• ARA LOGOS Logistics Trust is committed to growing its portfolio likely in Australia and Singapore, as well as in the same asset class which is seeing strong demand.
• LOGOS would further beef up ARA LOGOS Logistics Trust’s capability in asset management while providing cross-selling opportunities and a large acquisition pipeline.
• Reiterate ADD. ARA LOGOS Logistics Trust is trading at an attractive 7.6% yield.

Visits to ARA LOGOS Logistics Trust’s Assets

• We recently visited three of ARA LOGOS Logistics Trust (SGX:K2LU)’s 10 properties in Singapore, namely DHL Supply Chain Advanced Regional Centre, Changi DistriCentre 1 and Commodity Hub. These assets are ARA LOGOS Logistics Trust’s larger multi-tenanted ramp-up logistics warehouses.
• To recap, ARA LOGOS Logistics Trust has 8 ramp-up assets and 2 cargo lift assets in Singapore. Compared to cargo lift warehouses, ramp-up warehouses provide direct vehicular access to all levels and offer greater efficiency in the movement of the cargo as well as lower operating and maintenance costs.

DHL Supply Chain Advanced Regional Centre –

• The property is a built-to-suit development project for DHL completed in 2015. It is DHL’s first innovation centre outside of Germany and a modern state-of-the-art logistics warehouse with a NLA of 928,108sf. The property was awarded Leed Gold Certification (Leadership in Energy and Environmental Design) under the LEED-New Construction System, a globally recognised symbol of sustainability achievement.
• As part of the built-to-suit agreement, DHL is leasing the property for 10 years that includes the option to renew until the end of the land lease tenure. Compared to an average warehouse, DHL Centre has more unique specifications, as it comes with a higher floor-to-ceiling height of 13.6m (vs. the usual warehouse height of 9-12m) and compatible floor loading and sprinkle system. As an advanced regional centre, the warehouse has an automation system which features advanced robotics and offers bespoke solutions to cater to specific industry needs. For instance, it has clean rooms for life science and healthcare businesses, specialised infrastructure for aerospace operations and customised storage solutions for managing service parts for technology customers.

Changi DistriCentre 1 –

• This property is one of ARA LOGOS Logistics Trust’s IPO assets and comprises a six-storey ramp-up warehouse with ancillary office space and 53 loading/unloading bays with dock levelers. It is one of the few ramp-up warehouses in Changi South and is currently fully occupied. Because of its location near major expressways, it is ideal for international logistics specialists and hence, the property is mainly tenanted by ecommerce and logistics players.
• Due to the high demand for online shopping and last mile delivery, we understand that one of the tenants is looking to expand, which should benefit ARA LOGOS Logistics Trust.

Commodity Hub –

• This property is one of the largest warehouses in Singapore and Southeast Asia, with a 2.2m sf NLA. In addition to its large size, the asset is also unique for
  1. its central vehicular ramp which connects the two buildings of the asset,
  2. its large average floor plate of about 450k sf, and
  3. its multiple loading bays.
• These allow greater efficiencies in the movement and storage of goods. The property commands a high occupancy rate of almost 100% and tenanted mainly by third-party logistics. One of the tenants is seeing strong demand for warehousing, especially cold room, which the tenant had asked ARA LOGOS Logistics Trust to build.

Focus on Growing Presence in Same Asset Class and Markets

• While ARA LOGOS Logistics Trust’s sponsor LOGOS has assets across Australia, China, Singapore, Indonesia, Malaysia, Vietnam, India and New Zealand worth US$9.5bn (exclude ARA LOGOS Logistics Trust’s AUM of S$1.26bn), ARA LOGOS Logistics Trust plans to firstly focus its expansion on its traditional markets of Singapore and Australia.
• We understand that half of LOGOS’s assets in Singapore and most of the assets in Australia have achieved income stability. The aim of the REIT currently is to acquire long term, sustainable assets and be diversified in a few countries. Instead of divesting its assets, ARA LOGOS Logistics Trust intends to focus on growing the portfolio within the same asset class.
• Based on our analysis, to make an accretive acquisition, ARA LOGOS Logistics Trust could fund a S$300m deal at a 5.5-6% acquisition yield, with 55% debt funding, which would give a 1-3% DPU accretion in 2021F. At 55% debt, we estimate gearing would increase from 40.4% to ~43%.
• ARA LOGOS Logistics Trust's management remains comfortable with 45% gearing.

More AEI Opportunities With LOGOS on Board

• Acquisition opportunities aside, ARA LOGOS Logistics Trust could ride on the expertise of LOGOS and further enhance its asset management/development skills and provide complete solutions to its customers. Building more cold rooms/centres is one way to go due to growing consumption and omnichannel distribution of groceries as well as healthcare demand. We visited few of ARA LOGOS Logistics Trust’s tenants who have asked ARA LOGOS Logistics Trust to build cold rooms for them. ARA LOGOS Logistics Trust is currently reviewing each of its assets for potential AEIs.
• ARA LOGOS Logistics Trust has a cold centre in Singapore. It is the first ramp-up cold storage warehouse and one of the largest, multi-temperature controlled logistics facilities in Singapore. Given the higher demand and complexity of building a cold storage facility, the cold centre commands a higher rental rate of > S$3/sf/month versus its other warehouses of S$1.20 to S$1.80/sf/month in Singapore in 2019.

Improving Sector Outlook

• The management continues to see strong demand for warehouse/logistic real estate, particularly in Australia given the strong growth of ecommerce and larger population. CBRE is forecasting increasing twenty-foot equivalent (TEU) volumes to meet the demand generated from online shopping.
• Meanwhile, JLL expects demand for industrial space to outstrip supply in Australia, backed by rising ecommerce and increasing demand for companies to implement supply-chain efficiencies. It also expects industrial yields to compress further as Australia’s yield spread to bonds remains attractive relative to other global markets. In Singapore, the increasing online sales penetration and tapering supply would help to support the rental rate, stabilizing rental reversion in the medium term.

Not Too Concerned on Non-renewal of Single-tenant Leases

• ARA LOGOS Logistics Trust has two single-tenant leases in Singapore which are up for renewal in 2021F and 2022F. We understand that negotiations are still ongoing and management believes that any non-renewals will be buffered by the strong demand for warehouse properties, in particularly companies that now prefer a local presence after having experienced COVID-19.
• Although the conversions of a single-tenant lease to multi-tenant lease have weighed on performance in the past, the REIT is still keen on single-tenant leases, but will be selective, as single-tenant leases usually provide income stability due to the long WALE.

Retained Income More Than Sufficient

• While ARA LOGOS Logistics Trust retained S$2.5 worth of dividends in 1Q20, it released S$0.5m back to the shareholders in 2Q20, indicating situation is better-than-expected. Management believes that it has retained more than sufficient income.
• So far, we understand that there is no major disruption in both countries with all tenants still operating despite COVID-19. It continues to see high demand for quality logistics space.
• On the mandatory rental waiver imposed by the Australian government, we understand that only two leases in Australia are eligible for rental assistance so far.

Reiterate ADD on ARA LOGOS Logistics Trust

• It was encouraging to hear directly from the tenants we visited that they are seeing good demand and looking for expansion. With LOGOS onboard, we see ARA LOGOS Logistics Trust duplicating its success in asset management/customisation and there will be more opportunities in product cross-selling. More importantly, LOGOS provides ARA LOGOS Logistics Trust with a large acquisition pipeline.
• ARA LOGOS Logistics Trust is trading at about 1.1x P/BV and 7.6% dividend yield versus the industry’s P/BV and dividend yield of 1.7x P/BV and 5.5%, respectively. We believe successful acquisitions of accretive assets without straining the balance sheet would help to rerate the stock.

Source: CGS-CIMB Research - 14 Oct 2020