Alert: Future-proof modern logistics facility in Japan through Sponsor’s pipeline
- Tapping on Sponsor’s pipeline in maiden entry in to Japan
- NPI yield of 4.35% (including rental support); purchase price is below market comparable
- Two potential funding structures that will both be DPU accretive; we prefer the scenario with c.S$75m in equity fund raising
- Will require unitholders approval at an EGM as this is a interested party transaction
- Maintain BUY with TP of S$0.50.
Maiden entry into Japan
EREIT just announced the proposed acquisition of ESR Sakura Distribution Centre for S$183.5m (including rental support) from its Sponsor. As this is an interested party transaction, EREIT will have to seek unitholders approval at an EGM. The property is a five-storey logistics property in Sakura City, Chiba Prefecture in Tokyo, and the purchase consideration is c.21.8% lower than market comparable in the Chiba Prefecture.
Some additional details of the property:
- NLA of 81,507.4 sqm
- Occupancy of 75% (one tenant vacated the in May 2022, 25% of NLA)
- WALE of 2.9 years
- Freehold, property built in November 2015
- NPI yield of 4.35% (including income support)
- S$2.4m rental support for 12 months
- Future-ready ramp-up logistics facility with solar panels and fitted with LED lighting
- Key tenants include Universal Entertainment (listed manufacturing company), and Sanzen Logistics Solution (logistics and storage company)
Two funding scenarios; both scenarios will be DPU accretive
As the transaction will require approval from unitholders at an EGM, we believe the earliest the acquisition can be completed will be in October 2022. Depending on market conditions at that time, EREIT has identified two possible funding scenarios.
Scenario A:
- 100% debt funded (all-in cost of 0.98%)
- Gearing will increase from 39.8% to 42.0%
- DPU accretion of c.2.9%
Scenario B:
- 60% debt: 40% equity
- All-in cost of debt of 0.79%
- Issuance of 181.3m new units at S$0.4123 per unit (total of c.S$75m)
- Gearing will increase from 39.8% to 40.6%
- DPU accretion of 0.5%
Our thoughts
With this proposed acquisition, we believe it underlines EREIT’s ambitions to grow its portfolio in key logistics markets in Asia Pacific, and it also highlights its access to its Sponsor’s pipeline and commitment to grow EREIT into a leading new economy REIT. Although the acquisition yield is relatively tight, the future-proof facility is expected to benefit from the tight supply in Chiba Prefecture and will benefit from rising rents. The 12 month rental support will also help stabilise the property’s earnings in the near-term as EREIT works on back-filling the c.25% of NLA that was recently vacated by a tenant in May 2022.
Although EREIT has identified two possible scenarios to fund the acquisition, we believe Scenario B will be a more prudent approach as gearing will only inch up to c.40.6%. While market may be focused on the potential equity fund raising, we note that the need to raise c.S$75m is a very manageable amount for EREIT given its market cap of c.S$3.0bn, and this would not place any major overhang on the REIT. Depending on the issue price of the units during the equity fund raising exercise, DPU accretion could also potentially be higher or lower than the projected 0.5%.
While we await for further details on the proposed acquisition and the EGM, we will be maintaining our BUY recommendation and TP of S$0.50.