FLCT’s aggregate leverage rose but remained healthy at 36.1%, with a weighted average debt maturity of 2.3 years and interest coverage ratio of 4.5 times. With 69.7% of borrowings at fixed rates, FLCT’s cost of borrowings was 3.0% per annum on a trailing 12-month basis.
Finance costs were higher mainly due to the increase in interest rates and additional borrowings for developments and acquisitions. Distributable income for 1HFY2025 fell 13.5% y-o-y to $113.0 million due to higher finance costs, higher tax expense and 56.9% of 1HFY2025 management fees paid in the form of cash.
JP Morgan points out that since November 2024 when FLCT announced its FY2024 results, FLCT' s unit price has fallen 7.5% underperforming the S-REIT Index which gained 2.2%. It attributed this is to a 10%-12% cut in FLCT's consensus DPU for FY2025 and 2026.
“We believe FLCT will continue to disappoint, as we project FY2025 and FY2026 DPU to fall 16% and 4% y-o-y. While headwinds from the exit of Google at ATP and higher borrowing costs have been well known since last year, the AUD has depreciated further, margins have missed expectations, commercial portfolio occupancy has slipped with upcoming vacancies and the amount of capital top-ups is falling faster,” say JP Morgan analysts Mervin Song and Terence Khi in a report dated May 8.
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JP Morgan’s FY2025 and FY2026 DPU estimates are 4% and 8% below the Street’s. According to the report, valuations remain unattractive, with FLCT trading on an FY2025 DPU yield of 5.6% (excluding top-ups) compared to the core S-REIT average yield of 5.9%, other industrial REITs’ core yield and FLCT’s historical mean yield of 6.2%. For instance CapitaLand Ascendas REITis trading at 5.7% while Mapletree Logistics Trustand Mapletree Industrial Trustare trading at 6.5%.
“We expect a 10% p.a. decline in DPU over the next two years as FLCT faces interest rate headwinds, given that management estimates the cost of debt to rise to mid-3% in 2H2025 and to be marginally higher in FY2026 versus 3% in 2Q2025,” JP Morgan says.
In addition, JP Morgan estimates that FLCT is facing vacancies of around 2% of its gross rental income, the potential sale of 357 Collins Street whose occupancy has dropped to 63.9% compared to more than 80% in FY2024, the depreciation of the AUD, and continued vacancy at ATP. "We believe FLCT’s level of capital top-ups and DPU remains unsustainable. Even if gearing increases to 40% from 36% for acquisitions, we estimate FLCT can only deliver an annual DPU of 4.97 cents - 5.34 cents, below the Street's FY2025 DPU forecast of 6 cents," the report points out.
As a result of the headwinds, JP Morgan has cut FLCT’s target price to 80 cents from 85 cents with an underweight recommendation. FLCT closed at 83 cents on May 8.
