SINGAPORE (June 16): DBS Group Research has upgraded ARA Logos Logistics Trust (ALLT) to a “buy” from the previous “hold” with a target price of 70 cents, representing a 32% upside for the stock.
In a Monday report, DBS analyst Dale Lai believes that ALLT, along with other landlords and tenants, is well-placed to benefit from reopening of the Singapore economy as the state lifts its circuit breaker measures in staggered phases.
“With government grants and cash retained in 1QFY2020, we believe that ALLT has sufficient buffers in place to provide financial assistance to its tenants in the near term,” says Lai, who also says that the brokerage does not foresee the need for further provisions in 2QFY2020.
“With the worst of the Covid-19 pandemic likely to be past us, we see more clarity in earnings for ALLT especially as the retention of 20% of income in the previous quarter should be sufficient for rental waivers,” he adds.
Despite an amendment to the Temporary Measures Act which now requires landlords to provide one month of rental waiver to small and medium enterprise (SME) tenants whose businesses have been significantly impacted by the Covid-19 pandemic, Lai observes that only one-third of ALLT’s tenants in Singapore qualify for the waiver.
This means that the REIT’s retention of 20% of income in 1QFY2020 should be “more than sufficient” to provide for the waiver even if all SME tenants are eligible.
Currently, ALLT has properties in Singapore, Australia and China amounting to $1.6 billion, $2.0 billion and $0.6 billion respectively. In particular, Lai notes that ALLT has built a significant footprint in Australia over the past few years with 17 properties that are now worth some $404.6 million.
“With an enlarged presence in Australia, ALLT benefits from having a larger proportion of its portfolio on a freehold tenure and lengthens the Trust’s weighted average lease expiry (WALE),
which improves earnings visibility,” says Lai.
Looking ahead, Lai says more acquisitions are in the pipeline, especially since ARA and Logos provides ALLT with a sponsor that is vertically integrated in the logistics space and could provide it with access to $9.4 billion worth of assets in the region.
To be sure, the increased commitment from its sponsor is likely to boost the REIT’s share price.
“Looking ahead, we expect ALLT to revisit its growth plans through acquisitions as the market stabilises and its share price recovers,” says Lai.
“ALLT’s new sponsor should provide it with opportunities to acquire properties or participate in higher yielding development projects,” he says, adding that the next focus from investors will be on the REIT’s sponsor, which brings “exciting inorganic growth opportunities” as the economy reopens.
The way Lai sees it, a $300 million acquisition will require the REIT to raise $180 million in equity. However, current market conditions may not be supportive of an equity fund-raising. Yet, this issue is not unsurmountable.
“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,” observes Lai.
Even as acquisitions remain a “key theme” for ALLT in the medium term, Lai notes that the REIT’s high portfolio net property income (NPI) yield of 7% means it could be tough to source for acquisitions that are immediately yield accretive.
“The value-add will have to come from strong cashflows and eventually higher capital values,” says Lai.
While ALLT’s DPU outlook for 2020-21 is likely to remain “flattish” amid economic uncertainty, it is poised to benefit from movement in interest rates which have knock-on effects on investors’ return on investments.
“Over time, we have found a close correlation between the steepening of the yield curve and ALLT’s share price,” says Lai, adding that the REIT’s share price is likely to remain “rangebound” through 2021.
As at 12.14pm, units in ARA Logos Logistics Trust are trading three cents higher, or 5.7% up, at 55.5 cents.
