Frasers Logistics and Commercial Trust (FLCT) has on Feb 4 released its 1QFY2025 ended Dec 31, 2024 business update, which The trust reported an active leasing momentum with overall positive rent reversions achieved. It has 175,000 sqm of leases and renewals, with logistics and industrial (L&I) rental reversions came in at 21.3% higher (outgoing vs incoming) and 41.8% higher (average vs average) for about 126,800 sqm of new/renewal leases signed in 1QFY2025.
The trust has also continued its prudent capital management, with 4.9x interest coverage ratio, as compared to 5.0x in the previous quarter. The trailing 12-month borrowing cost stands at 2.9%, while the trailing three-month borrowing cost is at 3.1%.
See more: FLCT posts higher rental reversions in 1QFY2025 update
Following the announcement, analysts have kept a rather positive view on the counter, as the trust’s outlook is expected to be rosy.
CGS International has kept its “add” call and $1.35 target price on FLCT, as analyst Lock Mun Yee likes the trust’s L&I segment that “continues to shine”, as well as its visible inorganic growth potential and robust balance sheet.
Within the commercial portfolio there was occupancy slippage at Alexandra Technopark (ATP), 357 Collins St and Blythe Valley Park, partly offset by uptick at Central Park, Maxis Business Park and Farnborough Business Park.
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According to management, about 25% of phase 1 (returned in Feb 2024) and 29% of phase 2 space (expired Dec 2024) previously occupied by Google has been backfilled to date, implying that about 27-28% of the total space to be returned by Google would have been re-leased, by CGS International’s estimates. Meanwhile, the Commonwealth of Australia lease at Caroline Chisholm Centre was renewed, extending the weighted average lease expiry (WALE) to 12.5 years.
During the first quarter, gearing has risen to 36.2% after the acquisition of the trust’s maiden Singapore logistics asset and borrowings stood at 3.1%. Management has guided that its average funding cost is likely to rise to mid-3% if its $709 million of debt maturing in FY2025 is refinanced at current market rates. As for growth strategies, FLCT said it continues to evaluate both acquisition and divestment opportunities, to optimise its longer-term portfolio returns.
DBS Group Research too has maintained its “buy” call but lowered its target price on FLCT to $1.10 from $1.30 previously.
Analysts Dale Lai and Derek Tan likes that FLCT is a large-cap logistics REIT with a sizeable debt room. FLCT has one of the lowest gearing of about 36% compared to its peers and a debt headroom of over $400 million before gearing reaches 40%.
Following its divestment of Cross Street Exchange (CSE), FLCT has been actively redeploying proceeds into higher yielding assets. Recently, FLCT made its maiden acquisition of a logistics facility in Singapore.
Lai and Tan also see development and asset enhancement initiative (AEI) projects as another growth driver.
“Having successfully completed several forward-funded development projects in the past two years, we believe further development and AEI projects will complement FLCT’s acquisition plans going forward,” say the analysts.
In addition to the recently completed development of Ellesmere Port (UK), FLCT has an ongoing development in Maastricht (Netherlands). “We understand that the REIT will continue to focus on acquiring forward-funded projects or assets with “value-add” opportunities, such as those with potential for expansion,” add Lai and Tan.
The analysts are also upbeat on the trust’s right of first refusal (ROFR) pipeline from its sponsor. Since its merger with Frasers Commercial Trust (FCOT) in 2020, the FLCT has acquired assets worth about $800 million from its sponsor. Despite this, FLT still has the largest ROFR pipeline, valued at more than $5.0 billion, which could double its portfolio, providing unparalleled visibility. Its currently low gearing also provides it with ample debt headroom to fund acquisitions.
Meanwhile, Morningstar has a five out of five star rating on FLCT, where analyst Xavier Lee believes that appreciation beyond a fair risk adjusted return is highly likely over a multi-year time frame. Scenario analysis developed also indicates that the current market price represents an excessively pessimistic outlook, limiting downside risk and maximising upside potential.
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Management highlighted that they would like to use their debt headroom to pursue growth and may reduce some of the capital gains distribution from its divestment gains. That said, they are mindful of investors’ concern over the impact it may have on its DPU and shared that they will look to strike a balance between growth and unitholders’ return.
“We are cutting our fiscal FY2025-FY2027 DPU estimates by 5.3%-6.6% after lowering our capital distribution forecasts and increasing our financing cost assumptions to account for the higher for longer interest rate environment. However, our fair value estimate of $1.14 per unit is retained as our key assumptions on the terminal value remain intact,” says Lee, who is in the view that the units in FLCT are undervalued currently
Lee also likes the trust’s portfolio of high-quality logistics and industrial assets in Australia, which are still enjoying favourable demand and supply dynamics.
Management notes that the leasing environment remains challenging for its Australian commercial properties, as the trend of hybrid and remote work is here to stay. On the other hand, management expects the L&I portfolio to continue to register robust rental reversion numbers given that the existing leases are 20%-30% below the current market rents.
As at 3.45pm, units in FLCT are trading at 88 cents.
