Paving the way ahead
• Merger was completed
• Renamed as ESR-LOGOS REIT
• Exposure to New Economy properties increases to 66%
Investment thesis
ESR-REIT’s merger with ARA LOGOS Logistics Trust (ALOG) completed on 28 Apr 2022. The newly formed
REIT will be renamed as ESR-LOGOS REIT (ELOG). Postmerger, ELOG will increase its income diversification to Australia to 13% by rental income and exposure to New Economy asset i.e. logistics/warehouse and high-specs industrial from 47% to 66%. With an enlarged scale, ELOG could tap on its sponsor’s strong network and rich pipeline of USD2b of visible and executable New Economy assets to undertake sizeable acquisitions. Future acquisitions are likely to focus on freehold assets in Singapore, Australia and Japan. Factoring the impact of the merger, we reduce our distribution per unit (DPU) estimates for FY22-26 by 0.8% -4.3% due to enlarged unit base and higher utility costs. After adjustments, our fair value estimate decreases marginally from SGD0.52 to SGD0.50.
Investment summary
• A newly formed REIT – The merger with ARA LOGOS Logistics Trust (ALOG) completed on 28 Apr 2022.
ALOG was subsequently delisted from the SGX on 5 May 2022. The newly formed REIT will be renamed as ESR-LOGOS REIT (ELOG). For the first 100 days postmerger, ELOG will focus on integration, asset business plan i.e. divestments/asset enhancement initiatives (AEIs) opportunities, as well as evaluation of acquisitions and redevelopment potential. Factoring the impact of the merger, we reduce our DPU estimates for FY22-26 by 0.8%-4.3% due to enlarged unit base and higher utility costs. After adjustments,
our fair value estimate decreases marginally from SGD0.52 to SGD0.50.
• Leveraging growth opportunities in New Economy properties – Post-merger, ELOG will increase its
income diversification to Australia to 13% by rental income while 87% is derived from Singapore. With the addition of ALOG’s portfolio, ELOG’s exposure to New Economy asset will increase from 47% to 66%. This
provides ELOG outsized exposure to benefit from the largest secular growth opportunity in Asia. With an
enlarged scale, ELOG could tap on its sponsor’s strong network and rich pipeline of USD2b of visible
and executable New Economy assets to undertake sizeable acquisitions. Future acquisitions are likely to
focus on freehold assets in Singapore, Australia, and Japan.
• 1Q22 DPU fell 9.6% YoY due to enlarged unit base – ESR-REIT’s 1Q22 DPU rose 0.3% quarter-over quarter (QoQ) but was down 9.6% year-over-year (YoY) to 0.723 Singapore cents, primarily due to an enlarged share base, in-line with our expectations. 1Q22 net property income fell 10.4% YoY to SGD39.5m, weighed down by higher utilities expenses. We understand that utilities cost made up ~25% of the REIT’s total operating cost in FY21, but is expected to increase to 35% in FY22. Portfolio occupancy
remained healthy at 91.5% in 1Q22, supported by healthy demand and robust positive rental reversions
of 3.1% from the logistics/warehouse, general industrial, and business park sectors. Retail space in
the business park remained weak, registering negative rental reversions in 1Q22, but is likely to
improve as the workforce gradually returns.
ESG Updates
• ESR REIT’s ESG rating was downgraded in Oct 2020, largely driven by weakening governance structure
due to concerns with related party transactions. 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
Potential catalysts
• Earlier than expected recovery in industry demand-supply dynamics
• DPU accretive acquisitions
Investment risks
• Tenant defaults or asset conversions from masterleased to multi-tenanted.
• A slowdown in macroeconomic conditions may dampen business sentiment.