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Frasers Logistics Trust - Optimistic despite slight DPU drop





DPU rises (but not really)
No thanks Australia














The TLDR version is that DPU went up by 6.5% (which is respectable) but the actual DPU received in SGD went down by 1.1% due to unfavorable AUD/SGD exchange rates.

The impact was slightly mitigated by currency hedging.

Spot rate (28 Jan): AUD/SGD: 0.97102 (source* OANDA)
Hedged rate (1Q19) AUD/SGD: 0.982
The hedged rate is still slightly better than the live rate.


AUD is at historical low

Over the last 15 years, the AUD only went below parity with the SGD for a short period of time during the 2008/09 GFC and recorded its lowest at 0.93 SGD.




The AUD has steadily lost value since Jan 2018 (1.057).  I do not believe that the AU economy is in such bad shape that the value of its currency would drop to GFC levels. One must also remember Australia is an export economy, and is highly dependent on tourism. A lower AUD is in fact a boon for these industries and acts as a hedge against further currency weakening.

While the AUD might stay low for a bit, i think it speaks volume for FLT management that they managed to keep DPU decline at only 1.1%.  Especially when you realise the corresponding drop in AUD (for the same reporting period in 1Q2018) is 7.2% (from 1.0583 to 0.982).

Credit must be given to the management for cushioning the FX loss by growing the DPU via EPS accretive acquisitions. Which brings me to my next point.

Diversification and Expansion into Europe

FLT has been buying into Germany and Dutch properties. I think that is a sensible move to diversify out of Australia. It is further noteworthy that, unlike local Industrial REITs, FLT holds a majority of freehold assets, which makes its NAV a lot more defensive. A lot of industrial properties in SG are on 30 year old leases, which makes lease depreciation a significant issue when valuing the property portfolio.

Industrial REITs tend to provide higher yields (see Cache, AIMS) because they need to account for the relatively rapid lease decay compared to other classes of property. This is where i think FLT truly differentiates itself from the rest of the pack.

Despite its mostly freehold assets, it is still providing unit holders close to a 7% yield if you had bought when it was hovering around the 1.02-1.03 range. Extraordinary.  Definitely a gem I will continue holding on to.







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