ESR REIT & ARA LOGOS Logistics Trust - CGS-CIMB Research 2021-10-15: Propose Merger

ARA LOGOS LOGISTICS TRUST (SGX:K2LU) | SGinvestors.io ARA LOGOS LOGISTICS TRUST (SGX:K2LU) ESR-REIT (SGX:J91U)

ESR REIT & ARA LOGOS Logistics Trust - Propose Merger

  • Enlarged REIT to see acceleration in acquisitions and more resilient income.
  • It is positioning itself as a New Economy REIT in the next 18-24 months.
  • A faster acquisition pace and non-core assets disposal would rerate ELOG.



Fairly valuing ARA LOGOS Logistics Trust at 52-week high of S$0.95 per unit



Size does matter; large sponsor pipeline to boost acquisition pace

  • The merger will create the 9th largest REIT by free float in Singapore with a total asset AUM of S$5.4bn (+166% for ARA LOGOS Logistics Trust; +59% for ESR-REIT) which positioned it as the 13th largest S-REIT by AUM.
  • While both REITs were performing well recently in share price and operations, we note that the merger provides it with immediate good DPU accretion and acceleration in inorganic growth via lower funding cost as index weightage improves and cost of debt reduces with larger AUM, longer WALE and potentially a debt rating. 100% of the assets are unencumbered post-merger. See ARA LOGOS Logistics Trust's share price and ESR-REIT's share price.
  • The large AUM from ESR-REIT of US$131bn (largest S-REIT sponsor in APAC, ~2x larger than its closest peer) will help to support ESR-LOGOS REIT (ELOG)’s inorganic growth. Post-merger, 66% of AUM will be in new economy assets (logistics/warehouse/high-specs industrial) with the remaining in general industrial (18%) and business park (16%).
  • ELOG plans to further increase its exposure to the new economy by tapping on its sponsor large pipeline ( >S$50bn in new economy assets – no 1 in APAC) and disposal of non-core/underperforming/short land-lease assets. As of now, there is already ~US$2bn worth of visible and executable Asia Pac New economy pipeline for ELOG. Acquisition focus will be in Australia, Japan and China. In the long run, overseas AUM may go up to 40% of the portfolio.
  • Inorganic growth aside, the merger provides more flexibility in performing AEIs and capital recycling by divesting non-core assets without impacting income substantially. It aims to recycle a portfolio of non-core assets in the next 18-24 months to create a flagship New Economy REIT.
  • While post-merger gearing is 42.1%, the merged entity has substantial debt headroom of S$815m.

Enlarged entity (ESR-LOGOS REIT) could see a re-rating

  • We think the merged entity could see a re-rating given the potential acceleration in inorganic growth underpinned by large sponsor pipeline and potential lower cost of funding. The more resilient income from more diversification will also help in boosting its profile.
  • We keep our target price for the REITs unchanged. See ARA LOGOS Logistics Trust's Target Price and ESR-REIT's Target Price.





EING Kar Mei CFA CGS-CIMB Research | LOCK Mun Yee CGS-CIMB Research | https://www.cgs-cimb.com 2021-10-15
SGX Stock Analyst Report ADD MAINTAIN ADD 0.961 SAME 0.961
ADD MAINTAIN ADD 0.538 SAME 0.538



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