ANALYSTS SAY: Buy, Sell, Hold (28 June)

• Announced the forward funding acquisition of a logistics facility development in the UK
• Total consideration of GBP101.0m (S$171.7m) will be funded partially by remaining cash and new debt
• 15-year lease to a leading UK auto distributor, with built-in rental escalation mechanism
• Remaining cash proceeds from CSE divestment will be utilised; still has ample debt headroom with gearing currently at only c.30%
• Maintain BUY with a TP of S$1.75

(+) Delivering on another development project

FLCT delivered on a forward funding opportunity in Cheshire, North West England, UK. Some of the details on the deal:

• Total consideration on a completed basis is GBP101.0m (S$171.7m)
• Development expected to complete in 2H23
• NLA of 667,185 sqft.
• 15-year lease to Peugeot Motor Company Plc
• Estimated NPI yield of c.3.7%: will receive coupon payments on amount paid down during the construction phase

(+) Rental escalations to commensurate with inflation

During the 15-year lease, rentals will be reviewed in year 5 and 10, based on the retail price index compounded for five years (guaranteed minimum of 2% per annum, compounded for five years). This ensures that rentals will increase by at least 10.4% at year 5 and year 10, mitigating inflation.

(+) Partially funded by cash and new borrowings

Based on our estimates, FLCT will fund this development with a mix of cash and new debt (50:50 mix), interest rates on new loans estimated to be in the low-3% range. Following the divestment of CSE, FLCT has been proactively utilising its cash balance to acquire a suburban commercial property and three logistics and industrial properties in Victoria, Australia. We understand that part of the cash proceeds have also used to fund its other ongoing development and AEI projects.

(+) Fully utilising cash from CSE sale

Since divesting CSE in late January 2022, FLCT has been very active in reallocating its capital. Half of the sale proceeds of S$810.8m was used to pay down debt, and the remaining to fund ongoing developments and these recent acquisitions.

Our thoughts

This acquisition of a state-of-the-art logistics facility in the UK will provide FLCT with a steady and growing income stream in the coming years. In addition to receiving coupon payments for the amounts paid during the construction phase, the property will have a 15-year lease to Peugeot Motor Company plc. The built-in rental escalation mechanism that is pegged to the retail price index also helps to mitigate any inflation throughout the course of the lease.

With an estimated NPI yield of c.3.7%, we believe that it is relatively attractive compared to other modern logistics facilities in the UK which are transacting at yields closer to 3%. Although borrowing costs in the UK has risen to slightly more than 3% currently, FLCT benefits from being able to fund approximately half of the entire amount through cash on its balance sheet, making it accretive.

Based on our estimates, the divestment of CSE left a c.S$20m void to its NPI on an annual basis. Through the recent acquisitions (1 suburban commercial property in Australia, 3 logistics and industrial properties in Australia, and this forward funded development in the UK), we estimate that they would generate a total NPI of more than S$11.2m when completed. Although these acquisitions do not fully offset the entire amount of NPI void from CSE, we remain positive on FLCT for its speed in reallocating its capital.

We will be maintaining our BUY recommendation with a TP of S$1.75.