The Motley Fool

Frasers Logistics and Industrial Trust: Key Risks and When I Will Sell

Recently, I wrote an article on why Frasers Logistics and Industrial Trust (SGX: BUOU) is an important piece in my portfolio. Besides providing me with exposure to the Australian and European real estate market, the REIT also boasts leases with annual rent escalations, owns predominantly freehold properties, and recently made an acquisition that will boost its distribution per unit (DPU).

But despite my fondness for the REIT, there are still risks to the investment. In this article, I highlight two key risks facing Frasers Logistics and Industrial Trust, and when I will consider selling.

Risk 1: Foreign currency risk

As Frasers Logistics and Industrial Trust collects its rental income in Australian dollars (AUD) and Euro (EUR), there is a risk that foreign currency fluctuations might impact its Singapore dollar (SGD)- denominated DPU.

In fact, the depreciation of the AUD last year already had a painful impact on its DPU. In the quarter ended 30 June 2019, DPU in Australian dollars increased by 3.4% compared to the same period last year. However, because of the softening of the AUD and EUR against the SGD, its SGD-denominated DPU decreased by 3.9%.

Risk 2: Management’s inclination to raise funds through private placements

Frasers Logistics and Industrial Trust has twice raised funds through a private placement in the last year or so. 

Although private placements may be a faster way to raise funds, it may not always be beneficial to retail unitholders. If the new units issued are priced below book value, it may result in a dilutive impact to book value per unit.

Although I was positive about the last private placement, as I believe new units were issued at a reasonable price, this may not always be the case. Investors will need to watch this space carefully to see if the REIT managers are keeping minority unitholders interest at heart.

Scenarios in which I might sell

As for now, I intend to hold Frasers Logistics and Industrial Trust for the long-term. However, things could change in the future. 

If the Australian dollar continues its slide, the trust’s DPU may be impacted further. Although I think the risk is small, if the situation does get out of hand, I might have to reconsider my position.

In addition, alarm bells will ring if the REIT decides to raise funds through a private placement at unfairly low valuations. If that happens, it may be a sign that the manager may not be keeping minority unitholders’ interest at heart, and I may have to decide if the REIT is still worth holding on to.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia owns units of Frasers Logistics and Industrial Trust.