Frasers Logistics and Industrial Trust (SGX: BUOU), or FLT, is a REIT that invests in logistics and industrial properties. As of 31 March 2019, its portfolio is comprised of 81 properties worth around 2.9 billion Australian dollars, concentrated with major logistics and industrial markets in Australia, Germany, and the Netherlands.
FLT announced a major acquisition of 12 properties located in both Germany (nine) and Australia (three) for AU$507.2 million (around S$481.8 million), and it’s purchasing these properties from its sponsor, Frasers Property Limited (SGX: TQ5). The acquisition will be financed by a mix of equity and debt to be determined at a later date, and it is expected that the entire acquisition process should be completed by the end of August.
Here are five reasons I feel this deal is attractive for unitholders of FLT.
1. It improves the portfolio’s geographic diversification
Since its IPO, FLT has been diversifying its exposure away from being purely Australian-based. In April 2018, the REIT acquired 21 properties in both Germany and the Netherlands, thereby providing unitholders with exposure to Europe in addition to Australia. However, Australia still made up around 65% of the appraised value of the properties within the portfolio.
With this acquisition of 12 more properties, the portfolio will be less concentrated in Australia as that percentage will fall to 56.3%. Germany and the Netherlands will take up 35.8% and 7.9%, respectively, of the portfolio’s appraised value.
2. It improves the portfolio’s property metrics
The 12 properties will also boost FLT’s existing portfolio metrics. The proportion of freehold assets within the portfolio will increase from 77.6% to 81.7% as all 12 properties are freehold. The average age of all the properties within the portfolio will fall from 7.7 years to 7.0 years, as the average age of the 12 new properties is just 3.7 years. This is a positive for FLT as the new properties come equipped with high-specification installations and state-of-the-art facilities. The portfolio’s weighted average lease expiry (WALE) will tick up slightly from 6.5 years to 6.7 years, offering unitholders more certainty on rental income flows.
3. It’s a timely acquisition
The acquisitions are proposed at a time when both Australia and Europe are enjoying low interest rates. This lowers borrowing costs for the REIT and increases the spread between net property income yield (of around 3.7%) and the cost of financing. Historically low exchange rates for AUD and EUR also signify potential upside for Singapore-based unitholders as an improvement in these economies would strengthen rates over time.
4. It reduces FLT’s tenant concentration risk
Source: FLT’s Acquisition Presentation Slides 3 July 2019
FLT will reduce its tenant concentration risk through these acquisitions. Previously, the REIT’s top ten tenants by gross rental income (GRI) made up 30% of GRI, and the largest tenant (BMW Group) made up 3.9% of GRI. With the acquisitions, a new tenant (Hermes) has been introduced into the top ten, and the top ten tenants now comprise just 26.2% of GRI, while BMW Group’s contribution to GRI has been diluted down to 3.3%.
5. It should improve FLT’s financial metrics, specifically with a higher DPU
With these acquisitions, FLT’s enlarged portfolio is expected to deliver higher net property income as well as higher net distributable income. FLT’s projected distribution per unit (DPU) for H1 FY 2019 (ended 31 March 2019) is expected to rise by 1.1% in Singapore-dollar terms to 3.58 Singapore cents after accounting for recent divestments. When annualised, the full-year dividend is anticipated to hit 7.16 Singapore cents, which translates to a forward dividend yield of 5.9% at the FLT’s traded price of S$1.22.
Potential future asset injections into FLT
Unitholders should also note that as of 31 March 2019, FLT has the right of first refusal over its sponsor’s remaining 35 Australian and European logistics and industrial assets amounting to around 1.1 million square metres. This sets up a good pipeline for asset injections into the REIT over the next few years. Frasers Property Limited could also acquire more assets over time in preparation for potential injection into FLT.
Pending the finalisation of the financing terms for these acquisitions, I feel that the above five factors and the potential future asset injections augur well for FLT unitholders, and that FLT justifiably qualifies as a great long-term investment.
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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Singapore contributor Royston Yang owns shares in Frasers Logistics and Industrial Trust.