ARA Logos Logistics Trust (ALOG) has 30 logistics properties (10 in Singapore, 20 in Australia) and stakes in two property funds. Based on its latest 1Q 2021 business update, 73% of its gross revenue is derived in Singapore while 27% is derived from Australia. Based on its FY 2020 DPU of 5.25 cents, it is trading at a 12M trailing distribution yield of 6.6%. 

ALOG's business model is like any other REIT where it collects rental income as the landlord from its tenants. Its tenants are a mix of third-party logistics players or 3PLs (eg. DHL, FedEx) and end-users like ST Engineering. After collecting rent, it would have to pay certain property expenses like property manager fees and leasing commissions. Historically, Net Property Income (NPI) margins have been hovering around 75%. After property-level expenses, we have to take out REIT-level expenses like REIT Manager fees and also remove borrowing costs to derive a net income. From this net income, non-cash items are added back to get the income available for distribution to unitholders. 

ALOG was listed in 2010 as Cache Logistics Trust (CACHE) with 6 properties that were master leased to its sponsor back then, CWT. Over the years, as shown in the diagram below, CACHE has acquired properties almost every year. In recent years, acquisitions have trended towards Australia to increase its exposure to freehold assets as management recognised that the declining land leases in Singapore could lead to valuation declines. 

In 2018, ARA took over as the sponsor of CACHE as CWT sold off its stakes in the REIT and REIT Manager. As the master leases from CWT expired, they were not renewed and this led to a decline in occupancy as master-leased properties were converted into multi-tenanted properties. Rentals were also affected as master lease rentals were above market rents at the time. 

Reducing exposure to CWT was also opportune as CWT defaulted on its loans in 2019; this was also somewhat linked to financial troubles at HNA Group, which bought over and delisted CWT in 2017. I understand that there have been no defaults on rentals by CWT and CWT only contributed 2.2% of gross rentals in 1Q 2021. 

In 2020, there was another change in sponsor as LOGOS was made the sponsor after ARA bought over LOGOS and made LOGOS its logistics arm. Ultimately, ARA is still in control here. This also led to the change in name from CACHE to ALOG. 

Australia logistics rental

3. Attractive yield spread over alternatives and historical mean

Yield spread comparison

Compared to its own historical trading yield, ALOG is also trading at >+1SD above its historical mean. I think it should actually be around the -1 SD level instead as it currently has a better growth outlook from its new sponsor. Additionally, in 2019, there were concerns over its exposure to CWT as CWT had just defaulted on a loan. 

ALOG forward trading yield (Source: UOBKH)

Potential concerns

Trading at 6.6%, ALOG may find it difficult to make DPU accretive acquisitions as cap rates continue to compress especially in Australia. This difficulty materialised in its latest acquisition at end-2020 when it made a DPU dilutive acquisition of 5 properties and fund investments. The messaging from ALOG was that it was 'biting the bullet' this once in order to reset its growth trajectory. Without this, it would have been stuck in a vicious cycle of not being able to acquire and grow. Thus far, investors have given them the benefit of doubt and share price has improved since the announcement. 

Another concern would be the declining land leases of its Singapore assets. ALOG has 2 assets that have <15 years left on their land leases. Gul Logiscentre has 12 years left and contributes about 2% of revenue. I think ALOG could divest this asset and recycle the capital into freehold assets abroad. As for Commodity Hub which has 14 years left, ALOG is likely to hold on as it is their 'crown jewel' contributing 22% of revenue and being one of the largest warehouses in SE Asia. Due to its specifications, I think JTC is likely to renew its lease when the expiry comes. 

FYI I'm not vested in ALOG.