Sunday, 12 June 2016

Frasers Logistics and Industrial Trust

Another REIT is going IPO, this times, it's an Australian pure-play REIT with logistics and industrial properties, Frasers Logistics and Industrial Trust. With the Australian dollar at a fairly favourable exchange rate to the Sing dollar now, or at least compared to the past, it might be a good chance to invest in Australian assets.

(Image source: Frasers Logistics and Industrial Trust prospectus)

Looking at the profit and loss statement, I'll be using the pro forma financial statements provided in the prospectus. The distributable income looks so-so, with around $0.05 per unit (I'll use a A$1 = S$1 exchange rate, while the prospectus uses a A$1 = S$0.99 exchange rate), translating to a ~18 P/E ratio, not particularly low for a REIT. Also, some of its income is from tax related and other adjustments and I couldn't find any information on it in the notes as to why it's positive and removing that, the P/E ratio goes up to around 25, which is quite high for any company. Maybe I'm worrying too much about this though, since it could be a refund of its tax paid in Singapore since its a REIT. It also doesn't have a large amount of fair value gains like some other REITs that increase the earnings of the company, it's fair value adjustments are negative.

The balance sheet seems quite safe with a low net gearing ratio of 0.34 which is quite low for a REIT. But the REIT offer price is above book value, which is uncommon among REITs now, which makes it comparatively expensive. Given that its return on equity doesn't seem particularly when looking at the above financial statements, the REIT would seem overpriced at its offer price given its P/B and P/E ratio.

I have nothing much to add for the cash flow statement, so moving on. The REIT seems to be fairly overpriced at its offer price, but given that the Australian dollar has fallen quite a fair bit due to the slump in commodity prices, its returns may increase when and if the Australian dollar does recover back to its original levels, but this may take quite a while given Australia's exposure to the commodity business and that commodity prices don't seem to be recovering. But the REIT seems to be able to maintain its income due to a Weighted Average Lease Expiry (WALE) of 6.9 years

While the REIT may have a stable income stream with its long WALE and have some upside with foreign exchange, but I don't think I'll be investing in the REIT as for the time being, its offer price is quite high relative to other REITs and also the currency upside may turn out to be a downside so I wouldn't really count on it to push up the returns of the investment.

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  1. why do you think this portfolio is fair. isnt the quality of the assets much higher than what we have in singapore consider its free hold, long wale and rental escalation?

    1. Hi Kyith,

      I think they have quite a lot of leasehold properties (around 40% of value) as well. And yes, the relatively long WALE and built in rental escalation is good. But for me, it seems a bit expensive considering that investors at the offer price are paying above book value while there are many other REITs selling at below book value and with much lower P/E ratios

    2. i think you are basing too much on that lower than book value is actually a good thing on reits. if you google up george soros what he wrote about in alchemy in finance about reits in the 1970s when they first started out, then it will give you a perspective on that.

      on another note. what if the asset value of the local reits are expensive in the first place?

    3. Hi Kyith,

      I have not read the book alchemy in finance, but I'll try to get it in the future. I think the local REITs may be better also because of their lower P/E ratio while the P/E ratio on the company is higher and it also has a tax related and other adjustments part that accounts for a fair bit of profits and didn't see an explanation in the notes, which may be of concern.

      And yes, some local REITs may be overpriced as well, but I think there are some which are of better value and I would rather invest in than in this issue (I'm thinking of Soilbuild as a comparison since it's also in industrial property)

    4. Google up the "Alchemy of REITs" and Soros and you will find the resources. Then think about how AREIT recent australia purchase, and Parkway Life REITs growth.

      How would you determine value? I believe PE is a rather irrelevant measure for REITs consider that the earnings picture is rather differnet from traditional.

      The emphasis on book value is challenging. I believe for you the total return of a 8% yielding soilbuild with 0% rental growth is much more safer then a geographcially diversified industrial reit.

    5. Hi Kyith,

      It's not that I'm emphasising book value of a REIT above all else but it's return on equity and earnings are not high enough to justify that price (so the vicious cycle of raising more capital might not even start)

      And Soilbuild has rental escalations averaging 2-3% as well for its business parks which make up half its gross rental income and so far it's rental reversion a for last year were in that range as well. Just that its occupancy dropped slightly due to the softer market here. But FLT is not geographically diversified given that it is only exposed to the Australian market so it would also be affected by adverse conditions there

  2. IPO = It's Probably Overpriced is true almost all the time.
    But the Cornerstones and Institutions oversubscribed 6 times.
    Not overpriced enough for them, meh?
    They know something that the public has no access to (besides special discount)?

    We just have to wait to see the 1st day of trading after IPO lol!
    What the actual market will do then is everybody guess.

    1. Hi temperament,

      But the BHG REIT last year was also oversubscribed by quite a lot yet it's price is now below the IPO price, though it's price held for the first day of trading, so the institutional investors may not always be right, so yeah, whatever happens in the future is anyone's guess

    2. It's good to listen to opposite view in investment.
      That we may be reminded there is no 100 % sure thing.
      (If we are not careful, we can fall in love with our own view)
      So that we may not commit our all at one go.
      That's the same to say don't let "GREED" gets into your heart in investing.