Latest / Investor Exchange / Frasers Logistics & Commercial Trust FY2025 — Revenue’s Up… So Why Are Payouts Down?

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Frasers Logistics & Commercial Trust FY2025 — Revenue’s Up… So Why Are Payouts Down? · Investor Exchange

• 0:02
  Time for another Investor Exchange podcast. Here are your hosts, Matt and Sally.
• 0:08
  Welcome back to The Deep Dive. Today, we are digging into a major global property
• 0:12
  player, Fraser's Logistics and Commercial Trust, or FLCT.
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  And we've been going through their full year 2025 financials.
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  So our mission for you, the listener, is to really get under the hood and understand
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  what feels like a very complex story this year. It is.
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  I think the best way to put it is there's a huge disconnect,
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  a disconnect between how well their actual buildings are doing and what investors
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  are actually getting in their pockets.
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  Okay, so lay out that contradiction for us. What are the headline numbers?
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  Well, on one hand, the operation looks healthy. Revenue was up 5.6%,
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  which is solid, came in at about $471 million, the Singapore dollars. Okay, good start.
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  And their net property income, the NPI, that also rose by 1.9% to $326 million.
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  So the core business, it seems to be performing. So if revenue's up and property
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  income is up, where's the problem? The problem is the distribution,
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  the amount that actually gets paid out.
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  The total distribution per unit, the DPU, it fell.
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  And it didn't just fall, it plummeted by 12.5 percent.
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  Landed at 5.95 Singapore cents.
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  So you've got this growing top line, but a bottom line for investors that's
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  shrinking fast. That's the puzzle we need to solve. A double digit drop in returns.
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  OK, that's a serious disconnect. Let's start with the good news then.
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  Where did that MPI growth actually come from? A lot of it was driven by acquisitions,
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  which is, you know, part of their strategy.
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  We saw a full year's worth of income from four logistics properties in Germany
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  they bought back in early 2024.
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  So that gave them a nice foundational boost. Exactly.
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  And then they brought new assets online, too. A property in Maastricht in the
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  Netherlands was completed in October, so that started bringing in cash.
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  And didn't they make a big move in Singapore? They did.
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  Their first big entry into Singapore Logistics with a property at Tutua Southlink.
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  That, plus some better performance from their UK business parks,
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  is what pushed that NPI number up.
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  Okay, but before we get to the pain, there was one number in the report that
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  just jumped off the page at me. Total return before tax was up.
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  What was it? 42.5%. An incredible number. $248.4 million.
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  That sounds amazing for the balance sheet.
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  But if the DPU fell that hard, there has to be a catch, right?
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  That can't be cash. You're exactly right. That's where you have to look past the headline number.
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  That huge surge was almost entirely driven by a non-cash item.
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  Let me guess, property valuations. Exactly.
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  A net fair value gain on their investment properties of about $37 million.
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  Ah, so last year they probably had a loss. A big one.
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  In 2024, they booked a $40.8 million fair value loss.
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  You have this huge S-77 million swing from a big loss to a decent gain.
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  That's what drove the total return number. It's a good sign for the health of
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  the assets, for sure, but it doesn't pay the bills.
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  It doesn't put cash in the distribution pool. Right. That's a critical distinction.
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  Real cash versus accounting gains.
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  Okay, so let's pivot to the pain point. If operations were growing and valuations
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  were stabilizing, what on earth was powerful enough to wipe all that out and cut the DPU by 12.5%?
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  The villain of the story is, without a doubt, higher interest rates.
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  It all comes down to a massive surge in their finance costs.
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  The single biggest factor.
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  By far. It completely undermined everything else. So just how bad was that increase?
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  Finance costs jumped by a snaggering 26.4% in one year.
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  26%. Wow. And it wasn't just the market rates going up. It was a double whammy.
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  They were refinancing old debt at these new higher rates, and they were taking
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  on new debt to pay for all those acquisitions we just talked about.
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  So they were essentially forced
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  to borrow at the peak of the rate cycle to fund their growth strategy.
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  Precisely. The long-term strategy might be sound, but the short-term cost is
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  incredibly painful for unit holders.
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  Their average cost of debt for the year went up to 3.1% from 2.8%.
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  It might not sound like a lot, but on billions of dollars in debt, it chews up cash flow.
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  And were there other pressures or was it all just interest rates?
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  It was a bit of a multi-front assault, really.
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  Their tax bill went up significantly by over $12 million.
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  And they had some internal issues, too. In the commercial portfolio, I'm guessing? Yes.
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  Specifically higher vacancies at a key Singapore asset, Alexandra Technopark.
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  That dragged down the NPI growth they were getting elsewhere.
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  So a drag from commercial, a higher tax bill.
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  And then what about currencies? They have a lot of Australian assets.
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  Absolutely. The Aussie dollar was weaker against the Singapore dollar on average,
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  and that acted as another headwind. It just, you know, chipped away at the final reported numbers.
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  OK, so management is seeing this squeeze coming from all sides.
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  Rising rates, taxes, vacancies, currency.
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  They must have done something to try and stop the bleeding on the DPU.
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  What countermeasures did they use? Yeah.
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  The main lever they pulled was their own pay. The manager chose to take a much
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  bigger slice of their management fees in units instead of cash.
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  How much bigger? It was a huge jump.
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  They took almost 70%, 69.8% to be exact of their fees in units.
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  The year before, it was under 50%. Hold on. I mean, that's great for preserving
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  cash right now, but isn't that just kicking the can down the road?
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  What does that tell you about their confidence in near-term cash flow?
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  That's a really sharp question. On one hand, it shows they're aligning with unit holders. right?
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  They're betting on the long-term value of the units. But you're right.
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  It is a cash preservation tactic, and it tells you just how severe the pressure
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  is right now. They needed to do that to support the distribution.
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  Let's shift to the real success story here, because when you isolate the logistics
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  part of the business, it seems incredibly strong.
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  What do the core numbers look like? They're the bright spot, for sure.
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  Overall portfolio occupancy is still very healthy at 95.1%. And the whale.
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  The weighted average lease expiry, is at 4.8 years, which gives you good income stability.
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  But the logistics and industrial segment, their core focus, that's where the
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  real action is. It's stellar.
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  I mean, the occupancy in that part of the portfolio is 99.7%. It's basically full.
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  And that demand is translating into some serious pricing power.
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  Okay, give us the rental reversion numbers, because they are pretty shocking.
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  So for the whole portfolio, the rental reversion was a massive plus 29.5% for
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  the year. Which is already great.
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  But if you just look at the logistics and industrial assets,
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  the core of their strategy...
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  They achieved a rental reversion of plus 39.6%. Wow, nearly 40%.
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  That's not just growth. That's explosive.
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  It proves the pivot to logistics, even with the high debt cost,
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  is working at the asset level.
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  It absolutely validates the strategy. And that leads right into the big move they made this year.
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  They finally sold off 357 Collins Street, which is a big office building in Melbourne CBD.
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  That was a key exit, wasn't it? It was. They got out at a slight premium to
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  its valuation, and they were very clear about why.
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  They said they needed to exit a tough office market and redeploy that cash into
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  L&I opportunities, where they can capture that, you know, 40% rental growth.
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  And has that already started to shift the balance of the portfolio?
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  It has, and quite quickly.
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  The L&I portion of the portfolio is now up to 75.1% of the total value,
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  up from about 72%. They're not waiting around.
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  Okay, which brings us back to capital management. All that strength is needed
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  because the balance sheet is clearly being tested.
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  How are they looking on the stability front? Their aggregate leverage is still prudent.
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  It's at 35.7%, which is up a bit. But it leaves them with over S-500 million
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  dollars in debt headroom before they hit the 40% regulatory threshold.
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  So they're not in the danger zone.
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  But the cost of that debt is the issue. How's their ability to service it?
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  That's where you see the pressure.
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  The interest coverage ratio, the ICR, it weakened. And it's down to 4.3 times
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  from 5.0 times last year.
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  So they're a bit less comfortable covering their interest payments.
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  What about hedging? How protected are they from even more rate hikes?
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  They've done a decent job there.
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  About 70% of their debt is at fixed rates. But the risk is in that other 30%.
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  They ran a sensitivity test, and it's quite sobering. What did it show?
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  A 100 basis point or 1% increase in interest rates would drop that ICR all the
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  way down to 3.2 times. So it shows you they're still quite vulnerable on that
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  variable portion of their debt. And they have a big chunk of debt coming due soon, right?
• 8:29
  They do. As $476 million is maturing in FY2026.
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  Management says they're confident they can refinance, but finding new terms
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  for almost half a billion dollars in this environment is a significant challenge.
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  Let's talk Outlook. Is there any relief coming from central banks?
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  Well, in Europe, maybe. The ECB has been trimming its key rate,
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  holding it at 2.0% since June.
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  That should eventually help with their European debt. But overall,
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  management is flagging sustained volatility and, you know, ongoing currency
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  headaches. And looking at their key markets, does the on-the-ground reality
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  support this big strategic shift?
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  Australia is the perfect case study. The industrial rents are still growing
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  strongly, like up 7% or 8% in key markets like Sydney and Brisbane.
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  While the office market. The office market is struggling.
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  In Perth, for instance, vacancies up to 17.1%. So it shows they're getting out
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  of the weak sector and doubling down on the strong one.
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  And is it a similar story in Singapore? Exactly the same divergence.
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  Demand for prime logistics space is very healthy, supply is tight,
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  which is what's driving those huge rental reversions.
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  But the island-wide vacancy for business parks, their main commercial exposure
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  there, is stuck at a very high 21.4%.
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  So to pull this all together, the story for FLCT this year is really one of
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  internal strength fighting against external financial drag.
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  The logistics assets are performing brilliantly, but the high cost of financing
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  that growth, plus the weak commercial side, is just weighing everything down.
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  That's it in a nutshell. And that's exactly why management sent a very clear
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  signal for the year ahead.
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  They've stated that they don't expect the FY2026 distribution to be any higher
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  than what we saw in the second half of this year. So basically,
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  telling investors to expect stability, not growth, in their payouts.
• 10:17
  Right. And they're projecting they'll continue to take 75% of their fees and units next year.
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  It confirms the focus is all on preserving cash and managing debt for the immediate future.