Happy Thanksgiving Folks!!!
I was busy surfing around for deals in the internet for the kids edition of the fire kindle when I suddenly found a deal in FLT instead. Alright, I’ll talk more about the Amazon buy in my next post.
I added 20,000 shares in FLT today at a price of 91.5 cents. I bought them earlier on the 15th Nov for 93.5 cents, so I’m just adding my tally to it.
I’m just going to write through briefly what I like about this company.
Pure-play Australian Industrial Portfolio
Let’s face the truth.
The Singapore industrial properties are going to have a glut of supply in the next few years. Together with the poor economic forecast, this is going to get worse for the demand.
Depending on how you see it, this can also be a risk as the properties are concentrated in a single country risk. But already a few companies like Ascendas, Mapletree, AIMS and Cache are all already venturing into diversifying their assets moving into the Australian market. If this is not a sign of what is to come, then I don’t know what else.
FLT’s properties are concentrated in Victoria, New South Wales and Queensland, three of the major states in Australia where they are currently seeing more demand influx than supply.
|Melbourne – Demand outweigh supply
|Sydney – Demand outweigh supply
|Brisbane – Demand outweigh supply
Long-WALE with positive rental reversion (built-in)
The current portfolio of assets are young with an average portfolio age of only 6.5 years, so there are hardly the need to go over for maintenance AEI capex.
The lease built-in are fairly long at a current WALE of 6.5 years. Compare this against the local industrial assets we have and you will see that most of them have less than about 3 years WALE running. AIMS has about 2.6 years while MINT has about 2.8 years. You see the same pattern running for Cache and also Sabana. The only exception is probably Ascendas, our big blue-chip player.
In addition to the longer WALE, FLT also has a 3.02% annual rental escalation built-in which gives a natural growth income to their current properties leased out. Comparing this with the other industrial reits, we can already see that most industrial assets in Singapore are already building in negative rental reversion, especially for flatter factories and Hi-ramps up building type. AIMS is venturing into a BTO, which probably gives them quite a good edge in terms of creativity and diversification.
I think this is a good base case to make my point on this article I wrote previously.
FLT dividend yield currently stands at about 7.1% while most other industrial reits are yielding a lot higher at 8 to 9%. Yield hungry folks would have run straight for the higher yield but the more pertinent question is what has not been accounted for.
In my case above, I am looking at a 7.1% + 3.02% annual growth reversion while most are looking at a potential 8% – Y negative reversion. What is better for you has to be decided on what you are comfortable with.
Most of FLT’s freehold assets are on a cap-rate of about 7%.
When we compare this against the other industrial reits which has a leasehold of about 30 years in general yielding a cap rate of 8+%, it’s good to start thinking which is the better return for the investor.
This also explains why most industrial reits are yielding higher than their other compatriots like retail or offices.
I guess this is straightforward.
Most of the gearing I’ve seen for industrial reits are at a comfortable level and hardly anyone is gearing above 40% at the moment.
FLT is currently geared at about 28.2% with a cost of debt of 2.8% and an interest coverage of 7.5x. That’s a rather good level for me.
Mapletree companies typically have a lower cost of debt and they tend to gear up more.
I used to be skeptical of foreign exchange risk in the past because of the fluctuations.
These days, management have largely hedged their exchange risk so the fluctuations would be minimal.
Even so these days, with the SGD generally weakening, it appears that being Singapore concentrated is not necessarily a good thing.
All in all, I’m likely to hold the company for the yield play since it’s fairly stable which doesn’t need me to monitor the company too much.
Operationally, they also deliver on their performance that are better than the forecast during the IPO so that gives me a lot of comfort knowing what they put out there in the prospectus is not some hard selling numbers.