$Frasers L&I Tr(BUOU.SI) Some Takeaways from FLT’s EGM for their 21 Property Purchase in Germany and Netherlands

This post was originally made from my site InvestmentMoats.com , produced here for the benefit of readers and shareholders here. Do visit my blog if you wish to support me.

I attended the extra general meeting (EGM) for Frasers Logistics and Industrial Trust (FLT) yesterday to see if there is any delta differences between what I wrote about of the proposed acquisition and what the management answered.

You can read the post in the URL above.

I didn’t want to write this as I didn’t take down a lot of notes. I also couldn’t hear well since one of my ear is muffled for weeks.

I spoke to Chung Keat the investor relations and Rob Wallace the CEO in brief.

But since some friends asked about it, here it is. This will be rather short. Some of them are my views about the question and answer as well.

A few shareholders questioned why go into Europe. They cited increased currency risks. One or 2 of them question why not set up a European REIT, away from FLT’s which owns Australian properties.  This totally messes up their own plans because with an Australian property REIT they can pick and choose which area they would like to be invested in.

Mr Wallace’s answer is that there was such an opportunity, they felt its good, so they went into it.

I think a few asked me about this question and I honestly do not know what surprise answer are shareholder expecting. FPL owns 22% of FLT, and we see FPL’s purchase last year.

The property will either go into FPL and stay in FPL, go into FLT or another new REIT.

Based on the speed at which this acquisition came after FPL’s purchase it is likely the plan was set in motion last year. This could indirectly be seen as FPL helping FLT purchase first, because FPL have the flexibility to do it faster.

Any other reasoning would provide an alternate view but in all honesty sugar coating it.

It is true that there will be currency risks, but this is as if we are saying that FLT, without the acquisition, do not have any currency risk. The depreciation of the AUD to SGD in recent months come to mind. If you buy in, you are contend to this.

The shareholders want FLT to hedge, but Mr Wallace highlighted they do not wish to engage in speculation. I think what the shareholders wish for is some management magic in speculative hedging here, and perhaps fail to see the purchase of hedging the currency in the first place.

The acquisition comes with little yield accretiveness yet the overall balance sheet is poorer. One gentlemen poses this question early and it is a question on our mind as well.

Mr Wallace explanation is that they believe that this gives FLT an overall stronger long term portfolio.

Where is the growth going to come from? One gentlemen highlighted that the WALE of the portfolio is long, and that annual escalation is not growth because, it only helps to keep up with operating expenses.

Mr Wallace corrects the situation and explains that these new leases are on mostly double net lease, and some are on triple net lease, so the inflation we see in operation for its tenants do not hit them.

Mr Wallace explains that most of the growth will come from tenants who are interested in redeveloping the premises, to improve or expand on them. This is highlighted in the presentation slides which could potentially bring about 2 million Euro in rent increases.

This is not part of the proforma income increases. By my own computation, with the expanded outstanding shares, will bring about 0.16 cents or 2.22% full year improvement over Annualized Q1 2018 financials.

From my conversation with Mr Wallace, they are actively engaging with some of their Australian tenants on this front as well.

This and the 5-10% annual portfolio expiry would be where the growth (negative or positive).

The average rental escalation of the portfolio could potentially go down. Overall 2 of the new properties have rental escalation of 1%, with 89% of the new portfolio have CPI based rental escalation. This is good if there is inflation. Not good if there is an absence in inflation growth.

The current existing portfolio has an average rental escalation of 3.12% per year. Thus in low inflation Europe, this will bring down the average.

In my view, with increasing interest rate environment, which usually is to combat overheating economy or later stage inflation, having CPI based escalation is better. But its not as if 2-3% annual escalation is not good.

FPL earns 1.4% or 7 million from the purchase last year and the sale to FLT. The author of the book Building Wealth Through REITs, Bobby Jayaraman was on hand to ask some good questions.

He wanted to press Panote, FPL Group CEO, on the purchase, but overall gotten no response there. Mr Wallace took on the questions.

Bobby wanted to find out the difference between FPL purchase price and the sale. Mr Wallace said its not a like for like comparison.

In the first place FPL bought Geneba’s management and a portfolio, follow by a portfolio with Alpha Investments.

The title of this bullet point illustrates Mr Wallace’s final answer how much did FPL earned from this deal.

There was no Portfolio Premium for the Purchase Price, FLT’s Management can Pick and Choose. One gentlemen pressed the management on how come one of the valuer’s value is always higher than the other, and that FLT’s purchase value is near the higher one.

Mr Wallace’s answer is that the purchase was not at the high end, but at a slight discount. I don’t think the shareholder was very satisfied with the answer.

In my conversation with Chung Keat, he explains that usually if we buy a whole portfolio directly from the market, we should be expected to pay a premium for the portfolio.

In the case of this portfolio, FLT was able to independently assess the valuation of these assets and pay the final price.

As explained by Mr Wallace, they did not take all of Geneba and Alpha Investment’s portfolio. They took 2 more property that came later than the Geneba announcement and did not take 2 properties and 2 gymnasiums that came a lot with it.

In our conversation, Mr Wallace explains that of course when FPL made the purchase, they also indicate whether the acquisition meets all the criteria.

He explains for example what came across for them was Spain and Polish portfolio, and those probably interest them less.

The Industrial Hub in Germany and Netherlands. To bridge with the previous point, Mr Wallace in his slides, explained that most of these properties are in the logistics hub in Germany and Netherlands.

Netherlands is a vital transport hub in Europe since very early centuries (if you play Unchartered Waters enough last time) and that in Germany, much car production and parts are moved.

Mr Wallace was able to go into some deep explanation on the vibrancy and transportation linkages between some of the towns in Germany with Asia.

Much was lost to me because, frankly, I am no traveler nor an expert in this area.

He explains that Netherlands are getting some of the spillover effects from Germany.

The slides show that while demand exceeded supply, in Netherlands you can see a drop in supply over the years.

Mr Wallace also explained that some of the vehicle manufacturers chose to have their facilities in that vicinity or in FLT’s property due to the necessity of being there.

In some case, such as Constellium’s premises, they invested like $100 mil into equipment installed on property which is doubled that of what the value of the property itself. (if I understand this part correctly)

Debt Structure. I think Bobby Jayaraman asked if they are purchasing the enterprise value. From the circular, it seems clear as unit holders, are buying the equity of the holding company. However, once it comes online, we take on the assets and the debt as well.

The CFO Susanna explains that that on the average the tenure of the debt is 5 years. The interest on the debt is 2%. They are comfortable with that.

The loan, as explain in my article referencing The Edge interview is an amortizing loan instead of a bullet loan.

They believe that they can refinance at 1.5%.

Amortizing loan is like your housing loan. By right over these 5 years, FLT should build up equity and be deleveraging.

This is what shareholder wants.

Mr Wallace explains that what they intend to do is to replace those principal with debt. I dunno how that is going to work, but I suppose every year the debt shrinks by A$87 mil. They will take this A$87 mil to put inside bullet loan of 1.5%.

The amortizing nature should mean we see reducing interest expense over the 5 years. When they take on more debts to replace the principal, this should be mixed with more debts.

The simple way to look is a movement from 2% average debt to 1.5% over the 5 years. on $463 mil that is A$2.3 mil.

At the expanded units, this is 0.11 cents or 1.6% of annualized Q1 2018 DPU.

Breaking the Long Lease. Bobby Jayaraman asked deeper about the nature of the lease, specifically under what circumstances can they break the lease.

Mr Wallace updated that the tenants cannot break the lease easily. Bobby eventually asked if the manager will get compensated adequately if the tenant decide to break the lease pre-maturely. Mr Wallace replied yes.

FPL’s shareholding in FLT is controlled. One shareholder asked why does FPL hold such a small stake in FLT. Panote updated that they have to maintain an efficient structure for FLT, so the ownership cannot easily go above or below this amount.

Unit Holders wanted to know the nature of the un-renounceable rights issue. At the tail end, one lady, who I have seen in a lot of these AGMs asked how can the unit holders approve for the placement and rights issue if they do not know whether the terms are attractive enough.

Mr Wallace’s answer is that they cannot announced the terms as it is dictated by market forces.

I don’t think the shareholders are very satisfied with this answer.

I have one chat group member blasting them that they should have announced the nature of the rights issue to remove the uncertainty and they only have themselves to blame.

I got no comments on this except that usually you announce it if your rights is heavily discounted. If you look at the MCT preferential offering, this FLT, Manulife and MLT’s upcoming one, they weren’t made known as well.

It is likely they do not wish to have it heavily discount and are banking on good support from the market.

Taking More Cash Compared to Units as Management Fee. I asked offline that in this past year they have  taken less than 100% of the management fees in units so what is their direction here.

Mr Wallace updated that they have some internal metrics they work within as to whether to take more fees as units.

My inference of this is that they probably will use the units as fee to buffer for some volatility due to particular execution. I am not sure if they would do this when it comes to the depreciating currency situation.

Passing Rent Outrunning Market Rent. I asked offline that the nature of the business is that 45% of the initial IPO portfolio have passing rent higher than market rent. Mr Wallace explain that there will be some time before the leases expire so there will be time for the market rent to narrow.

In the upcoming renewals the tenant is Coles, and Mr Wallace isn’t expecting a negative reversion there.

Recent Portfolio Renewals. The recent quarter’s renewal have been mixed with a short lease and 2 long lease. I asked about the nature of the short lease, whether that is prevalent in the Australia context.

Mr Wallace explained that the tenants are unwilling to renew possibly a larger premise, so they didn’t get a favorable lease term.

The 2 longer ones ( 7 and 10 years) were the result of the team working the ground to provide their tenant with another property that they can lease.

If the tenant signed up a longer lease with them, they will allow them to rent that premises.

I asked about incentive for those properties and Mr Wallace updated its 10%, which we both agree is good for an area like Sydney.

Overall the rent is signed close to market rent, which means there is a negative rental revision of 7%. with the incentives, it might take 3-4 year of the lease to break even before we see the growth in the rent in these 2 properties.

I shared more about stuff on REITs like this in my section on REIT where I go deep into the weeds of investing in REIT. It is FREE and available:

 

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51 likes 18 comments
ghc

thanks for the detailed write up ! :)

Spinning_Top

Thank you for the detailed write up

sysy

Thanks for sharing :)

ThumbTackInvestor

how come u need to reproduce here manually
Isn't it directly posted here using some RSS feed or something

kc2024

Thank you for the detail notes.

amosng2

Did they mention anywhere when the placement or issue will be?
Also, how do we sub to the placement or rights when it occurs?

terrylim2

Reply to @amosng2 : For rights, they will send letter. The letter will inform which banks are participating. Go to the participating bank's atm to subscribe. Can apply for excess units also.

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richardtan00

good summary but still no explanation on why management decided on non renouceable vs renounvceable?

ganda

Sorry. Mind if I ask a question. Will the non renounceable rights issue be available to shareholders if their shares are not under cdp but custodian (eg stand chart)?

numberator

is it going to be private placement or rights issue?

mj0101

Thanks for sharing this.

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Frasers Logistics & Industrial Trusts Smooths the Dividend Per Share and Makes 2 Positive Divestments
- Original Post from Investment Moats

Back when I was reviewing Frasers Logistics and Industrial Trust’s (FLT) Q2 2017 result, I notice the big difference between its dividend per unit in that quarter versus the same dividend per unit in Q2 2016.
Back then the DPU declared was S$1.81 cents. If it is paid in Australian cents, it would be A$1.77 cents. In Q2 2016, the DPU for SGD and AUD was S$1.75 and A$1.75 respectively.
FLT hedge their currency only 6 months and the hedge rate was A$1 to S$1.0647. In 2016, it was A$1 to S$1.
Thus, currency depreciation or volatility, can affect the DPU paid out.
There is also another difference between the result in Q2 2017 and 2016. The management fees paid out in units for Q2 2017 is lower, while in Q2 2016, FLT paid out its management fee fully in units.
I wonder whether, in the event of unfavorable currency movement would management use the management fee paid in units as a lever to smooth out the distribution.
I decide to ask the Investor Relations this question and the response that I get is this:
On background, the REIT Manager had elected during FLT’s IPO to take up 100% of management fees in the form of units for the financial period 2016 and FY2017.
Thereafter, the management fees to be received in units or paid in cash is at the discretion of the REIT Manager who will take into consideration FLT’s strategic objectives of delivering stable distribution, as well as FLT’s capital management.
That is vague. However, I do understand that if you list a REIT that predominately draws its income from assets that earns in another currency, you cannot eliminate currency risk completely.
Hedging, depending on which currency, might not be cheap. There is an expense to hedging, so if the currency movement is favorable, it seems wasted and when its not, it will only take care of business for a limited duration. If you hedge it for 2 years, the consistent expense will eat into the distribution.
And you cannot promise shareholders that the currency movement in the future would be favorable.
This is why I get letters from readers saying given the weakness in the Australian economy they would sell FLT. That is a valid move. You eliminate that risk by getting out of the game.

Last week, FLT announced its Q3 2018 results.
The dividend per unit in SGD is down from 1.81 cents to 1.80 cents. That is not a lot. If we compare in AUD the dividend per unit went up from 1.75 cents to 1.76 cents.
Compare to the previous 2 quarters in 2018, the currency hedge dropped from A$1:S$1.06 to A$1:S$1.02.
With this currency drop, the dividend per unit should have been lesser than 1.80 cents.
FLT management decide to make up for this, by taking their management fees in units. When this is done, it frees up the portion of cash flow for management fees to be paid out for dividends.
So it seems, they will try to smoothed out the distribution with these form of financial engineering.
When companies pay out their management fee in units they create, this is dilutive. Net Net, you can see it as your share of the dividends get reduced. The actual impact in practice is uncertain due to the volatility of the REIT share price.

Management also came out with this slide to illustrate that smoothing out better. We can see the management fee is roughly like 3% of DPU.
Australia’s economy is not in a good place right now. It faces mortgage loans overhang. The mining industry looks to be in the bottoming process. Bank Credit Analysts gives a forecast of longer term lower AUD.
This quarterly DPU gives us a glimpse of what they will pay out. FLT pays out dividends semi annually.
If we annualized the DPU its SGD 7.2 cents. On a share price of S$1.05, the dividend yield is 6.85%.
The recent Q3 2018 results factor in 1 month of contribution from the recent Netherlands and Germany purchases.
While FLT’s Australia portfolio have built in rental escalation, which may translate into growth, if we be conservative, the growth would be cancel out by the negative currency movement.

2 Divestment that are Positive


Around the results, FLT also announced 2 divestment of their existing Australia property.
These are done above book value, which means FLT will book some gains.



The first divestment of 80 Hartley Street is larger. The property’s book value is A$64 mil in Mar 2018 but sold for A$90 mil. The tenant lease on that property runs to 2019 but if the property is valued as if it is extended by 4 years, and if we throw in the outstanding incentives (tangible and intangible) the value is at A$85 mil.


The second divestment is smaller but when sold, the book value carried on the balance sheet was A$6.4 mil. It was sold for A$8.7 mil. The acquisition price for the IPO shareholders was A$6.9 mil so this turned out to be a good sale.
The tenant lease is going to expire in 0.85 years time as well.
I think these 2 divestment indicates to us management’s willingness to sell assets instead of accumulating all sorts of assets just to facilitate the growth of the AUM.
At some point, people seem to think that they went on an acquisition spree that is too fast, bordering on dumping assets.
It is also good that the market is buoyant to sell off at good prices.

Mediocre Rental Reversion


FLT forward re-lease one property and also managed to re-leased 2 others.

The leases are rather short from 2 years to 5 years, with Springhill Road having more impact to the net income. The tenant also signed a 3 year lease on an adjoining 48,000 sq m. It is likely that some incentives was given. Either Inchcape signed a longer lease term so that they can signed the adjacent plot.
All of them have build in rental increase, which mitigate the negative reversion for 18-34 Aylesbury Drive.

Asset Enhancement Initiative



For a REIT whose WALE is rather long, the growth will have to come from inorganic acquisition, organic rental escalation and organic asset enhancement.
This is one question that I pose to the CEO during the EGM and he was explaining that there are some AEI that could potentially be carried out.
These potential AEI was in the power point slides presented then as well.
It seems the first one has just been completed.
This property is a 63 year leasehold property whose WALE was 2.5 years, leased toRoman Mayer Logistik & Hellmann Worldwide Logistics. The plan is that, once this AEI is completed, the WALE will be extended to 5 years.
This AEI will double the size of the property by building 3 logistic halls and an office annex, to add on to the existing 3 logistic halls and office annex.
It seems one of them are leased to Johnson Outdoors for 10 years, with the other 2 halls leased to Roman and Hellmann. Not much is mentioned about the WALE fro Roman and Hellmann but the inference here is for 5 years.

Summary


Overall this result was satisfactory because there was less negative surprises. Next quarter results would let us have a better feel with most of the properties’ full contribution in and taking away the cash flow from recent divestment.
The outlook for the logistics in Australia looks buoyant but with the consumers facing some spending challenges down the road, we will see if these consumption based logistics will be as resilient.
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$Frasers L&I Tr(BUOU.SI)

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Did a summary of the portfolio of purchase by $Frasers L&I Tr(BUOU.SI) . Overall it does not do much to the returns. Rather it diversifies the portfolio. I do find the price purchase to be rather dear. Compare to that of $ManulifeReit USD(BTOU.SI) recent purchase, which seems to have a higher NPI Yield.

http://investmentmoats.com/money-managemen...

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