Frasers Logistics and Industrial Trust's European debut to boost DPU: analysts

FLIT bought 21 industrial properties in Germany and the Netherlands from its sponsor.

Frasers Logistics and Industrial Trust marked its entry in the European industrial market with the acquisition of 21 prime industrial properties in Germany and the Netherlands from its sponsor Frasers Property.

OCBC Investment Research analysts Andy Wong Teck Ching noted that Germany and the Netherlands are ranked as the number one and number four logistics hubs globally, respectively, according to the World Bank. "On a pro forma basis, this proposed transaction would result in a slight DPU accretion of 1.7% for 1Q2018, whilst FLT’s gearing ratio would move up to 36.8% from 30.9%... We are largely positive on this deal as it would not only diversify FLT’s income streams but also lengthen its WALE to 7.1 years from 6.8 years and increase the proportion of its freehold assets to 71% from 60%, whilst being DPU accretive to unitholders," he said.

"Demand and supply dynamics also look favourable in Germany and the Netherlands, underpinned by robust underlying demand and limited supply for warehouse space," Ching added.

For CGS-CIMB analyst Yeo Zhi Bin, German Bratwurst and Australian Shiraz are an umami combination. "Whilst FLIT’s entry into Europe came sooner than what many anticipated, and some feared that its Australian story could be diluted, we point out that Germany and Netherlands industrials share similar dynamics with Australia’s, and are peaking markets. The two markets benefit from GDP growth, the rise of e-commerce, and are key logistics hubs. Also, the sponsor did not materially gain from this divestment at just €7.6m of gains. Last, FLIT can leverage its sponsor’s European team to manage the assets," he said.

Yeo agreed with Ching that the acquisition would be DPU accretive. "Post-acquisition, AUM is expected to grow from A$1.9b to A$2.9b; Australia would account for 67% of AUM whilst Europe, 33%," he added.

He also pointed out that the bulk of the auto Geneba platform would be injected into the REIT. 

The two analysts are also bullish about the properties' occupancy. Ching noted that the properties are also 100% occupied and key tenants include multinational corporations such as BMW Group, Volkswagen, and Mainfreight. "89% of the leases have CPI-linked indexation or fixed rental escalations. Pending approvals from an upcoming EGM and completion of this proposed acquisition which is expected by June, we have not incorporated this transaction in our model," he added.

Yeo pointed out that the leases have an average annual step-up of 1% per annum versus Australian leases which have average 3% increase. "Also, European leases have longer tenures and lower incentives. Because of where spot rents are, renewals could positively revert (Australian leases revert negatively)," he concluded.