• Abating downside risks with the gradual reopening of businesses; sufficient provisions made in 1Q20.
• With more clarity on earnings outlook, we shift our attention to acquisitions from ARA LOGOS Logistics Trust's new Sponsor.
• Potential acquisitions can be made accretive at the right share price.
• Upgrade ARA LOGOS Logistics Trust (SGX:K2LU) to BUY with a Target Price of S$0.70.

Downside Risks Abating With Reopening of Economies

• Landlords and tenants can look forward to reopening of businesses as Singapore gradually lifts its Circuit Breaker measures in phases.
• Amendment to Temporary Measures Act requires landlords to provide one month of rental waiver to SME tenants whose businesses have been significantly affected by the COVID-19 pandemic.
  • Despite being detrimental for landlords, it provides certainty on impact to earnings.
  • Moreover, only SME tenants who have seen revenues decline by more than 35% are eligible for this rental waiver.
• Only about one-third of ARA LOGOS Logistics Trust’s tenants in Singapore qualify as SMEs.
• Retention of 20% of income in 1Q20 should be more than sufficient to provide for the one-month rental waiver even if all SME tenants are eligible. We do not foresee the need for further provisions in 2Q20.

Potential to Grow AUM With New Partnership

• ARA LOGOS Logistics Trust’s AUM has grown by less than S$140m in the past five years at a CAGR of 2.3%. At the same time, AUM of industrial S-REITs grew at a CAGR of 10.7%
• ARA LOGOS Logistics Trust’s Singapore portfolio has been shrinking while its Australia portfolio has been growing steadily to more than 30% of the total portfolio currently
• Partnership between ARA and LOGOS will create synergies in property management and provide pipeline for ARA LOGOS Logistics Trust.
• LOGOS’s investments are concentrated in its three key markets of Singapore, Australia, and China. These three key markets are also complementary to ARA LOGOS Logistics Trust’s portfolio and could be valued at as much as S$4bn.

LOGOS’s Properties in the Three Key Markets

Singapore

• LOGOS currently has interest in seven logistics and industrial properties in Singapore. Three of the assets are jointly held and occupied by Yang Kee Logistics in which LOGOS has a 35% stake.
• Its latest sale-and-leaseback project, LOGOS Penjuru Logistics Centre, is being redeveloped and will be fully leased to CSC Holdings on a 10-year lease upon completion at the end of FY21.
• The estimated value of the seven properties in Singapore is S$1.6bn.

Australia

• LOGOS currently has investments in 13 logistics facilities in Australia with an estimated value of S$2.0bn.
• At least eight of the assets have known anchor tenants and have an estimated occupancy of between 50-100%.

China

• LOGOS has investments in nine logistics assets in China with an estimated value of S$0.6bn. Most of the properties are either under development or newly completed.
• At least two of the newly completed assets have known anchor tenants that occupy approximately 35-90% of the property.

Right Price for Acquisitions

• We performed a scenario analysis to look at how various levels of ARA LOGOS Logistics Trust's share price affect its WACC and make conditions conducive for accretive acquisitions. Some of the assumptions made are:
  • Acquisition value of S$300m,
  • 40:60 debt-to-equity funding structure,
  • Acquisition NPI yield of 6.7%,
  • Acquisition completion in 2H20.
• Given the implied yield of its portfolio, ARA LOGOS Logistics Trust will have to raise equity at a share price of at least S$0.62 to make an accretive acquisition
  • c.0.3% accretion to FY20 DPU.
  • Portfolio gearing will remain around 40.6%.

Our Views on ARA LOGOS Logistics Trust

• With the worst of the COVID-19 pandemic likely to be past us, we see more clarity in earnings for ARA LOGOS Logistics Trust especially as the retention of 20% of income in the previous quarter should be sufficient for rental waivers.
• The partnership between ARA and LOGOS provides ARA LOGOS Logistics Trust with a Sponsor that is vertically integrated in the logistics space and could provide it with access to S$9.4bn of assets in the region. LOGOS’s investments in the three main markets of Singapore, Australia and China would be complementary to ARA LOGOS Logistics Trust’s portfolio.
• Looking ahead, we expect ARA LOGOS Logistics Trust to revisit it growth plans through acquisitions as the market stabilises and its share price recovers. ARA LOGOS Logistics Trust’s new Sponsor should provide it with opportunities to acquire properties or participate in higher yielding development projects. Based on our analysis above, a S$300m acquisition will require ARA LOGOS Logistics Trust to raise S$180m in equity.
• Although the quantum may not be too demanding, current market conditions may not be supportive of an equity fund-raising. However, we see this as an opportunity for the Sponsor to support the fund-raising by taking a larger portion and to increase its stake in the REIT at the same time.
• We rolled forward our model to derive a DCF-based Target Price of S$0.70 and upgraded our recommendation for ARA LOGOS Logistics Trust to a BUY due to a potential upside of 29% from current share price.
• At the current ARA LOGOS Logistics Trust's share price, a prospective 8.6% yield for FY20F is on offer.

Source: DBS Research - 15 Jun 2020