With regard to current developments, he points out FLCT’s newly acquired Blythe Valley Park located near Birmingham, UK, which it plans to develop the site into four units of logistics warehouses. Management has conducted an evaluation and expects the development to be viable.
Similarly, Farnborough Business Park located in Thames Valley has an office development site, with planning permission for a commercial building with 18,000 sq meters of office space.
FLCT’s management is reviewing feasibility to redevelop the site into a last-mile e-commerce fulfilment centre instead, given its proximity to Farnborough Airport and a high-density residential catchment.
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This is because growth in e-commerce creates demand for more logistics space, with online retailers being heavy-duty users of logistics space.
Koh says online retail sales are supported by three times the logistics space required for brick & mortar retail sales. On average, every US$1 billion of retail sales creates demand for 1 million sq ft of logistics space.
“The US-China trade conflict and the COVID-19 pandemic have caused disruptions and exposed the vulnerabilities of lean just-in-time supply chains. It is estimated that the transition from just-in-time to just-in-case supply chains would increase inventories by 5-10%,” Koh points out.
Shares of FLCT closed on Oct 22 at $1.49, up one cent or 0.68% from its previous close.
