ESR REIT revises offer for ALOG

■ EREIT proposes a revised scheme consideration for ALOG of S$0.97/unit.
■ Revised scheme consideration takes into account proxy advisers’ recommendations and downside risks of conflict of interests.
■ We think this is a more attractive and fairer offer and see income stability and inorganic growth potential for the merged entity over the long term.

Increased scheme consideration for ALOG of S$0.97

● ESR REIT (EREIT) has revised the scheme consideration for the proposed merger with ARA Logos Logistics Trust (ALOG) from S$0.95 per ALOG unit to S$0.97 per unit, increasing the gross exchange ratio from 1.863x to 1.97x.

● The new consideration consists of S$0.097 cash and 1.7729 units of EREIT shares vs. the original offer of S$0.095 cash and 1.6765 units of EREIT shares. The new offer is now based on an issue price of S$0.4924 (4.4% premium over 1-month VWAP, prior to the merger announcement on 15 Oct 21) while the original offer valued EREIT’s shares at S$0.51 per unit (52-week high closing price). On a like-for-like comparison, assuming an illustrative issue price of S$0.4716, which is EREIT’s 1-month VWAP, the new offer of S$0.933 represents a 5.3% premium over the original offer of S$0.886.

● Based on the revised offer, DPU accretion for ALOG will increase from 8.2% to 12.8% (assuming cash reinvested at EREIT’s 1-month VWAP of S$0.4716) but a decline of 1.1% pts to 4.7% for EREIT. While EREIT’s pro forma NAV is estimated to decline by 8.5% post the merger, ALOG’s pro forma NAV accretion will be raised from 2.2% to 5.3%. Pro forma post-merger gearing is unchanged at 42.1%.

Key considerations for the revised scheme

● In the revised scheme, EREIT takes into account (i) recommendations from the proxy advisers, Institutional Shareholder Services and Glass, Lewis & Co, (ii) issues of overlapping mandates in relation to asset pipeline, tenant, operational network and financial resources from the sponsor, following the completion of the acquisition of ARA Asset Management by ESR Group, and (iii) ALOG’s quality logistics asset portfolio, with 45% located in Australia, which has seen increasing demand for logistics assets and
cap rate compression. Since the merger was announced on 15 Oct 21, ALOG has not received any other offers. The merger with EREIT remains the only offer for ALOG.

● In view of the revised scheme consideration, both EREIT’s and ALOG’s EGM originally scheduled for 27 Jan 2022 will be postponed and announced in due course. A more attractive offer to position the REIT for stronger growth.

● We think EREIT has shown its commitment to the proposed merger by revising its offer higher while trying to strike a balance between both REITs’ shareholder interests. The revised scheme is more attractive for ALOG’s shareholders. Based on the issue price of S$0.4924, it values ALOG at a 3.7% premium over its last closing price of S$0.935 prior to the merger announcement on 15 Oct 2021 and 2.1% premium over its 52-week high of S$0.95. Based on EREIT’s 1-month VWAP illustrative issue price of S$0.4716, the offer price of S$0.933 is near to ALOG’s last closing price of S$0.935 and a 0.5% premium over ALOG’s 1-month VWAP of S$0.928 prior to the merger announcement. The revised offer values ALOG at c.1.4x P/NAV. Although the proposed merger is NAVdilutive to EREIT currently, the potential positive asset revaluation, especially for the assets in Australia, and acquisitions would help neutralise the effect in the longer term.

● The merger will immediately increase the combined AUM size to S$5.4bn and position the REIT as the 13th largest SREIT by AUM. Being a larger and more diversified REIT will provide greater income stability and growth potential, in our view . Potential higher weightage in key indices will also help to improve cost of capital and ability to leverage on its sponsor’s pipeline to grow.

● We keep our TPs for the REITs unchanged.