FLCT’s Q3 Fiscal 2022 Business Update In Line; Strong SGD And Rising Interest Rates Weigh On FVE

Frasers Logistics and Commercial Trust’s, or FLCT’s third-quarter fiscal 2022 (ending September) operating performance was generally in line with our expectations. However, with the Monetary Authority of Singapore increasing the rate of appreciation of the Singapore dollar to manage imported inflation, we are seeing higher foreign currency risk exposure for the trust as 90% of its real estate assets are based outside of Singapore. In particular, the euro and British pound have depreciated around 8% against the Singapore dollar. While FLCT manages the impact of foreign exchange volatility through hedging foreign income on a six-months rolling basis, we think this may not be sufficient and expect a distribution per unit, or DPU erosion of circa. 3% for fiscal 2023. We are also raising the exit cap rate used to compute the terminal value of FLCT's portfolio on the back of the more aggressive U.S. federal-funds rate hikes to combat inflation. Our projected long run federal-funds rate is 1.75%. To capture the lower expected real estate value that can be crystallized by FLCT through an asset sale, we are reversing our expectation of a 25-basis-point yield compression (to reflect the tight acquisition yield environment) that we previously baked in. After taking these into account, our fair value estimate is lowered to SGD 1.44 from SGD 1.72, while our fiscal 2022 DPU estimate is lowered slightly to SGD 0.0775. This imputes a forward fiscal 2022 distribution yield of 5.4% based on our fair value estimate. While we continue to like FLCT‘s portfolio of logistics and industrial assets that is benefiting from the strong secular demand from e-commerce, we think the positives have been priced in and the trust is fairly valued at current price.