ESR-REIT - OCBC Investment 2021-10-20: Size Matters

ESR-REIT (SGX:J91U)

ESR-REIT - Size Matters

Proposed merger of ESR-REIT (SGX:J91U) and ARA LOGOS Logistics Trust (SGX:K2LU).
Scheme consideration of S$0.95 for each ARA LOGOS Logistics Trust unit.
Accept the offer.

ESR-REIT announced jointly with ARA LOGOS Logistics Trust a proposed merger of the two REITs by way of a trust scheme of arrangement. ESR-REIT will acquire all units of ARA LOGOS Logistics Trust via a combination of cash and new units in ESR-REIT. The total consideration for the proposed merger is ~S$1.4b based on the scheme consideration of S$0.95 for each ARA LOGOS Logistics Trust unit (S$0.095 in cash + 1.6765 new ESR-REIT units at S$0.51).
Upon approval and completion, the newly formed REIT will be renamed as ESR-LOGOS REIT (E-LOG).

The proposed merger is expected to be DPU accretive with pro-forma FY20 DPU increasing 5.8% and 8.2% for ESR-REIT and ARA LOGOS Logistics Trust respectively, mainly attributable to lower financing cost and payment of upfront land premium.
Post-merger, ESR-REIT’s gearing will increase slightly from 41.6% to 42.1% while NAV will be diluted by 6.4% on a pro-forma basis.

ESR-REIT’s total assets is expected to grow by 59% to S$5.4b with a diversified portfolio of 87 properties across Singapore and Australia post-merger. With an enlarged scale, E-LOG could tap on its sponsor’s strong network and rich pipeline in logistics/warehouse and high-specs industrial properties (i.e. new economy) to undertake sizeable acquisitions and larger asset enhancement initiatives to accelerate E-LOG’s growth and transformation into a leading new economy and future-ready APAC S-REIT.
Moreover, E-LOG will benefit from lower tenant concentration risks (no single tenant will account for more than 4.6% of E-LOG’s gross rental income), lower cost of debt, longer weighted average debt expiry of 3.4 years (from 2.6 years), longer WALE of 3.2 years (from 2.8 years), and access to wider pools of capital.

The proposed merger is conditional upon the completion of ESR Cayman and ARA Asset Management’s merger and requires both ESR-REIT and ARA LOGOS Logistics Trust’s unitholders’ approvals at EGM which will be held in early Jan 2022. Upon approval, the transaction is expected to complete in Feb 2022 and ARA LOGOS Logistics Trust will be delisted after completion.
We are largely positive on this proposed merger, given the importance of scale in the REITs sector with potentially better trading liquidity, lower cost of capital and greater feasibility to acquire larger properties to drive inorganic growth. We recommend unitholders of ESR-REIT to ACCEPT THE OFFER.
Pending for approval at EGM, we maintain our estimates but lower our cost of equity assumption to 7.3% to reflect a better operating environment, our fair value estimate for ESR-REIT correspondingly increases from S$0.48 to S$0.51.
See

ESR-REIT’s environment score trails its peers due to fewer green-certified buildings in its portfolio relative to peers. However, its human capital development ranks higher than industry average, with comprehensive employee development efforts including strong managerial and leadership development training initiatives

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2021-10-20

SGX Stock Analyst Report BUY MAINTAIN BUY 0.51 UP 0.450