Frasers Logistics & Commercial Trust (FLCT) is an SGX-listed real estate investment trust that owns a portfolio of 105 industrial and commercial properties in five countries – Singapore (9.9%), Germany (23.8%), the Netherlands (5.5%), the United Kingdom (9.4%), and Australia (51.4%). As of 30 September 2022, FLCT’s portfolio is currently valued at S$6.7 billion.
In view of the current uncertain economic landscape, I was curious about FLCT’s performance in this environment and its management’s outlook on the year ahead. To learn more, I attended FLCT’s most recent annual general meeting.
Here are eight things I learned from the 2023 Frasers Logistics & Commercial Trust AGM.
1. Gross revenue decreased to S$450.2 million, 4.1% lower from S$469.3 million in FY 2021 and adjusted net property income (NPI) decreased 3.7% to S$342.1 million, from S$355.1 million in FY 2021. The decrease in revenue is due to the sale of Cross Street Exchange during the year and the effects of lower exchange rates. In particular, the Singapore dollar had appreciated strongly against Euro, British pound, and Australian dollar in FY 2022.
2. Distributable income rose 4.3% to S$281.8 million, from S$270.1 million in FY 2021. However, distribution per unit (DPU) decreased 0.8% to 7.62 cents, from 7.68 cents in FY 2021. The management attributed the decrease in DPU to the negative movement in the AUD, EUR and GBP against SGD. As of 30 September 2022, NAV per unit has increased to S$1.30, from $1.24 a year ago.
3. As of 30 September 2022, gearing ratio is at 27.4% — one of the lowest amongst S-REITs, providing debt headroom of S$3.2 billion. In FY 2022, FLCT utilised the net divestment proceeds from the sale of Cross Street Exchange to repay S$504.9 million of borrowings. FLCT’s interest coverage ratio is at 13.0 times, putting them in a well position to repay debt due in FY 2023. The company has a high fixed-rate debt ratio of 81.7%.
4. Portfolio occupancy level stood at 96.4%. Based on the sectors, the logistics and industrials portfolio remain fully occupied while the commercial portfolio is relatively stable at 91.2%. In FY 2022, FLCT recorded a tenant retention rate of 79.4%, a result of securing 44 lease renewals and 25 new leases which accounted for over 13.4% of total portfolio lettable area.
With regard to Farnborough Business Park, the decrease from 82% to 75.6% in occupancy rates was due to downsizing of space requirements by one of FLCT’s larger tenants. This was attributed to slowdowns in the tenant’s project pipeline during the pandemic.
Decrease in occupancy rates from 85.3% to 81.9% in Blythe Valley Park was mainly due to lower physical occupancy levels as office workers have been slow to return to their physical workspace. Despite this, the management is confident that Blythe Valley Park will remain well-positioned to capture workspace demand.
5. As reported, the SGD has appreciated strongly against the AUD, EUR and GBP. In light of this, a unitholder asked if FLCT has plans to increase the level of natural hedging given that over 90% of the REIT’s assets are in foreign currency. The management stated that to combat the impact of changes in foreign currency, they intend to borrow in the currencies of the countries where their properties are located to match the future income from these assets. FLCT will optimize the amount of debt based on the assets and debt markets, and all debt used to finance these assets will be in the same currency as the assets in the FLCT portfolio.
6. FLCT’s UK business parks have dropped in valuation by as much as S$45 million. In relation to this, a unitholder asked the management on their views regarding the UK economy and their prospects of this segment. The management shared that the UK economy has faced many challenges despite its diverse economy. In spite of this, they believe that UK will remain an attractive investment market in the long run and FLCT’s business parks will be competitively positioned to capture future demand.
In terms of opportunities for asset enhancements, the management is reviewing opportunities. For example, FLCT is close to completing an industrial property ‘Connexion II’ at Blythe Valley Park which has seen strong leasing momentum. Management remains bullish on the future of their UK segment and will continue to capitalise on future opportunities as it comes.
Here are some of FLCT’s key projects:
7. A unitholder was curious about the management views towards their strategy in terms of geographical expansion and the specific requirements they have. In response, CEO Robert Wallacementioned that they are comfortable in the markets that they operate in and not looking for further international expansion, given the challenges they may face. In terms of his preference, he plans to continue growing the logistics and industrials parks supported by suburban offices in the markets FLCT is in. The management will only look to expand into other locations if compelling opportunities arise and where they have resources – in terms of having people familiar with the ground. At the moment, no such opportunity exists to them.
8. Moving into an uncertain market in 2023, a unitholder asked about the management’s capital allocation strategy. The CEO said that in this rising debt environment, they are patiently looking for investment opportunities. FLCT also intends to manage their portfolio by divesting those assets which they believe will no longer reap future benefits. These divestments will be carefully made, ensuring that they are well-positioned to take advantage of it.
The fifth perspective
In the past year, FLCT has undergone multiple challenges and was negatively impacted by forex volatility, given that their assets are in other countries. Despite this, FLCT’s portfolio remains resilient, and the management has a positive outlook in FY 2023.
Occupancy rates have remained rather stable with good tenant retention. However, for areas that were impacted by the pandemic, we have to continue to monitor their recover. Moving forward, the management remains bullish and FLCT is financially well-positioned to cushion the impacts of the rising interest rate environment.
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