News Analysis: Growing its presence in the US Logistics market
- Announced the acquisition of 7 logistics properties in Chicago for S$133.2m
- Healthy portfolio fundamentals: 100% occupancy, WALE of 5.0 years, 2.0% – 3.0% annual rental escalation
- What we are watching: (i) marginal accretion to DPUs, sustainability of returns of longer WALE assets as rates and inflation run higher, and (ii) final cost of funds achieved.
- Maintain BUY with TP of S$3.65
Announced the S$133.2m acquisition of a portfolio of logistics properties in Chicago, US
- Purchase consideration of S$133.2m
- 7 freehold logistics properties
- 100% occupancy with an average WALE of 5.0%
- Attractive annual rental escalations ranging from 2.0% to 3.0%
- Expected to complete acquisition in 2Q22
- NPI yield of 5.3%, and 5.1% (post transaction costs)
Chicago is a major logistics hub in the US
- Chicago has the largest logistics property market in the US based on existing inventory size
- Strongest net absorption in the US (FY21)
- c.4.3m sqm of net absorption
- Vacancy rate of only 3.1% as at 1Q22
- Expected to tighten further in FY22
- Average asking rent has increased c.3.7% per annum over the last 5 years
Comparing with acquisition in Kansas City in November 2021
| Chicago | Kansas City | |
| Purchase Consideration | S$133.2m | S$207.8m |
| Property | 7 Logistics properties | 11 Logistics properties |
| NLA | 132,344 sqm | 200,908 sqm |
| Land Tenure | Freehold | Freehold |
| NPI Yield (pre and post transaction costs) | 5.3% – 5.1% | 5.1% – 5.0% |
| Annual Rental Escalation | 2.0% – 3.0% | 2.5% – 3.0% |
| WALE | 5.0 years | 2.8 years |
| Occupancy | 100.0% | 92.6% |
| No. of Tenants | 12 tenants | 27 tenants |
| Estimated DPU Accretion | 0.01% | 0.73% |
- Estimated DPU accretion of 0.01% is significantly lower than Kansas City acquisition
- Due to higher borrowing costs now
- Chicago acquisition will be funded by debt
- Gearing to inch up to c.37.3%
Our thoughts
Deepens exposure in the USA. We think that the asset attributes are attractive as AREIT expands its presence in the US logistics market with this portfolio that has full occupancy and long WALE. With built-in rental escalations of 2.0% to 3.0%, it will provide a growing income stream for AREIT, and the low vacancy rates in Chicago will support positive rental reversions in the future as leases are renewed.
Is there a risk of negative spreads in the future? The accretion from this deal stands at only 0.01%, which is due to a hike in funding cost (est. at 4+%, coupled with taxes to be paid). We note that although the value of this Chicago portfolio is smaller than the acquisition in Kansas City in November 2021, NPI yields are slightly higher. We understand that the cost of borrowings for this acquisition is slightly more than 4.0% (5-year loan), almost double than the cost of borrowing for the Kansas City acquisition.
Over time, given the rise in base rates, the key datapoint is to lookout for the impact on valuation of longer WALE assets where the annual escalations could potentially fall behind inflation rate, which is currently high in the USA. This may potentially result in a relook in asset values over time.
Implications on stock
Overall we remain positive on AREIT and we believe this portfolio acquisition in Chicago will allow the REIT to gradually grow its presence in the US logistics market. Although initial accretion seems low, the built-in rental escalations and strong fundamentals in the Chicago logistics market will lead to organic growth in the medium term. We will be maintaining our BUY recommendation with TP of S$3.65.