ARA LOGOS Logistics Trust - DBS Research 2021-01-26: Logistics Portfolio Has Indeed Paid Off


ARA LOGOS Logistics Trust - Logistics Portfolio Has Indeed Paid Off

  • Positive rental reversions of 4.8% for the 2.6m sqft of leases (29% of portfolio) that ARA LOGOS Logistics Trust signed in FY20.
  • Demand driven by third-party logistics and e-commerce sectors; expect more positive reversions in FY21.
  • Some dilution to DPU expected for ARA LOGOS Logistics Trust in FY21 due to equity issuance, but should rebound by ~4% in FY22.

ARA LOGOS Logistics Trust's FY20 results

FY20 DPU of 5.25 cents; above expectations

  • ARA LOGOS Logistics Trust (SGX:K2LU)'s FY20 NPI and DPU came in above expectations mainly due to stronger-than-expected rental reversions and occupancy rates.
  • 2H20 NPI of S$46.1m was 10.7% higher y-o-y, due mainly to commencement of new leases and additional revenue from DHL Supply Chain ARC.
  • ARA LOGOS Logistics Trust's FY20 DPU of 5.25 cents includes capital distribution amounting to ~S$1.3m.
    • Excluding a one-off distribution of S$6.6m and capital distribution of S$1.8m, FY19 DPU would have been 8.8% lower.
    • S$1.0m of the remaining retained income had been paid out in 4Q20 (S$2.5m of income retained in FY20 has been fully repaid).

Outlook and Recommendation

Portfolio occupancy rate expected to remain robust

  • Despite a slowdown in leasing activities due to the COVID-19 pandemic, ARA LOGOS Logistics Trust signed and renewed 2.6m sqft of leases in FY20 (c.30% of portfolio NLA).
    • Higher portfolio occupancy rate of 98.5% in 4Q20, a 3.2% increase y-o-y.
    • Positive rental reversion of 4.8% for FY20 mainly due to strong leasing demand from third-party logistics and e-commerce players.
    • Strong positive rental reversion for the renewal of Schenker’s master lease at 51 Alps Avenue (which led to the 9.8% positive reversion for the overall portfolio in 2H20).
    • We expect the continued growth of the logistics and e-commerce industry to drive further demand and higher rental rates in FY21.
  • 27.5% (by GRI) of portfolio leases due for renewal in FY21.
    • This is a ~5% reduction from the previous quarter as ARA LOGOS Logistics Trust has commenced early negotiations with tenants.
    • Remaining lease expiries are equally spread between Singapore and Australia.
    • Expect rental reversions for Singapore leases in FY21 to be positive.

ARA LOGOS Logistics Trust's Singapore portfolio valuation declined by 1.9% y-o-y

  • The decline was mainly due to the shortening land tenure of ALOG Commodity Hub (c.14-years remaining). However, given the prime location and importance it plays in the Jurong Industrial Estate, we believe that ARA LOGOS Logistics Trust has a high chance of obtaining a lease extension in the future.
  • Overall portfolio valuation increased by 2.0% due to cap rate compressions and higher valuation for Australian properties; also contributed by the appreciation of AUD against S$. Australian portfolio valuation increased 2.5% y-o-y in AUD terms.

Looking forward to the completion of the ~S$404m acquisition in Australia

  • Successfully raised ~S$190m via placements and preferential offering for the acquisition.
  • Completion of acquisition expected to be in late February 2021.
  • Acquisition portfolio WALE of 11.3 years will significantly improve ARA LOGOS Logistics Trust’s portfolio WALE.
  • High occupancy of 97.0% and built-in annual rental escalation to create income stability.

Gearing expected to go up to 42.9% post acquisition

  • Gearing had improved to 39.0% in 4Q20 due to the placements and preferential offering.
  • But it will creep back up to 42.9% once the S$404m acquisition is completed.
  • Although gearing will be high, it is underpinned by a portfolio of quality assets, especially in Australia where valuations are still increasing, and cap rates have room for further compression.

ARA LOGOS Logistics Trust could still benefit from some savings in financing costs

  • Only S$53m of loans will be due to expire in December 2021.
  • Given the low interest rate environment, we believe that there is room for further savings in financing costs.
  • Early refinancing of this expiring loan will provide some upside surprise to earnings

Our thoughts

  • Despite the challenging environment in FY20 due to the COVID-19 pandemic, we were pleasantly surprised by the resilience of ARA LOGOS Logistics Trust’s portfolio. Strong leasing demand drove the improvement in portfolio occupancy, and the continued growth of the third-party logistics and e-commerce sectors have translated into positive rental reversions.
  • Given the robust outlook for these sectors going forward, we believe that ARA LOGOS Logistics Trust can continue to benefit from positive rental reversions. Although gearing is expected to increase once the acquisition is completed, we remain confident of ARA LOGOS Logistics Trust’s portfolio given the continued cap rate compressions for its Australian portfolio in FY20.
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  • Due to the placements and preferential offering, we expect a slight dilution to FY21 DPU (~1.7% dilution). However, given the high occupancy of the acquisition portfolio and the built-in rental escalations, we expect DPU to rebound by ~4% by FY22.
  • Moreover, the construction of the property on the corner of Heron Drive and Curlew Street (in the Port of Brisbane) is expected to be completed in November 2021 and will begin income contribution as it has already been 100% pre-committed.
  • Looking ahead, ARA LOGOS Logistics Trust will continue to explore acquisition opportunities from its Sponsor’s pipeline, namely in Singapore, Australia and China. We maintain our BUY recommendation with a higher target price of S$0.80.

Dale LAI DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2021-01-26
SGX Stock Analyst Report BUY MAINTAIN BUY 0.8 UP 0.700