• 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 ALOG at 52-week high of S$0.95 per unit

ESR REIT’s and ARA LOGOS’s proposed merger will involve the acquisition of all the units of ALOG with (i) S$0.095 in cash per unit, and (ii) 1.6765 new ESR-REIT units per ALOG unit, issued at 52-week high of S$0.51 per unit. This works out to a total consideration of S$0.95 per ALOG unit. ALOG will be delisted and became a sub-trust of ESR REIT. The enlarged ESR-REIT will be renamed ESR-LOGOS REIT (ELOG) which will be held by (i) ESR Cayman – 10.9% stake (ii) Summit Group – 12.7%, and (iii) minority shareholders – 76.4%. The EGM is expected to be held in early Jan 2022 and delisting of ALOG is expected to be in Feb 2022. The merger which is conditional upon the completion of ESR Cayman and ARA Asset Management did not come as a surprise as we have anticipated the merger of the REITs under the enlarged ESR Cayman post-merger with ARA. The
transaction fairly values ALOG at market price which is 1.4x P/BV, in line with ALOG’s 52- week high closing price and our TP of S$0.961. The merger will provide 8.2%/5.8% DPU accretion to ALOG and EREIT. The bulk of the accretion will come from lower financing cost and payment of upfront land premium.

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 ALOG; +59% for EREIT) which positioned it as the 13th largest SREIT 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. The large AUM from ESR of US$131bn (largest SREIT sponsor in APAC, c.2x larger than its closest peer) will help to support 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 c.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 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 TP for the REITs unchanged.