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Frasers Logistics & Industrial Trust Latest Earnings: Exchange Rate Continues to Weigh on DPU

Frasers Logistics and Industrial Trust (SGX: BUOU), a REIT that invests in income-generating logistics and industrial properties, recently announced its third-quarter 2019 (Q3 2019) earnings. Its portfolio comprises 81 properties worth around 2.9 billion Australian dollars in major logistics and industrial markets in Australia, Germany, and the Netherlands. Its sponsor is Frasers Property Limited (SGX: TQ5), a property developer that owns, develops, and manages total assets of approximately S$33.2 billion as of 31 March 2019.

Though FLT reported improved performances in revenue, net property income, and distributable income for the quarter, the weak Australian dollar (AUD) continued to weigh on Singapore-dollar (SGD) distributions. This has been a recurring theme for FLT in the last few quarters — though there has been growth in FLT’s portfolio thanks to acquisitions and capital recycling initiatives, DPU continues to be negatively affected by the weaker Australian dollar.

However, investors should look past this quarter’s performance and take comfort in the initiatives put in place by the REIT to continue to grow both its portfolio and DPU.

AUD weakening leads to SGD DPU decline

For Q3 2018, the exchange rate used for conversion of the DPU of AU$1.76 was 1 AUD = 1.02 SGD, but the AUD has now depreciated to 1 AUD = 0.95 SGD for Q3 2019. Therefore, even though the DPU in AUD has increased by 3.4% year on year, the SGD DPU declined by almost 4% year on year from S$1.80 to S$1.73.

This continued weakness in the AUD is a result of macro headwinds as well as financial market volatility and turmoil. While the exchange rate has stabilised somewhat in recent months, there are no indications that it will strengthen anytime soon. Investors will need to learn to live with this headwind for a while.

It lowered cost of debt and maintained strong portfolio metrics

The REIT manager has done an excellent job in lowering the overall cost of borrowings from 2.4% to 2.1% by securing a new AU$170 million 5-year term green loan. The low interest rates arise from the negative Euribor interest rates that have persisted.

FLT’s portfolio remained near full occupancy at 99.5%, and there are no lease expiries for the remainder of FY 2019 (ended 30 September 2019). During the quarter, FLT executed two lease renewals, one in Australia and the other in Germany. The Australian lease will expire on May 2025 with annual fixed rental increases of 3.25%, while the German lease will expire on May 2024 with CPI-linked indexation for rental rates. Average rental reversion for the quarter was 1.6%.

Proactive capital recycling

FLT demonstrated proactive capital recycling with the sale of 610 Heatherton Road and a 50% interest in 99 Sandstone Place, both in Australia. I have previously observed that the manager was doing a great job in switching out older properties for newer ones.

The future looks promising

Subsequent to the quarter’s end, FLT announced a proposed acquisition of 12 prime logistics properties in Germany and Australia for a total consideration of around AU$507.2 million. Details of the funding for these acquisitions have yet to be released, but the properties display very attractive characteristics as they are 100% freehold, with 100% occupancy rates and a long weighted average lease expiry of 8.6 years.

In addition, FLT also has the right of first refusal over 21 properties in Europe and 17 properties in Australia from FPL as at 30 June 2019, and this represents more potential injections into the REIT from FPL’s strong pipeline of properties.

In a nutshell, the future looks promising for FLT, and investors should not let the slightly weaker SGD DPU for this quarter affect their outlooks too much.

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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.