Sunday, February 12, 2017

Frasers Logistics & Industrial Trust(BUOU)

Draft: 2/4/2017 (Market size: 1.355b, PB: 1.124; 1.43b units)


While reading some online blog's recent article, I notice this post from ASSI, one of the well-known financially independent bloggers, on Frasers Logistics & Industrial Trust(FLT). His entry price is 92.5c.

I decided to take a look myself.

FLT IPO in Jun 2016, 850-page prospectus can be found here. Invest mainly in industrial properties in Australia. IPO price 0.89/unit. (1A$=1.01S$), market cap of S$1.27b at IPO list price.
Listing expense S$29m.

AU GDP expected grow 4.9% from 2014 to 2016(2.7% p.a till 2020),with AU$50b commitment on "Infrastructure Growth Pkg". AU Interest rate 1.75% in 05/2016.

Sponsor: FCL.
51 properties(and another 3 call-option properties), S$1.6billion, 1.16m sqm under mgmt. 98.3% occupancy, 68 tenants(profile, consumer companies and e-comm biz). 60% freehold, 30.2% for at least 80y leases. (=>A$1400/sqm)
WALE: weighted average lease expiry. (6.9years)
NPI: Net Property Income(A$107.9m)
GLA: gross lettable area.
ROFR: right of first refusal
FPA: Frasers Property Australia. (90years in Australia), offers free rental and fit out allowances to tenants in 14 properties.
AEI: Asset Enhancement Initiative.
HAUT: head Australian trust(FLT Australia Trust)
MIT: managed investment trust
Considered as ALT(Australia Land Trust)

Demand & Supply:
Pg 47/850 states: approx. 1.3m sqm of new supply completed in 2015, more than 20% below the 10-y annual average of 1.7m... occupier take-up 2.3m sqm in 2015, above 10-y average at 2m sqm.
<details on Pg 236/Pg 727>

Pg 237: Goodman group, Charter Hall, Dexus, 360 Capital <FLT ranks 4th>
SREITs: Ascendas REIT(yield 6.02%), Mapletree logistics trust, AIMS AMP Capital Ind. REIT, Cache logistics trust.

Typical lease term in AU:

Existing buildings  Development lease  Speculative construction
Typical lease term (years)  3 to 5 years  10 to 20 years  5 to 10 years
Typical rental escalation p.a.  3.0% to 3.5%  2.75% to 3.5%  3.0% to 3.5%
Typical incentive (new lease) 5% up to 30%  10% up to 30%  10% up to 35%
Growth potential: organic growth 3.2%(2.5~3.75%) annual rental increments; inorganic: ROFR assets(147k sqm) from Sponsor.

47.3% of rental income from top 10 tenants, largest being with Coles(supermarket),15.6%.
<Risk factor: subject to the risk of loss of anchor tenants, non-renewal, non-replacement or early termination of leases>
Pg 699: Closure of Ford, Toyota and GM plants in 2017 will have negative impact (1m sqm) to AU L&I rental market (Melbourne and Adelaide), impacting 8.2% of FLT's portfolio income, if counting other tyre, parts companies' usage. (Risk of significant vacancy with car manufacturing closure)

Distribution policy: 100% attributable income for 2016, 2017; 90% thereafter.
REIT mgr fee: 0.4% per annum of deposited property value (S$6m+)
Performance fee: 5% per annum of distributable income of FLT. (S$4m+)
REIT trustee(Perpetual (Asia) Ltd) 's fee: 0.015% per annum of deposited property value
Property mgmt fee and Lease mgmt fee: 1.2% per annum of NPI
(from pg 76, complicated reason is explained on Pg 77 of formation of HAUT)


Pro Forma P/L

Gross revenue 100,726
Property Op Ex -15,584
Net Property Income 85,142 84.5% 83,458 82.6% 92,302 83.1%
REIT Mgr's mgt fee -7,788 7.7% -7,966 7.9% -8,736 7.9%
Trustees’ fees -161 0.2% -171 0.2% -181 0.2%
Other trust expense -12,864 12.8% -2,400 2.4% -3,716 3.3%
Finance cost

Fair value adj to investment property -36,167
Total return for the period bef tax 28,162 28.0% 62,038 61.4% 61,344 55.3%
Tax -9,658 34.3% -9,586 15.5% -10,830 17.7%
Total return after Tax 18,504 18.4% 52,452 51.9% 50,514 45.5%
Other adjustments 50,660
Income available to Unitholders 69,164 68.7% 68,288 67.6% 71,895 64.8%

(AU tax rate: company 30%, trust 47%)
<due to straightline account, rental income adjustment will cause gross rental incoming reported in FR to be reduced each year? only if can be offset by addition of new tenancy>


As Dec 2015(A$'000)
Investment properties 1,604,039
Other non-current assets 7,650
Total non-current assets 1,611,689 97.3%
Cash/equivalents 36,879
Other current assets 7,319
Total current assets 44,198 2.7%
Total 1,655,887 100.0%

Total Current liabilities 6,757 0.4%
Other non-current payables 7,650
Borrowings 418,200
Total non-current liabilities 425,850 25.7%
Total liabilities 432,607 26.1%
Net assets to Unitholders  1,223,280 73.9%
 (other non-current assets, other current assets are from FPA under incentive reimbursement arrangement)

CFO(2015), 73.9m A$. Net cash generated from op(after tax): 67m A$.

IPO proceeds used for:
  • consideration for the purchase of the IPO properties
  • payment for related acquisition cost, issuance cost
  • working capital
 (2.7% premium over NAV when listed)

Pg 200 (projected 2017 income, I don't understand why add back fair value, mgmt fee, deferred tax)

Auditor: Ernst & Young LLP.
Valuers: Savills Valuations Pty Ltd, Urbis Valuations Pty Ltd.
<in the valuation reports annex-E, pg 515/Savills: Discount rate 8.25% is used, with majority of properties valued having an IRR of 8.xx%; pg 637/Urbis: DR 7.75%, with IRR of 7.xx%>

S-REITs regulation: 45% aggregate leverage. = total borrowings (including deferred payments for assets) to the value of the Deposited Property.

Frasers is controlled by TCC group, whose chairman is Charoen Sirivadhanabhakdi who owns ThaiBev.

Throughout the reading of prospectus, I notice a lot of acronyms, is that fashionable for Investment banker to draft their docs in mountains of acronyms? It is just such a headache for readers.

A lot of duplicated info in the prospectus, does IB feel guilty of getting paid way too much that is why the doc is stuffed with unnecessary duplication?

After reading the prospectus, I have the impression that Trust of such(in that matter any S-REITs) has to pay various fees to so called "manager" or mgmt for the formation of such Trust. Even for divestment of property, quote a hypothetical case, if FLT sells a property due to poor performance because of its initial wrong judgement, REIT mgr still collects money for such buy and sell 'round-trip' transaction, whereas unit holders suffer economically due to "internal transaction(friction) cost" after as-if-non-existent transaction.

 Quoted from prospectus:
"As an investment in a REIT is meant to produce returns over the long-term, investors should not
expect to obtain short-term gains.

Based on Trust Deed, unit holder cannot demand transfer of Deposited Properties from REIT mgr, meaning the underlying assets value has no direct impact to secondary market investor, the pecuniary gain can only be from, other than the usual unit price fluctuation, the distributable rental income. This is illustrated by JLL's top10 competition analysis table, too.
FLT has only BS(rental income) as investment vehicle.  (Pg 777/778)

Two questions:
- Is the current yield attractive to the investor?
- Is the current rental income sustainable and expected growth attractive to the investor?

The beauty is in the eyes of byholder. I decided to buy and hold a small position, not so much of the answers to the above, but I'd like to initial some AU exposure at an acceptable price.

Anyway, go with GIC should not be too wrong.


1 comment:

  1. I do not believe I finished reading of the entire prospectus of FLT, a doc of 850 pages written in English. Bravo!