The DPU accounted for 46.4% and 47.3% of OIR’s and the street’s initial FY2025 DPU forecasts respectively. “We expect capital distribution from divestment gains to ease sequentially in 2HFY2025,” states OIR.
Revenue and net property income (NPI) increased 7.5% y-o-y and 5.4% y-o-y to $232.3 million and $167.4 million respectively. Net finance costs jumped 37.5% y-o-y to $39.0 million and FLCT took a smaller proportion of management fees in units (43.1% versus 100% in 1HFY24).
For the 2QFY2025 ended Mar 31, rental reversions came in at 33.0% for its logistics and industrial (L&I) portfolio but 0.3% lower for its commercial portfolio, culminating in an overall portfolio rental reversion of 19.2%.
The team at OIR notes that the slightly negative rental reversions for FLCT’s commercial portfolio were due to its weaker Singapore assets, which offset positive rental uplifts in the UK, and Victoria and Western Australia.
“The softer rents in Singapore were due to the backfilling of space vacated by Google at Alexandra Technopark (ATP), with around 54% of the vacated space backfilled. New tenants to the property came from industries such as engineering, third-party logistics (3PLs) and transport and freight,” writes the team.
While committed occupancy at ATP stood at 77.1%, physical occupancy was only at 66.4% with the signed leases to commence in due course.
Due largely to the higher vacancies at ATP, occupancy for FLCT’s commercial portfolio fell 1.4 percentage points (ppts) q-o-q to 84.1%. As the occupancy at its L&I portfolio was much higher at 99.6%, this resulted in overall portfolio occupancy of 93.9%, versus 94.3% in the preceding quarter.
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Meanwhile, FLCT’s aggregate leverage ratio edged down marginally from 36.2% to 36.1%, with 69.7% of its debt fixed.
The REIT’s interest coverage ratio remains high at 4.5 times, and its cost of debt inched down 0.1 ppts q-o-q to 3.0% on a trailing three-months basis.
The team of OIR analysts still expect this to increase to a mid-3% for the FY2025 due to the refinancing of low-cost debt taken in the past.
Given the lower-than-expected 1HFY25 results, the team has cut their FY2025 and FY2026 DPU forecasts by 8.3% and 6.3% respectively.
“We also raise our cost of equity assumption from 6.8% to 7.1%, which is in-line with our approach for a number of the other industrial S-REITs under coverage,” adds the team.
Potential catalysts noted by them include a stronger-than-expected growth in industrial rents in Australia and Europe, DPU accretive acquisitions, as well as a better-than-expected hedge rate for the A$, GBP and EUR.
Conversely, investment risks include a slowdown in macroeconomic conditions which may impact business sentiment, any spike in interest rates which could raise the borrowing costs of FLCT and finally, depreciation in the A$, GBP and EUR against the Singapore dollar which may impact distributions to unitholders.
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Meanwhile, CGSI’s Lock Mun Yee has lowered her FY2025 to FY2027 DPU by 14.6% to 21.7% as she adjusts for lower capital distributions and higher-than-projected interest expenses.
She notes that FLCT has 5.2% of L&I and commercial leases due to be recontracted in 2HFY2025, including the Techtronic lease, which, according to the manager, is unlikely to be renewed.
On this, she writes: “FLCT is considering leasing options for this property, including dividing the floor area into smaller lots to cater to tenants looking for smaller floor areas.”
FLCT has indicated that it will continue to evaluate both acquisition and divestment opportunities to optimise its longer-term portfolio returns, says Lock.
One key downside risk noted by her includes the REIT’s inability to make accretive purchases.
Like their fellow analysts, DBS Group Research’s (DBS) Dale Lai and Derek Tan have kept their “buy’ call on this counter with a reduced TP of $1.05 from $1.10 previously.
They note that FLCT’s softer DPU, while in-line with their earlier forecasts, was mainly due to the weaker AU$ and EUR against the Singapore dollar, higher financing costs, and the partial payment of management fees in cash.
They add that in order to help buffer DPU, the REIT’s management also used around $18 million in distribution gains during the first half of the year.
“However, we understand that management intends to gradually reduce reliance on such distribution gains to support payouts moving forward, aiming for a more sustainable distribution profile over time,” write Lai and Tan.
On FLCT’s ATP asset, they write: “Given the rising economic uncertainties and persistent global trade tensions, we believe it may take a longer timeline to secure replacement tenants at ATP, as well as for the other vacancies within the portfolio.”
Lai and Tan have also assumed a drop in divest gains distribution in their forecasts, with future distributions that are higher than their assumptions leading to upside to their numbers.
Despite the REIT’s near-term challenges, they continue to hold a positive view on FLCT’s L&I portfolio.
“The segment is underpinned by a long weighted average lease expiry (WALE), high occupancy, and continued tenant demand, which should continue to deliver stable and healthy returns,” write Lai and Tan.
They add: “We see the issues within the commercial portfolio, particularly at ATP, as a temporary overhang that will ease once leasing momentum picks up again. In addition, the counter is trading at 0.8 times price to book value (P/B), which is 1.5 standard deviation (s.d.) below its five-year historical average, suggesting the headwinds could be priced in.”
As at 4.30 pm, units in FLCT are trading 3 cents lower or 3.47% down at 83.5 cents.
