“We recommend accepting the offer due to accretion of 8.2 percent for pro forma 2020 DPU [distribution per unit]. [ALOG] will benefit from enhanced scale, increased diversification and lower cost of debts through merger with ESR REIT. New sponsor ESR Group provide New Economy pipeline exceeding US$50 billion, of which US$2 billion is visible and executable,” the brokerage said in a note Monday.
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.
UOB Kay Hian said the merger would more than double ALOG’s asset size, taking it from the 19th largest Singapore REIT (S-REIT) to the 9th largest. The higher market capitalization will give the combined REITs, to be called ESR LOGOS REIT, or E-LOG, a larger weighting in the FTSE EPRA Nareit Developed Asia index, the note said.
E-LOG will have a “laser-like” focus on new economy assets, with logistics and high-specification industrial properties to make up 65.7 percent of gross rental income as of end-June, the brokerage said. Around 40 percent of assets under management will be allocated to overseas markets, including Australia, China and Japan, compared with around 13 percent in Australia currently, the note said.
ALOG currently has borrowings of S$768.7 million at 2.9 percent and perpetual securities at S$101.5 million, but under the deal, that would be replaced by new banking facilities — provided by DBS, Maybank and Sumitomo Mitsui — of S$618.7 million at a weighted average cost of 2.25 percent and new perpetual securities of S$251.5 million at 4.5 percent, the note said, adding that would decrease financing costs and be DPU accretive.
UOB Kay Hian has set ALOG’s target price at S$1.07, with an Accept Offer rating.