ARA LOGOS Logistics Trust - DBS Research 2021-04-29: The Logistics Dark Horse


ARA LOGOS Logistics Trust - The Logistics Dark Horse

  • ARA LOGOS Logistics Trust (SGX:K2LU) is one of only three S-REITs that are well positioned to ride the growth of the logistics sector.
  • Earnings rebound and recent acquisition to drive NPI growth by ~18%.
  • Highest-yielding logistics-focused S-REIT in the market; forward yields of more than 6.7%.
  • Maintain BUY with a higher target price of S$0.85.

Riding on the growing logistics bandwagon

  • ARA LOGOS Logistics Trust's portfolio occupancies improved to 99.1% and rental reversions were a positive 0.9%.
  • Higher occupancies and positive rental reversions mainly driven by third-party logistics firms (“3PL”) in Singapore.
  • Going forward, 3PL is expected to continue driving demand and rental reversions are projected to remain positive.

Completion of the SS$400m Australian portfolio acquisition

  • ARA LOGOS Logistics Trust's acquisition of the Australian portfolio has been completed on 16 and 21 April 2021. Development of the property in Heron Drive, Brisbane, will only complete in November 2021 and payment of remaining 95% will be made upon the development’s completion. Blended NPI yield was expected to be ~5.0%.
  • Partially funded by private placement and preferential offering of S$100m, as well as the S$88.7m placement to Ivanhoe and LOGOS.
  • Mostly freehold properties with a long WALE of more than 11 years.
  • Australian portfolio to account for ~48% of ARA LOGOS Logistics Trust’s portfolio value. The acquisition has transformed ARA LOGOS Logistics Trust into one of the key logistics S-REITs with a portfolio of quality assets diversified across Singapore and Australia.

New Sponsors demonstrating commitment to grow ARA LOGOS Logistics Trust

  • Maiden acquisition from new Sponsors to pave the way for further growth.
  • Remaining 50.5% in the New LAVIS Fund and 60.0% in the OP Fund could be the future acquisition pipeline for ARA LOGOS Logistics Trust (remaining stakes currently valued at ~A$433.2m).
  • Sponsor’s firepower and strategic partnerships bode well for the long-term prospects of the enlarged REIT (Ivanhoe and LOGOS subscribed for ~S$88.7m in new units).
  • LOGOS’s logistics portfolio (completed value of ~A$13.8bn) provides a pipeline for ARA LOGOS Logistics Trust to grow into a leading logistics landlord in the region.

Earnings to grow by double digits

  • ARA LOGOS Logistics Trust’s FY21 NPI is projected to grow by ~18% on the back of Australian portfolio acquisition.
  • ARA LOGOS Logistics Trust’s NPI growth is expected to outperform the growth of the industrial S-REITs sector (18% vs 14%).
  • Earnings growth is propelled by the outperformance of the logistics sector and recent Australian portfolio acquisition.
  • Projected forward DPU yield of 6.7% and 6.8% for FY21 and FY22 respectively.

Highest-yielding logistics S-REIT on the market

  • Slight compression in DPU due to enlarged unit base and divestment of two assets, but forward yield of ~6.7% is still very attractive compared to the sector’s ~5.0% yield currently.
  • Historical 10-year average yield spread between ARA LOGOS Logistics Trust and industrial S-REITs has been ~160bps, in line with ARA LOGOS Logistics Trust’s current yields.
  • As compared to its logistics peers (FLCT and MLT) which are trading at forward yields of 4.3-5.3%, ARA LOGOS Logistics Trust is trading at a premium of 150-250bps.
  • We believe ARA LOGOS Logistics Trust’s portfolio transformation warrants a compression in yield spread against the industrial S- REIT sector, and for it to trade at yields that are closer to its logistics peers.

ARA LOGOS Logistics Trust has earned the re-rating it deserves

  • Prior to the announcement of its transformational Australian acquisition (end-October 2020), ARA LOGOS Logistics Trust had been trading at a historical 2-year average P/NAV multiple of 1.08x.
  • During the same period, the industrial S-REIT sector was trading at an average multiple of 1.41x, fuelled by the exciting growth prospects and acquisitions by the larger-cap REITs.
  • In comparison, ARA LOGOS Logistics Trust’s limited growth opportunities likely caused its share price performance to lag its peers.
  • Since its ~S$404m Australian acquisition was announced, there has been a call for the re-rating of the REIT.
  • Parallels have been drawn between ARA LOGOS Logistics Trust’s acquisition pipeline and that of its logistics-focused peers.
  • ARA LOGOS Logistics Trust currently trades at a P/NAV multiple of 1.31x; a 0.23x improvement from its historical 2-year average.
  • Despite its stellar performance over the past six months, we believe the re-rating exercise is still in progress.

Our thoughts

  • Since its rebranding at end-April 2020, ARA LOGOS Logistics Trust delivered its first acquisition from its new Sponsors within six months. In addition to providing ARA LOGOS Logistics Trust with the ~S$404m acquisition from its pipeline, LOGOS has also demonstrated its commitment to the REIT by increasing its stake in ARA LOGOS Logistics Trust from ~10.3% to ~12.7% currently. With the support and commitment from its sponsors, we believe that this is only the beginning of the repositioning of ARA LOGOS Logistics Trust. Although there has been somewhat of a re-rating of the REIT over the past few months, we believe that its current valuations warrant more upside.
  • Based on our projections, ARA LOGOS Logistics Trust’s earnings are expected to grow by ~18% in FY21, bringing its forward yield up to 6.7%. As one of the only three logistics-focused S-REITs, we trust that ARA LOGOS Logistics Trust has the potential to trade at a tighter yield and higher P/NAV multiple, at a similar level to its peers.
  • We have updated our projections to take into account the acquisition of the Australian portfolio, divestment of two non-core assets, higher AUD/S$ exchange rate, higher risk-free rate assumption of 2.5%, and lower all-in borrowing costs. Based on these, we have derived a higher target price of S$0.85. With the higher target price, this implies a target yield of 6.0% and P/NAV multiple of 1.47x. In our view, these valuations are undemanding as its larger logistics-focused peers are trading at an even higher premium.
  • Its timely rebranding, coupled with a major acquisition, has put ARA LOGOS Logistics Trust in a good position to ride the structural growth of the logistics sector. With an enlarged acquisition pipeline, ARA LOGOS Logistics Trust can tap on its Sponsors to grow its portfolio especially in the current environment where real estate investors are chasing quality logistics facilities and pricing the smaller players out. Moreover, its Sponsors have signalled their commitment to the long-term prospects of ARA LOGOS Logistics Trust and we believe that the REIT is well positioned to be one of the key logistics-focused S-REITs in the near future.
  • Looking ahead, further appreciation of the AUD/S$ as well as savings in borrowing costs will provide upside to our projections. Given the exciting growth prospects and the ongoing transformation of ARA LOGOS Logistics Trust, we are maintaining our BUY recommendation with a higher target price of S$0.85.
  • See

Dale LAI DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2021-04-29
SGX Stock Analyst Report BUY MAINTAIN BUY 0.850 UP 0.80