ARA Logos Logistics Trust is riding on a rising logistics demand, says RHB Group Research analyst Vijay Natarajan, with good medium-term growth potential ahead.
Natarajan is maintaining his “buy” call on ARA Logos, with a raised target price of 78 cents representing an 11% upside.
“Trading at a reasonable 1.3x price to book value (P/BV), ARA Logos, a pure-play logistics REIT has strongly outperformed year to date (+17%) vs the STI (+8%) and the S-REIT (-4%),” writes Natarajan in a March 12 note. “We expect this share price momentum to continue, driven by structural demand tailwinds, positive news flow, along with organic and inorganic portfolio growth.”
ARA Logos Logistics Trust is a Singapore-based REIT. The REIT invests in income-producing real estate used for logistics purposes in Asia Pacific, as well as real estate-related asset.
In addition, Natarajan notes that ARA Logos’ acquisitions in Australia will be completed soon. The completion of its 10 Australian assets, worth $404 million, is pending final approvals from the Foreign Investment Review Board (FIRB) in Australia, which RHB expects to be completed by the end of March.
“Despite a slight distribution per unit (DPU) dilution, the sizeable and maiden acquisition announcement from sponsor, coupled with an equity funding exercise, have significantly raised investor profile and trading liquidity,” says Natarajan, noting average daily turnover of +20% over last three months compared to one year.
See: 'Buy' ARA LOGOS on inclusion of logistics portfolio: analysts
The acquisition portfolio also comes with a long weighted average lease expiry (WALE) of 11 years with inbuilt rent escalations of 2.5 – 4.0% per annum. “In addition, we note that Australian logistic asset cap rates have firmed up (+30 bps) as reflected in ALOG’s portfolio valuation which makes the acquisitions even more timely,” writes Natarajan.
Meanwhile, favourable demand-supply dynamics will aid in continued positive reversions. ARA Logos’ portfolio occupancy has been on a steady quarterly uptrend, rising 3.2 percentage points in FY2020 to 98.5% (Singapore: 98.7%, Australia: 98.3%).
Rent reversions were also better than expected at 4.8% for FY2020 (2H2020: 9.8%), notes Natarajan. The bulk of which, he notes, came from signing of a long lease by its key tenant DB Schenker.
See also: RHB keeps 'buy' on ARA LOGOS Logistics Trust due to 'brighter outlook ahead'
The demand for warehouse and logistics space in Singapore continues to be on the rise as a result of increased stockpiling, e-commerce trends and vaccine rollout, says Natarajan.
On the supply side, approximately 800 million sq m of new warehouse space (source: JTC’s 4Q) is expected to come onstream in FY2021-22, compared to the last five-year average supply of 500 million sq m and a demand of 400 million sqm.
In Australia, a strong demand from the transport and e-commerce boom continues to drive logistics demand. For FY2021, approximately 28% of ARA Logo’s leases are due for renewal, equally split across Singapore and Australia, for which Natarajan expects low- to mid-single digit positive rent reversions.
Also, ARA Logo’s strong sponsor presents good medium-term growth potential. LOGOS currently manages a logistics portfolio with an assets under management of US$10.9 billion across Asia Pacific, presenting a good opportunity for acquisition-led growth, says Natarajan.
“Post-acquisition gearing is slightly on the high side at 42.9% indicating that future acquisitions are likely to be a mix of debt and equity. Medium-term acquisition opportunities include the acquisition of the remaining stake in New LAIVS Trust (49.5% stake currently) and Oxford Property Fund (40% stake),” he adds.
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RHB have revised up their FY2021-23F DPU by 1-3% by fine-tuning higher occupancy and rent growth assumptions.
As at 4.53pm, units in ARA Logos Logistics Trust are trading flat at 71.5 cents.
