ARA LOGOS Logistics Trust - CGS-CIMB Research 2020-07-07: Shifting Focus To Growth


ARA LOGOS Logistics Trust - Shifting Focus To Growth

  • We see more earnings clarity and stronger focus on growth going forward.
  • Tapering supply and the partnership with LOGOS provide ARA LOGOS Logistics Trust organic and inorganic growth opportunity.
  • Upgrade from Hold to ADD. ARA LOGOS Logistics Trust is trading at 1x P/BV, 1.5 s.d. below mean.

Brighter path ahead; upgrade to ADD

  • Our recent investor call with ARA LOGOS Logistics Trust (SGX:K2LU) revealed that the trust has not seen a large impact from Covid-19 and the S$2.5m dividend that the trust retained in 1Q20 should be sufficient. As of now, the management does not see the need to retain more income. With the entry into Phase-2 of the economy reopening in Singapore, we believe the worst is likely over. We believe any impact of Covid- 19 will be more felt in its 2Q20 results and ARA LOGOS Logistics Trust should see more earnings clarity beyond 2Q. We expect favourable occupancy and rental rates going forward due to the tighter supply in the warehouse space.
  • In the past few years, ARA LOGOS Logistics Trust has faced few challenges which include the weak rentals in Singapore due to the strong supply, the need to diversify from its pure focus on Singapore and the expiries of master leases inked during the IPO. In addition to that, CWT also ceased to be a shareholder in 2018 and the ROFR granted to ARA LOGOS Logistics Trust expired accordingly. With these challenges behind the trust and the timely onboarding of LOGOS, we believe ARA LOGOS Logistics Trust is in a much better position to grow going forward.
  • ARA LOGOS Logistics Trust is trading at 0.98x P/BV, near 1.5 s.d. below its 5-year mean of 1.13x P/BV. It is also trading below the industrial sector average of 1.25x P/BV. Despite it being in a more resilient sector, ARA LOGOS Logistics Trust is only trading slightly above the retail sub-sector average P/BV 0.95x.
  • ARA LOGOS Logistics Trust offers one of the most attractive dividend yields of over 8% among the REITs under our coverage. ARA LOGOS Logistics Trust’s P/BV discount has widened from 4-19% in 2019 to 18-41% YTD. We think the valuation gap could narrow as uncertainties from Covid-19 subside.
  • We reduce our FY20-21F DPU forecasts by 3-12% to reflect the 1-month mandatory rental waiver for SMEs in Singapore and the retention of S$2.5m dividend in the last quarter to be conservative. However, our DDM-based Target Price of S$0.71 remains relatively unchanged as we roll over our valuation to FY21F. We upgrade ARA LOGOS Logistics Trust from Hold to ADD.

Karen Lee from LOGOS, the new CEO of ARA LOGOS Logistics Trust, subject to approval.

  • ARA LOGOS Logistics Trust announced this morning that the current CEO Mr. Daniel Cerf, who has been with ARA LOGOS Logistics Trust since the IPO, will retire as the CEO on 14 Aug 2020 and Karen Lee Kiah Ling will be the successor. During the interim period with effect from 7 Jul 2020, Ms. Karen is appointed as the CEO Designate of the manager and her appointment as the CEO is subject to approval from relevant authorities. The appointment of one of LOGOS’s management team as ARA LOGOS Logistics Trust’s CEO may be a sign of LOGOS’s commitment to ARA LOGOS Logistics Trust.
  • Ms. Karen has vast experience in the real estate industry, with over 20 years of work experience. Her last position was the Head of Asset & Investment at LOGOS SE Asia Pte Ltd and she was responsible for overseeing the asset management strategic planning for LOGOS’s Southeast Asia business and concurrently responsible for growing its Singapore portfolio. Prior to this, she was the Head of Singapore Portfolio and Asset Management at Ascendas Funds Management (S) Limited and the manager of Ascendas REIT from May 2011 to Nov 2018. From Sep 2008 to Apr 2011, she was with Ascendas Services Pte. Ltd., focusing on asset management. Ms. Karen Lee holds a Master of Science (Real Estate) and Bachelor of Social Science (Honors) – Economics from the National University of Singapore.

Partnership with LOGOS provides fresh acquisition pipeline after the expiration of ROFR with CWT

A new partner to revive growth for ARA LOGOS Logistics Trust.

  • Recall that ARA LOGOS Logistics Trust (formerly known as Cache Logistic Trust) was listed with CWT as the sponsor back in 2010. However, in 2018, CWT sold its shares to ARA who then acquired full control of the manager and became a substantial 9.2% unitholder. As CWT ceased to be ARA LOGOS Logistics Trust’s shareholder, the right of first refusal granted by CWT on its assets to ARA LOGOS Logistics Trust during the IPO also expired. Since then, ARA LOGOS Logistics Trust has been relying on third-party acquisitions as ARA does not have much exposure to logistics assets, based on our understanding.
  • Since CWT ceased to be a shareholder of ARA LOGOS Logistics Trust in 2018, ARA had been on the lookout for a suitable logistic real estate partner. On 5 Mar 2020, ARA finally found a suitable partner by acquiring a majority stake in LOGOS which now operates as ARA’s global logistics real estate platform.

A win-win partnership.

  • We view this as a win-win partnership as
    • ARA as a leading APAC Real Assets Fund Manager could provide LOGOS with source of funds due to its global network while
    • LOGOS could provide ARA stronger exposure to the logistics real estate industry and ARA LOGOS Logistics Trust access to its strong pipeline opportunities to drive future growth.
  • In our view, ARA LOGOS Logistics Trust could take part in the development and asset acquisition opportunities from LOGOS while riding on the expertise of both ARA LOGOS Logistics Trust and ARA. We understand that LOGOS has a good asset pipeline and talks on asset monetisation had started even before the official partnership.
  • The ability to make an accretive acquisition, however, depends on ARA LOGOS Logistics Trust’s asset recycling capability and share price recovery. Based on our analysis, to make an accretive acquisition, ARA LOGOS Logistics Trust would need to fund a S$300m deal with 45% debt assuming an acquisition yield of 6.5%.

Who is LOGOS?

A logistics real estate specialist with an AUM of A$10bn.

  • LOGOS is a logistics real estate specialist with operations across Australia, China, Singapore, Indonesia, Malaysia, Vietnam, India and New Zealand. It has over 6m sqm of property owned and under development, with a completed value of A$10bn (S$9.6bn), across 20 ventures, including assets of ARA LOGOS Logistics Trust.
  • LOGOS’s shareholders include:
    • ARA Asset Management (ARA), a leading Asia Pacific real estate asset fund manager with S$88bn in gross assets under management globally;
    • Ivanhoé Cambridge, a Canadian real estate industry leader investing in high-quality properties and companies with C$64bn in real estate assets globally; and
    • LOGOS’s founders.

A vertically integrated logistics player.

  • LOGOS manages every aspect of logistics real estate, including investment management, sourcing land or facilities and undertaking development and asset management, on behalf of some of the world’s leading global real estate investors. We believe the vertically integrated business model of LOGOS would provide valuable know-how and ample acquisition/development opportunities to ARA LOGOS Logistics Trust.

Quality assets with strong tenants.

  • Based on the limited info on its website, we can see that LOGOS’s assets are of high quality and tenanted by large and reputable companies which include Toll Group, Volvo Group, Asahi Beverage, Hilton Food Group, McPhee Transport, Fisher & Paykel and Valleyfresh Global.
  • We estimate that out of the 20 tenanted fully developed assets displayed on its website, 15 of the assets are fully occupied, one is 92% occupied and the remaining assets have an average 60% occupancy rate. We understand that the assets displayed on its website are relatively new.

LOGOS’s geographical exposure complements ARA LOGOS Logistics Trust’s

Large exposure in Australia complements ARA LOGOS Logistics Trust’s business direction.

  • While LOGOS does not display all of its assets publicly, based on our checks on its website, LOGOS may have the largest exposure in Australia. This is followed by China and Singapore. Its geographical exposure in Australia (S$4.2bn including 2 assets in New Zealand) and Singapore ( > S$1bn AUM, based on our estimates) complement ARA LOGOS Logistics Trust’s existing presence in both countries.
  • Given the short land lease nature in Singapore, we believe ARA LOGOS Logistics Trust’s expansion focus would be in Australia.

Diversification into Australia helps to grow ARA LOGOS Logistics Trust’s AUM.

  • ARA LOGOS Logistics Trust’s AUM in Singapore declined by 4.1% CAGR in the past four years due to disposals, weaker supply/demand dynamics and shortening of land lease tenure. Australia’s AUM in A$, on the other hand increased by 20.5% over the same period mainly due to acquisitions. Excluding the effects of acquisitions and disposals, Singapore’s AUM declined by 2.6% CAGR versus Australia’s AUM of +0.9% CAGR over the past 4 years.

Australia’s industrial sector seeing strong demand.

  • The Australian industrial sector is experiencing a phase of unprecedented demand with e-commerce helping to drive growth across the Australian market, according to CBRE. Pressure on industrial land supply and continued demand should see rents continue to rise and yields compress further.

Clearer path ahead

  • ARA LOGOS Logistics Trust’s NPI performance in the past five years was affected by the strong warehouse space supply in Singapore and the conversion of single tenant leases to multi-tenant leases due to the expiration of master leases inked during IPO in 2010. We believe these factors are behind ARA LOGOS Logistics Trust. It has also diversified into Australia aggressively to reduce dependency on Singapore since 2015.

Potential impact of any conversion of single tenant lease to multi-tenant lease is more manageable going forward.

  • Based on our checks, master leases secured during the IPO have all been converted to multi-tenant leases except for Schenker Megahub which is still under single tenant lease. Schenker Megahub is currently tenanted by DB Schenker, world’s leading global logistics provider with whom ARA LOGOS Logistics Trust has a strong relationship. The lease with Schenker will expire in Aug 2021.
  • The remaining two single-tenant assets in Singapore are Air Market Logistics Centre (lease up for renewal in 2021) and Pan Asia Logistics Centre (lease up for renewal in early-2022). While Schenker Megahub accounted for 5.7% of ARA LOGOS Logistics Trust’s total revenue in 2019, Air Market Logistics Centre and Pan Asia Logistics Centre only accounted for 0.9% and 3.1% of gross revenue in 2019 respectively. In Australia, there are 12 assets (out of 17 assets) which are leased to single tenants. Most of the assets account for < 2% of total revenue.

Expect warehouse to see rental recovery going forward.

  • As compared to other industrial space, warehouse has the least supply in the pipeline over the next 4 years vs. the average historical supply. This should help to support rental rates, in our view.
  • In 1Q20, while vacancy rate deteriorated by 0.5% pt q-o-q to 87.5%, warehouse was the only segment that saw rental increase of +0.2% q-o-q, possibly due to the surge in demand driven by e-commerce and delivery services during the circuit breaker. We expect rental rate for warehouse to be flat this year and should see some signs of recovery in 2021 as supply tapers off and economy slowly returns to normalcy. ARA LOGOS Logistics Trust has been able to maintain high occupancy rates and we believe the tapering supply would help to grow its revenue organically.

Better positioned for growth after portfolio rebalancing in the past.

  • Given the short land lease and weak rental rates in Singapore due to the strong supply over the past few years, ARA LOGOS Logistics Trust also made a conscious move in 2015 to diversify its revenue stream by entering into Australia aggressively. This has also weighed down its DPU performance in the past.

Low supply and weaker economy outlook would increase stickiness of tenants

  • ARA LOGOS Logistics Trust has renewed > 50% of 2020’s total expiries in 1Q20 and it has less than 8% of gross rental income to be renewed by end-2020. While it has 33% leases by gross rental income to be renewed in 2021, ARA LOGOS Logistics Trust has been maintaining high occupancy rates despite the strong supply in the past few years. We believe the weaker economic outlook would increase the stickiness of the tenants as they refrain from spending on fit-out costs. The lower supply situation would also mean that rents will be well supported and the possibility of getting very attractive rental rates for the same quality property is likely to be low.
  • Despite the Covid-19 crisis, ARA LOGOS Logistics Trust achieved occupancy of 97.1% in 1Q20, highest since 2015. Excluding short-term leases which surged in 1Q20 driven by e-commerce and delivery services during the circuit breaker, ARA LOGOS Logistics Trust signed 1.12m sf of leases in 1Q20 with flat 0.1% rental reversion. The total floor space secured during 1Q20 was significant when compared to the full-year leases of ~1.5m sf secured in 2019.

No major business disruption from Covid-19

  • In 1Q20, ARA LOGOS Logistics Trust retained S$2.5m worth of dividends which represented 20% of the distributable income. Management believes that it has retained sufficient income for now. Based on our back-of-the-envelope calculations, the retained S$2.5m dividend is more than sufficient to cover the mandatory 1-month rental waiver even if we assume all of the SMEs in Singapore (assumed 30% of Singapore’s revenue) are eligible for the 1-month rental waiver.
  • So far, we understand that there is no major disruption in both countries with all tenants operating as normal despite Covid-19. ARA LOGOS Logistics Trust has been working with affected tenants to assist them with their cash flow challenges resulting from Covid-19. We understand that rental collection rate remains high. It continues to see high demand for quality logistics space. We expect ARA LOGOS Logistics Trust to achieve stable occupancy rates with flat or slight negative rental reversion in FY20F. On mandatory rental waiver imposed by the Australian government, we understand that only two of ARA LOGOS Logistics Trust’s tenants in Australia are eligible for rental assistance so far.

No near-term refinancing until Dec 2021

EING Kar Mei CFA CGS-CIMB Research | LOCK Mun Yee CGS-CIMB Research | 2020-07-07
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.713 UP 0.710