ARA LOGOS LOGISTICS TRUST (SGX:K2LU)
ARA LOGOS Logistics Trust - BUY For Further Yield Compression
- ARA LOGOS Logistics Trust is one of only two pure-play logistics S-REIT with a very attractive yield of ~5.9%.
- Ongoing re-rating of ARA LOGOS Logistics Trust allows for accretive acquisitions in the near future.
- Potential index inclusion as another catalyst for re-rating.
ARA LOGOS Logistics Trust's 1H21 results highlight
1H21 DPU increased 10.6% y-o-y
- ARA LOGOS Logistics Trust (SGX:K2LU)'s 1H21 DPU at 2.57 cents, a 10.6% increase y-o-y.
- NPI increased 17.1% y-o-y to S$51.4m mainly due to the acquisition of the Australian portfolio and strong performance across the portfolio.
- 1H21 distributable income was 36.6% higher y-o-y mainly due to the acquisition of the Australian portfolio and contributions from the New LAIVS and OP Funds, and also due to the S$2.0m retention of distributable income in 1H20.
NAV increased 17.5% to S$0.67
- Overall portfolio valuation increased by S$104.0m.
- The acquisition of the Australian portfolio has been accounted for as well as the divestment of Kidman Park and ALOG Changi DistriCentre 2.
- The average portfolio cap rate was 5.4%, a significant compression as compared to the average of 6.3% on 31-Dec-20.
- Singapore cap rates fell from 6.3% to 5.9%.
- Australia cap rates dropped from 6.3% to 5.1%.
Slight dip in portfolio occupancy rate
- Occupancy declined by 0.9% q-o-q to 98.2% mainly due to lower occupancies for its Singapore portfolio. Lower occupancies were seen at Commodity Hub, Cold Centre, and Changi DistriCentre 1. We understand that the lower occupancies are transitionary and should pick up over the next two quarters
- Demand for logistics facilities is still very strong, especially for temperature-controlled facilities. ALOG Cold Centre is expected to achieve full occupancy by the next quarter.
Positive rental reversions of 2.4% in 1H21
- Majority of leases expiring in FY21 have been renewed. Only 3.7% of leases (by GRI) are to expire for the rest of FY21. Total of 127,300 sqm of leases secured in 1H21.
- Portfolio occupancy dipped slightly q-o-q to 98.2%. Slight dip in occupancy mainly due to a ~2.0% decline in the Singapore portfolio to 96.7% currently.
Lower all-in financing costs
- Healthy aggregate leverage of 39.5%, aided mainly by compression of cap rates. Expect leverage to creep up slightly in 4Q21 as remaining A$59.9m is paid down when the construction of the temperature-controlled facility in Brisbane is completed.
- All-in financing cost lowered to 2.92%, compared to 3.09% in 1Q21
One of only two pure-play logistics S-REITs
Benefit from pivot towards logistics as COVID-19 pandemic drags on
- As one of only two pure-play logistics landlords, ARA LOGOS Logistics Trust is set to benefit from the pivot towards logistics with the prolonged COVID-19 outbreak. As the pandemic continues to run its course, the logistics sector benefits from the growth of the e-commerce and third-party logistics sectors. The outperformance of the logistics segment is evident in ARA LOGOS Logistics Trust’s portfolio occupancy rates that have increased by almost 3% since the beginning of FY20.
- While other sectors continue to see the brunt of the prolonged pandemic, ARA LOGOS Logistics Trust has been reporting positive rental reversions that have been driven by robust demand. Its portfolio saw a positive rental reversion of 2.4% in 1H21, adding on to the 4.8% positive rental reversion in FY20.
Delivering on expectations since its re-branding
- Since its re-branding and the addition of a second Sponsor in 1Q20, ARA LOGOS Logistics Trust has completed the S$404.4m Australian portfolio acquisition from LOGOS’ pipeline. This demonstrates the new Sponsor’s commitment to grow the REIT and provides an avenue for it to continue growing, something that has been lacking previously.
- The remaining 50.5% and 60.0% stake in the New LAIVS and OP Fund provide an immediate acquisition pipeline for ARA LOGOS Logistics Trust. Based on its latest valuation, these stakes could be worth more than A$433m, providing ARA LOGOS Logistics Trust with access to quality distribution centres and cold storage facilities that boast full occupancy and have very long WALEs.
- Furthermore, the construction of the cold storage facility at the corner of Heron Drive and Curlew Street is expected to be complete in 4Q21, contributing additional revenue of ~A$3.2m per annum.
Portoflio rejuvenation that supports re-rating of ARA LOGOS Logistics Trust
- Following the acquisition of the Australian portfolio, we believe that ARA LOGOS Logistics Trust has addressed concerns on the portfolio’s relatively short remaining land tenure. With approximately 45% of its portfolio based in Australia (mostly freehold), ARA LOGOS Logistics Trust’s portfolio remaining land tenure is ~48 years currently.
- ARA LOGOS Logistics Trust has also been proactive in managing lower-yielding and underperforming assets with the divestment of Kidman Park (Australia) and Changi DistriCentre 2 (Singapore). The divestment raised a total of S$59.3m, which has mostly been used to pare down debt, in anticipation of the payment of the remaining 95% for the development for the cold storage facility at the corner of Heron Drive and Curlew Street in the Port of Brisbane.
Large-cap logistics S-REIT in the making
- Given how ARA LOGOS Logistics Trust has been undergoing a re-rating over the few quarters, it now trades at a very favourable P/NAV multiple of ~1.3x, making it conducive for accretive acquisitions. Despite the cap rate compressions seen for logistics properties globally, ARA LOGOS Logistics Trust can rely on its Sponsor’s US$16bn pipeline for further growth.
- With the sharp cap rate compression of Australian logistics properties, we believe that ARA LOGOS Logistics Trust will shift its focus to some of its Sponsor’s pipeline assets in Singapore and China. Cap rates of logistics assets in both countries currently hover at the 5-6% levels, and we believe that they remain conducive for accretive acquisitions.
Our thoughts
ARA LOGOS Logistics Trust continues to report earnings growth with the outperformance of the logistics sector.
- We were positively surprised by ARA LOGOS Logistics Trust’s revaluation of its portfolio in the middle of the year, and the revaluation reflects the portfolio’s potential based on current market climate. The average cap rate of its Singapore portfolio has dropped by 40bps to 5.9% currently, while its Australian portfolio has compressed by a much wider 120bps to 5.1%.
- As ARA LOGOS Logistics Trust continues to go through a re-rating, the 17.5% increase in NAV (from S$0.57 to S$0.67) implies a current P/NAV multiple of 1.3x, relatively inexpensive as compared to other logistics-focused S-REITs peers. Its forward yield of ~5.9% is also significantly higher than Mapletree Logistics Trust (SGX:M44U)’s (the only other pure-play logistics S-REIT) yield of ~4.1%.
- In light of its stellar performance and the very attractive forward yield on offer, we have re-looked our DCF-based valuation on ARA LOGOS Logistics Trust. We have rolled our valuations forward to capture the full impact of the enlarged portfolio as well as the additional contribution from the cold storage facility at the corner of Heron Drive and Curlew Street.
- In addition to the potential for further grow through its Sponsor’s pipeline, ARA LOGOS Logistics Trust also benefits from tailwinds of a potential inclusion into the FTSE EPRA NAREIT Index in September 2021. As such, we will be maintaining our BUY recommendation on ARA LOGOS Logistics Trust, with a higher target price of S$1.00.
- See
Dale LAI
DBS Group Research
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Derek TAN
DBS Research
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https://www.dbsvickers.com/
2021-07-23
SGX Stock
Analyst Report
1.00
UP
0.850
