ESR REIT - DBS Research 2018-04-26: Seeking Value Accretive Acquisitions

ESR REIT - DBS Vickers 2018-04-26: Seeking Value Accretive Acquisitions ESR-REIT J91U.SI

ESR REIT - Seeking Value Accretive Acquisitions

  • Proposed acquisition of a modern ramp-up logistics facility at 15 Greenwich Drive for S$95.8m.
  • Property is 100% leased to two strong tenants with good credit rating.
  • Price paid appears to be at a premium to reflect the property’s attributes.
  • Potential earnings risk - short land lease tenure a medium term issue on NAV sustainability.

What’s New

Acquisition of a modern logistics warehouse in Tampines LogisPark. 

  • ESR REIT announced the proposed acquisition of a modern ramp-up logistics facility at 15 Greenwich Drive for S$95.8m. The target property, also known as CEVA Logistics Hub, is located at Tampines LogisPark, an established master-planned and dedicated Logistics Park in the Eastern side of Singapore. The property is a multi-tenanted ramp up logistics facility with ancillary offices with a GFA of 455,396 sqft and has a remaining leasehold tenure of 23 years. It is currently 100% leased to two tenants.
  • ESR REIT will acquire the property at a slight discount to independent valuers’ valuation of S$96.4m, inclusive of upfront land premium payable for the balance of the 30-year term. The total cost of the acquisition, inclusive of fees and other transaction costs, is estimated to be S$99.9m.
  • The deal is subject to JTC approval and is projected to complete in 3Q/4Q18.

Impact on ESR REIT

  • Post acquisition, warehouse/logistics assets will form 27.1% of ESR REIT’s asset base (up from 22.6%).
  • Demand for modern logistics warehouses has been growing rapidly in the Southeast Asia region to support the Fast Moving Consumer Goods (FMCG) sectors. Singapore given its logistics hub status, stands to benefit from that trend.
  • The acquisition of the asset at 15 Greenwich Drive will enable the REIT to leverage on this demand and will provide further income diversification from a wider base of quality tenants in the logistics space to the REIT’s network.
  • The Manager intends to fund this acquisiton by debt; gearing will rise from 30% to 33%.
  • Assuming a 100% debt financed deal, our FY19F DPU is estimated to rise by 2.5%.

Our thoughts

  • Initial yield estimated to be close to c.6.1%. We estimate that the initial yield on total transaction cost of S$99.9m to be 6.1% (or 6.3% on purchase consideration of S$95.8m), based on rentals achieved at Tampines LogisPark. The yield is in line with valuation cap rates for modern logistics properties across the industrial REITs ranging 6.25%-6.5%.
  • Paying a premium for quality. Given the strong demand for quality modern ramp-up logistics warehouses in Singapore, the opportunity to acquire such a quality assets is hard to come by in Singapore. While we acknowledge that the property will improve ESR REIT’s portfolio quality, we note that on a psf basis, the property will be acquired at a valuation of S$210psf , which appears higher when compared to Cache Logistics Trust’s DHL Logistics Hub property located within the Park, which was last valued at S$162psf.
  • Potential renewal risk in the medium term? Assuming that the property was completed and leased back in 2014/2015, rentals achieved back then might have been higher than current market rates. This is due to the oversupply situation that the logistics sector went through over the past few years. Therefore, there might be rental pressure on rental expiry though we understand that to be a number of years away. The logsitics sector’s over- supply situation is abating and rents could rise back to previous levels.
  • Short land tenure poses longer term uncertainty. An issue that is unique to Singapore’s industrial market. The short land tenure of 23 years could mean that there is potential NAV erosion in the longer term, as valuations are written down to reflect the declining lease tenure. This is not an issue for now but will be when the lease tenure drops to < 20 years. Given that the property is located at a dedicated master- planned Logistics Park in Singapore, the chance of renewal of lease tenure is possible.
  • Our estimates are not adjusted to reflect the deal, pending completion. 
  • Our S$0.63 Target Price and BUY call are maintained.

Derek TAN DBS Vickers | Carmen Tay DBS Vickers | Mervin SONG CFA DBS Vickers | http://www.dbsvickers.com/ 2018-04-26
SGX Stock Analyst Report BUY Maintain BUY 0.630 Same 0.630