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 to Roman 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.
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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Monday 13th of August 2018
Due to the inbuilt rental escalation, they could be priced out of the market after the contract ended after a number of years. And then we could see a negative revision on new contracts. So net net how do we able to measure their performance ?
Monday 13th of August 2018
Hi Cory, if they get priced out its not their fault. performance should be their ability to fill the vacancy and realize as much of the assets at good valuation.