Daiwa: ESR-REIT takeover of ALOG may bring ‘compelling’ rerating

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ESR-REIT’s bid to merge with ARA LOGOS Logistics Trust, or ALOG, is “potentially transformative,” but faces some execution risks, Daiwa said in a note Friday.

“We believe the rerating story is compelling and could happen if ESR-REIT/E-LOG can come through in tapping the sponsor’s modern pipeline in Asia without eroding DPU [distribution per unit] and offloading its legacy non-core assets in a timely manner above NAV [net asset value],” Daiwa said.

ESR-REIT is currently trading at 1.1 times price-to-book value, below other industrial REIT’s under the bank’s coverage, such as Ascendas REIT trading at 1.33 times, Mapletree Logistics Trust at 1.51 times and Mapletree Industrial Trust trading at 1.57 times, Daiwa estimated.

But Daiwa added, “we see modest execution risk in the merger if ALOG minority unitholders cannot see the benefits of the merger.”

ESR-REIT proposed Friday acquiring ALOG for a total consideration of around S$1.4 billion in cash and shares, in a deal which will create an industrial REIT with around S$5.4 billion in assets across Singapore and Australia.

Under the deal, for each ALOG unit, ESR-REIT will pay S$0.095 a unit in cash and 1.6765 new ESR-REIT units issued at S$0.51 each, for a total of S$0.95 a unit, the REITs said.

Units of ESR-REIT were trading up 2.15 percent at S$0.475 at 11:55 a.m. SGT Monday, while ALOG was at S$0.90, down 3.74 percent.

Daiwa noted that on a pro forma basis, ESR-REIT’s 2020 DPU accretion would have been 5.8 percent, compared with 8.2 percent for ALOG, with management saying around 40 percent of the accretion for ESR-REIT coming from lower funding costs, around 40 percent from annual savings from an upfront land premium paid to JTC, and around 20 percent from management fees in units.

“We believe the lower funding cost, with E-LOG’s average cost of debt falling by 40 bps to 2.84 percent, would be a meaningful achievement.
However, paying an upfront land premium of S$87.9 million to save on annual land-rent expense and higher management fees in units to generate proforma DPU accretion looks less satisfying,” Daiwa said.

Daiwa noted management has guided E-LOG would have a pipeline of assets from its sponsor ESR Cayman, particularly assets in Japan, China and Australia, with a plan the merged REIT to sell off non-core assets over the following 18-24 months to create a “new economy” focused REIT.

But Daiwa kept its Hold call on ESR-REIT, with an unchanged target price of S$0.42, saying the REIT must prove it can deliver on its strategy.