SINGAPORE (Apr 30): Despite a slight improvement in performance q-o-q, analysts anticipate significant headwinds for the newly renamed ARA Logos Logistics Trust (ALOG) due to near-term uncertainties associated with the Covid-19 pandemic.
Previously known as Cache Logistics Trust, the transfer of ARA Asset Management’s entire stake in the REIT manager and 10.3% shareholding to Logos on Tuesday saw the REIT renamed to ARA Logos Logistics Trust to reflect the combined capabilities of ARA’s global fund management capabilities and LOGOS’s logistic expertise. While ALOG continues to be the majority shareholder, Logos serves as the REIT’s exclusive logistics real estate platform with $9.4 billion-worth of assets under its management as of December 2019.
“[ALOG] has the opportunity to work with a vertically integrated player (Logos) with management expertise in various aspects of logistics real estate. We look forward to potential acquisitions from LOGOS over time as ALOG looks to build up its AUM,” noted DBS analysts Dale Lai and Derek Tan.
“The delivery of accretive acquisitions should help mitigate concerns in the Singapore market, which is still bottoming out, and help drive a recovery in share price,” they add.
Results were mixed for ALOG in 1QFY20. Revenue and net property income (NPI) fell 6.6% and 7.3% y-o-y respectively due to the conversion of Cache Gul LogisCentre from a master lease to multitenancy in April 2019, transitory vacancy downtime between leases, lower signing rents, and a weak Australian dollar. Yet revenue and NPI rose 5.8% and 7.6% respectively q-on-q due to higher occupancy rates and commencement of new leases.
1QFY20 portfolio occupancy improved 1.8 per cent to 97.1%, with 1.1 million square feet of leases signed during the quarter, says Natarajan, who takes this as an indication of healthy logistics demand before COVID-19.
“We understand that demand was broad-based. Rental reversions were also flattish – an improvement on past quarters,” he added.
Only 8.1% of ALOG’s leases are up for renewal in the present financial year - down from 20.6% by income in 4QFY19 - which are likely to be renewed flat at best in the beleaguered operating environment.
“There are no COVID-19-led tenant defaults yet, but approximately 20 Singapore tenants have requested for some form of assistance. Aside from passing the 30% property tax rebate, ALOG is now looking at other ways to assist [such as] lease restructuring and some rental/cash flow assistance for specific tenants,” says Natarajan.
ALOG is unlikely to face significant cash flow challenges – despite its high gearing ratio of 40.8%, CGS-CIMB still reckons that the REIT retains “significant headroom” against cash flow pressures. Aside from having no refinancing obligations until 2021 and hedging 69.6% of its total debt, ALOG’s cash flow has been helped by a decline in borrowing costs by 20 basis points q-o-q to 3.63%, as well as a drawdown of A$155 million ($143.1 million) in loans and a healthy interest cover of 4 times.
Unfortunately, the uncertainty of a worsening Covid-19 situation has seen ALOG retaining around $2.5 million or 20% of distributable income in 1QFY20 to hedge against rental deferments and/or waivers associated with the pandemic. The REIT has also hedged 92.5% of its distributable income to hedge against foreign exchange risks from its Australian properties.
Distribution per unit (DPU) has therefore declined 34.1% y-o-y to $0.01 (0.997 cents), though ALOG possesses security deposits of 4.1 months that could be used to mitigate further DPU impact.
“The retained income works out to be less than half of its Singapore monthly rents, which the management believes is sufficient provision for now,” say CGS-CIMB analysts Eing Kar Mei and Lock Mun Yee.
CGS-CIMB has maintained its “Hold” call on ALOG, lowering its target price to $0.71 from $0.76. It anticipates a 5-7% drop in DPU for FY20-22 and weakened rentals due to the Covid-19 pandemic.
“While [ALOG] is currently trading at 0.9 times price-book valuation (P/BV), we see few catalysts for its share price outperformance in the near term due to uncertainties cast by Covid-19,” said Eing and Lock. “Having said that, the partnership with LOGOS will provide ALOG with more growth opportunities from potential acquisitions and economies of scale. Upside/downside risks include accretive acquisitions/a larger impact from Covid-19.”
In contrast, RHB Research has maintained a more optimistic “buy” call for ALOG, though it has cut its target price from $0.74 to $0.64, with a 23% upside and projected 9% dividend yield. The lower target price may have stemmed from the research house’s reduction in DPU for FY20F-22F by 14%, 8%, and 8%, factoring in rent relief and lower rent growth, though it raised equity assumptions by 80 basis points to 9%.
“ARA Logos Logistics Trust posted decent 1Q numbers, but near-term challenges are expected in light of a worsening COVID-19. The entry of Logos Group should help in terms of operational experience and growth pipeline. The REIT’s high trading yields also offer downside support,” explained Natarajan.
As of 3.50pm, ALOG was trading at $0.535 with a dividend yield of 7.52% and a price-to-book (P/B) ratio of 0.78.