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UOB Kay Hian ups ARA LOGOS Logistics Trust's TP to $1.07 on organic growth

Felicia Tan
Felicia Tan10/8/2021 09:13 PM GMT+08  • 5 min read
UOB Kay Hian ups ARA LOGOS Logistics Trust's TP to $1.07 on organic growth
ARA LOGOS Logistics Trust could also be a potential takeover target, says UOB Kay Hian analyst Jonathan Koh.
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UOB Kay Hian has kept “buy” on ARA LOGOS Logistics Trust’s target price to $1.07 from $1.02 previously, as it sees organic growth for the REIT.

In a report on Oct 8, analyst Jonathan Koh says the REIT is riding on two engines of growth.

The REIT is currently benefitting from strong leasing enquiries in both Singapore and Australia.

Furthermore, for the 2HFY2021, management expects neutral to mild positive rental reversion.

The REIT’s Singapore portfolio will benefit from growth in third-party logistics firms (3PL) and e-commerce, says Koh.

See: ARA LOGOS Logistics Trust draws SGX query after share price climbs to 95 cents

“According to CBRE, rents for prime logistics space have increased 5.1% y-o-y to $1.43psf/month in 2QFY2021. ARA LOGOS Logistics Trust has backfilled the transitory vacancy at Commodity Hub,” he writes.

“There is strong demand for cold storage warehouse space from supermarket operators for storage of frozen food and safety stock, which will boost occupancy at ARA LOGOS Logistics Trust’s Cold Centre,” he adds

To this end, Koh expects the REIT’s occupancy for its Singapore portfolio to improve by 1.3 percentage points q-o-q to 98.0% in the 3QFY2021.

Koh also estimates that the REIT’s Australian portfolio to maintain a high occupancy of 99.7% in 3QFY2021.

In Australia, leasing enquiries have risen to a 20-year high driven by 3PL and omni-channel retailers.

“Government stimulus for housing and infrastructure have also boosted demand from the construction and manufacturing industries,” he writes.

“ARA LOGOS Logistics Trust’s Australian portfolio benefits from a long weighted average lease expiry (WALE) of 6.3 years (weighted by gross rental income) and annual rental escalation of 1-4%,” he adds.

As it stands, the REIT has an open invitation to view the LOGOS Property Group’s pipeline of 116 logistics properties worth US$16 billion ($21.73 billion).

So far, it has actively looked at opportunities to invest in properties in its sponsor’s pipeline, according to Koh.

“Potential acquisitions could involve Singapore and tier- cities in China. ARA LOGOS Logistics Trust’s distribution yield has compressed from 8.1% at early-2021 to the current 5.6%, making equity fund raising to finance acquisitions more feasible. Management is working hard to ensure that potential future acquisitions would be yield accretive,” he writes.

In the same report, Koh estimates that cap rates for the Australia portfolio to drop from 5.1% to 4.5% as at December 2021.

“Thus, we estimate ARA LOGOS Logistics Trust would be able to recognise gain in fair value of investment properties at $82.7 million for its 2HFY2021 results. Hence, net asset value (NAV) per unit is expected to increase by 7% to 73 cents by Dec 2021. We estimate that aggregate leverage would be lowered by 1.4 percentage points to 38.1%,” he says.

In Australia, cap rates were compressed by 46 basis points, 57 basis points and 50 basis points y-o-y respectively to 4.25% in Sydney, 4.43% in Melbourne and 5.00% in Brisbane in the 1QFY2021.

ARA LOGOS Logistics Trust could also be a potential takeover target.

ESR Cayman, on Aug 4, announced that it will be acquiring ARA Asset Management for US$5.2 billion to form one of the world’s largest real estate management firms.

Upon completion of the acquisition, ESR Cayman will also own 100% of ARA LOGOS Logistics Trust Management, the manager of the REIT.

ESR REIT owns 12 logistics properties in Singapore, of which six are modern ramp-up warehouses. It has recently acquired a 10% stake in ESR Australia Logistics Partnership. ESR REIT also intends to pivot its investment strategy towards the acquisition of logistics assets.

The way Koh sees it, the overlapping investment mandates would “necessitate” a merger of ESR REIT and ARA LOGOS Logistics Trust to prevent a conflict of interest.

“ESR REIT could potentially mount a takeover offer to acquire ALLT given that it is 1.4 times larger in terms of market cap,” he says.

Finally, Koh is positive on ARA LOGOS Logistics Trust due to its inclusion in the FTSE EPRA Nareit Developed Asia Index from Sept 20.

The inclusion has caused trading liquidity to improve tremendously, with the REIT’s average daily turnover increasing from US$1.3 million in January, to US$3.8 million currently.

On this, Koh has upped his distribution per unit (DPU) forecast for the FY2022 due to higher occupancy for the Singapore portfolio. In addition, “the higher unit price results in less dilution from paying management fees through the issuance of new units”, says Koh.

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To him, the REIT provides an attractive distribution yield of 6% for the FY2022, compared to Frasers Logistics Trust (FLT)’s yield of 5.2% and Mapletree Logistics Trust’s (MLT) 4.3%.

The REIT’s price-to-net asset value (P/NAV) of 1.24 times is also attractive next to FLT’s 1.33 times and MLT’s 1.52 times.

Units in ARA LOGOS Logistics Trust closed flat at 90.5 cents on Oct 8, or an FY2021 P/B of 1.2 times or DPU yield of 5.6%.

Photo credit ARA LOGOS Logistics Trust: a logistics warehouse in Australia

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