(July 8): Frasers Logistics & Industrial Trust’s latest proposed acquisition marks a round of capital recycling. Following a spate of recent divestments, FLT on July 3 announced that it was buying a portfolio of 12 logistics properties from its sponsor Frasers Property for A$644.7 million ($612.5 million), which is 1% off the appraised value.
Nine of the 12 properties acquired are located in Germany, which marks FLT’s deeper move into Europe’s largest economy. The remaining three consist of one each in Melbourne, Sydney and Brisbane. The purchase will be funded by a mix of equity and debt at a ratio to be decided.
Over the past three months, FLT divested stakes in three assets: two properties in Melbourne and a 50% interest in another property in Parkinson, Queensland.
“We have gone through a little bit of an asset recycling programme,” says Robert Wallace, CEO of Frasers Logistics & Industrial Asset Management, in an interview with The Edge Singapore. “From our viewpoint, we have been able to use those funds released through the sale to apply them to these acquisitions,” he adds.
The 12 properties — all freehold — are set to enhance FLT’s portfolio. They are relatively new, with an average age of just 3.7 years. They come with a weighted average lease expiry of 8.6 years. The addition of these properties to the portfolio will lower the average age of FLT’s properties to seven years from 7.7 years. On the other hand, WALE will increase to 6.7 years from 6.5 years.
“We wanted to get assets that would be enhancing not just from a DPU perspective but also from the metrics of FLT. We think we have been able to achieve this; we have increased the WALE of the portfolio and the expiry profile. We are getting a portfolio of assets that is DPU-accretive and enhances our [overall] portfolio as well,” says Wallace.
He claims that logistics assets are a popular asset class at the moment, thanks to the surge in e-commerce activities, where more storage and distribution space is needed.
“[These properties] are modern and in fact very much involved in e-commerce, particularly the asset in Berlin and the one near Stuttgart. These assets have a very high level of investment in automation, to the extent of about €30 million [$45.9 million] each. That’s almost the value of the property itself,” he says.
Upon completion of this acquisition, FLT’s German exposure will be increased to 35.8% from 25.7% now. However, the bulk of FLT’s portfolio remains in Australia, although it will drop to 56.3% from 64.6% after the acquisition. The Netherlands, by contrast, will drop to 7.9% from 9.7%.
FLT’s original portfolio of assets comprised properties in Australia. Germany is a relatively new market. It only entered that country in April last year with the acquisition of 21 properties there and in the Netherlands for $972.8 million.
If Wallace has his way, FLT will be staying put in Germany for some time. “We like what we saw then [in Germany] and we like what we see now,” he says.
Furthermore, there are restrictions in supply in many of the markets FLT is in, such as Munich, Stuttgart and the Rhineland region. In Munich, for example, land use rates since 2015 have been at near-full levels, with vacancy rates lower than 2.5%. “That’s translating through to rental growth in those markets, and tenant retention rates and [shorter] down times as well,” says Wallace. Tenants, he says, show “great stickiness”.
By contrast, the Netherlands is a much smaller economy than Germany. However, the low country, with great ports such as Rotterdam, has for centuries been a transport and logistics hub for not just the continent but beyond. Hence, FLT is on the lookout for more assets there. “We think the fundamentals are strong in the Netherlands and it is certainly a market we are keen to explore,” Wallace says.
Is FLT’s latest big bet on Europe a signal that it is diversifying away from Australia? FLT’s core market has enjoyed steady growth, but there are recent signs of a slowdown, prompting the Australian Reserve Bank to cut rates.
Wallace says industrial rental growth in key cities such as Sydney and Melbourne were up 3.5% and 2.2% respectively in 1Q2019 ended March 31. “From a property fundamental viewpoint, we are seeing a good level of take-up and vacancy levels [falling], and we are quite buoyed by three major markets in Australia: Brisbane, Sydney and Melbourne,” he says.
Of the three Australian properties that FLT will be acquiring, the youngest one in the portfolio is just over a month old. This property in Sydney is subject to a five-year rental support from the sponsor, as it is just completed. The 12 properties enjoy a 100% occupancy rate as a result.
A key thing to note is that the tenant base will be improved with the acquisition, with 26.2% of the gross rental income coming from the top 10 tenants, down from 30% now.
The 12 new properties will have tenants such as engineering and technology company Bosch, Germany’s largest supermarket chain Edeka and its largest logistics provider Hermes, joining the tenant mix. Hermes, in particular, will be among the top 10 FLT tenants by gross rental income.
“The quality of the tenants post-acquisition is strong. We are not reliant on any particular customer. It is a good spread, with a diverse customer mix across our large portfolio,” says Wallace.
Pro forma net property income is likely to rise 10% y-o-y to A$109.1 million (based on 1HFY2019 financials) after the Melbourne and Queensland divestments and the German and Australian acquisitions announced on July 3. In turn, pro forma distributable income is likely to rise 12.5% y-o-y to A$82.8 million.
Assuming the equity portion is funded through a placement of around 226.7 million units, as illustrated by FLT, net asset value would rise 3.2% to 98 Australian cents and DPU would rise 1.4% to 3.68 Australian cents. These translate into NAV of 94 cents, DPU of 3.58 cents, with yield at 5.82% and price-to-NAV at 1.3 times.
FLT closed on July 3 at $1.23, up one cent. Year to date, FLT has gained 19.4%. At this level, it is valued at $2.49 billion.
