Singapore Industrial REITs - DBS Research 2021-04-20: Asset Reflation Drives Yield Compression

FRASERS LOGISTICS & COMMERCIAL TRUST (SGX:BUOU) ARA LOGOS LOGISTICS TRUST (SGX:K2LU) MAPLETREE LOGISTICS TRUST (SGX:M44U) ESR-REIT (SGX:J91U)

Singapore Industrial REITs - Asset Reflation Drives Yield Compression

Prized Australian portfolio to be transacted at robust cap rates to benefit most logistics S-REITs.
Frasers Logistics & Commercial Trust and ARA LOGOS Logistics Trust most leveraged given their bigger-than-peer exposure in Australia
Mapletree Logistics Trust’s focus on ASEAN will differentiate itself from the pack.
ESR-REIT to enjoy a potential acquisition pipeline as it pivots away from its pure Singapore status.

Blackstone has announced that GIC and ESR Cayman are the winning bidders to its Australian logistics portfolio for A$3.8bn (S$4.1bn).
The JV company is 20% owned by ESR Cayman and 80% owned by GIC.
The target portfolio consists of 45 industrial and logistics real estate assets in Australia with an aggregate land area of 3.6m sqm and leasable area of 1.4m sqm.
The target portfolio has a WALE of 6.9 years and a net operating income yield of 4.5%. The portfolio is well-spread across sub-markets in Sydney, Melbourne, Brisbane, Perth and Adelaide.
The portfolio is leased to a “blue-chip” tenant pool and with 100% occupancy (with 2-year rental support).
The winning bid of A$3.8bn is understood to be at a 10% premium to the portfolio valuation of A$3.43bn, before accounting for completion costs (likely stamp duties which will hike it up by a further ~5%), implying that the acquirers are buying at an implied yield of close to ~4% (pre-cost basis).

We view this Australian portfolio as a rare opportunity to gain a significant foothold in the logistics and industrial space in Australia, supported by robust consumption growth within a largely domestic driven economy, fuelled by increasing adoption of e-commerce. The pricing of ~4% is one of the tightest we have seen in recent times and is likely due to the target portfolio’s strong operating metrics and long weighted average lease expiry (WALE).

The industrial S-REITs have been allocating capital into the Australian logistics space over the past few years which now contribute about ~16% of total asset value. Among peers, we believe that the likes of Mapletree Logistics Trust (SGX:M44U) and Frasers Logistics & Commercial Trust (SGX:BUOU) and ARA LOGOS Logistics Trust (SGX:K2LU) will be most leveraged to benefit from this transaction.
Although not the final winners for this target portfolio, the Singapore-focused S-REITs will likely benefit through possible increases in portfolio valuations at year-end valuation exercises, in our view. We believe that valuers may look to “mark to market” their respective S-REIT portfolios to the metrics of this portfolio transaction exercise as a good representation of the overall industrial & logistics landscape in Australia.

Trading at a P/NAV of 1.4x, Frasers Logistics & Commercial Trust is currently trading at an implied cap rate of 4.8% (book cap rate of 5.8%), based on our estimates and is the most leveraged among peers to benefit.
As the most likely beneficiary of this transaction, in a scenario of at an implied cap of ~4.0%, Frasers Logistics & Commercial Trust’s book value should be S$1.85/unit, in line with our target price. BUY.

While we believe that Mapletree Logistics Trust may have looked at the portfolio closely as it seeks to “double-down” on its Australian exposure, the transaction cap of ~4.0% is tighter that its last done deal at 4.9% (for a Brisbane logistics warehouse).
We believe that a more attractive strategy is to focus on its unique ASEAN logistics pivot, where the REIT is one of the biggest owner of assets.
Mapletree Logistics Trust is currently trading at a P/NAV of 1.48x and an implied cap rate of 4.6%. BUY, target price S$2.20.

One of the best-performing mid-cap industrial S-REITs year-to-date, we believe that ARA LOGOS Logistics Trust, offering a yield in excess of 6.0%, will continue to attract investors. Its Australian portfolio, which contributes ~35%, is valued at an average cap rate of 6.0% and may see compression going forward. BUY, target price S$0.80.
For ESR-REIT, we believe that the availability of pipeline will be attractive as it pivots away from its pure Singapore industrial exposure. BUY, target price S$0.45.

Derek TAN DBS Group Research | Dale LAI DBS Research | https://www.dbsvickers.com/ 2021-04-20

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