Largest pure-play exposure to favourable Australian industrial
FLT is the first S-REIT with an initial pure-play Australian industrial portfolio of A$1.74bn, making it the fourth largest industrial owner in Australia. Its portfolio comprises 54 industrial properties located across the major cities of Melbourne, Sydney, Brisbane, Perth and Adelaide, with an aggregate GLA of 1.23m sqm. 96.9% of its portfolio value is concentrated on the eastern seaboard. Unlike other S-REITs with Australian exposure, FLT has minimised carry trade concerns by funding fully in 100% A$-debt.
Why Australia?
Australia has sustained 25 years of uninterrupted growth, with domestic consumption emerging as an engine of economic growth. Our economist at Morgans (our Australian JV partner) expects GDP growth to accelerate moderately at 3% for 2017. Rising consumption, e-commerce and internalisation of the retail sector is driving demand for 3PLs and logistics facilities. This has led to favourable supply-demand dynamics where cap rate compression, tightening occupancy and rental growth have been observed.
All shiny and chrome
FLT has a prime portfolio which ticks all the checkboxes: i) properties which are located in core markets with strong connectivity to key infrastructure, ii) a predominantly freehold/long leasehold and young portfolio, iii) a quality tenant base which accords the trust a high portfolio occupancy of 99.3% and long WALE of 6.9 years with built-in step-ups averaging 3.2% p.a. and lastly, iv) one of the largest Green Star performance rated industrial portfolios in Australia.
Strong sponsor with an established track record
Unlike the other industrial S-REITs with exposure in Australia, FLT is backed by sponsor FCL, which through FPA, has an end-to-end development platform and is a market leader in Australia’s industrial sector (15-25% market share over 2001-15). In fact, 100% of FLT’s portfolio was developed by FPA. Further, FPA has a development pipeline with an estimated completed value of A$850m, which offers FLT a strategic avenue to pursue inorganic growth, especially with an increasingly low availability of prime assets.
Forecast FY17 DPU of 6.87 Scts; 3.4% yoy DPU growth for FY18
Factoring in rental step-up of 3.2% p.a. and full-year contributions from the call option and development properties, we project FLT to achieve 6.87 Scts for FY17. We project muted underlying A$-distribution growth as negative rental reversions offset annual step-ups. FLT’s portfolio is slightly over-rented. However, as the A$ is appreciating against the S$, we expect FY18 distributions to be hedged at more favourable rates vs. FY17 distributions, which were hedged pre-Brexit, at an average A$:S$ of 1.0.
Initiate FLT as one of our sector preferred picks
We initiate FLT with an Add and DDM TP of S$1.10, translating into total returns of 18%, one of the meatiest in our coverage. Given CDREIT’s YTD 10% outperformance (one of the better performing S-REITs), we replace the former with FLT as one of our sector preferred picks (the other being MAGIC). Key downside risk is a turn in Australia’s industrial market. FX risk is mitigated as FLT’s units are traded in both A$ and S$ (the units are fungible), and investors can elect to receive dividends in A$ or S$.
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