ESR-REIT and ARA LOGOS Logistics Trust propose to merge
November 17, 2021
There has been a spate of REIT mergers recently. This wave of mergers signals the need for REITs to consolidate their operations to achieve cost savings and to scale up quickly in size.
ESR-REIT (SGX:J91U) and ARA Logos Logistics Trust (SGX:K2LU) are the latest to announce a S$1.4 billion merger on 15 October. The enlarged REIT will become Singapore’s fifth largest industrial REIT by asset size and is to be named ESR-LOGOS REIT.
Here are five things that investors should know about the ESR-REIT and ARA Logos merger.
1. Mechanics of the deal
ARA Logos Logistics Trust unitholders will be offered both a cash and stock consideration for their holdings in the REIT.
For every 1,000 units of the REIT, unitholders will receive S$95 in cash and 1,676 units of ESR-REIT in exchange.
Of note, the new ESR-REIT units will be issued as a unit price of S$0.51, which presents the 52-week share price high for the REIT.
Unitholders of ESR-REIT and ARA Logos Logistics Trust shall be entitled to receive and retain any permitted distributions declared by the respective managers in respect of the period from 1 July 2021 up to the day immediately before the date on which the trust scheme become effective.
(Source: ESR-REIT presentation slides)
2. Creating a stronger and larger REIT
ESR-REIT’s market capitalisation will enjoy a significant jump from the current S$1.9 billion to S$3.3 billion. A larger market capitalisation will garner increased analyst coverage and allow the REIT to occupy a higher weightage in the FTSE EPRA Nareit Global Development Index.
Separately, the free-float percentage of the enlarged REIT will increase from 70.8% to 76.5%, leading to improved liquidity for its units, as well as access to a wider and more diversified investor base.
Post-merger, the pro forma gearing of ESR-LOGOS REIT will be 42.1%. Nevertheless, the merged REIT will enjoy a lower cost of debt of 2.84% versus 3.24% previously, and its weighted average debt expiry (WADE) will be lengthened from 2.6 years to 3.4 years. These improved metrics should allow it access to wider pools of capital in future.
3. Increase exposure to in-demand new economy properties
The merger will enable the REIT to increase its proportion of new economy properties within its portfolio. New economy properties refer to industrial, logistics and warehouse properties including those with high specification.
Before the merger, around 47.0% of the REIT’s gross rental income are derived from such new economy properties. After the merger, around 65.7% of the REIT’s gross rental income will come from these assets.
The increased exposure to new economy properties is important as e-commerce penetration rates are expected to grow with a rising urbanised population. This in turn will support long-term demand for modern logistics in the APAC region.
4. Improvement in portfolio metrics
Investors can expect improvement in a slew of portfolio metrics for ESR-LOGOS REIT as follows:
Portfolio occupancy will increase from 91.7% to 94.5%;
The enlarged REIT will enjoy a longer weighted average lease expiry of 3.2 years versus 2.8 years previously;
There is also an increased exposure to freehold properties and an extension of land lease expiry profile from 31.0 years to 37.9 years;
Number of tenant will increase from 360 to 437, while its top 10 tenants will contribute to 26.3% of gross rental income, down from the current 29.4%, thereby reducing tenant concentration risk; and
Lastly, unitholders can look forward to larger payouts in future as the distribution per unit (DPU) for the REIT will rise by 5.8% from S$0.02775 to S$0.02935.
5. Leveraging on ESR Group’s financial strength and operating platform to grow
The proposed merger between ESR-REIT and ARA-Logos Logistics Trust comes on the heels of ESR Cayman Ltd (SEHK:1821)’s announcement to acquire 100% of the share capital of ARA Asset Management, the sponsor for ARA Logos Logistics Trust, for US$5.2 billion, which would create the largest real asset manager in APAC and the third largest listed real estate investment manager globally with a combined asset under management (AUM) of US131.0 billion.
ESR-LOGOS REIT would now have the opportunity to access the Sponsor (ESR Cayman)’s assets of more than US$50.0 billion and a work-in-progress development value of more than US$10.0 billion across 10 markets. With a stronger sponsor, ESR-LOGOS REIT has a competitive edge to supercharge its growth in an environment where quality new economy properties are becoming increasingly scarce.
Overall, the merger is transformational and will accelerate the merged REIT’s pivot to new economy trends. The REIT will be supported by the ESR Group (ESR Cayman), a developer sponsor with the largest AUM and new economy pipeline in APAC. It is easy to see that unitholders would be excited with the enlarged REIT’s future prospects.
An accountant by training, F.I.R.E 2030 is a student of value investing since 2012. She believes that successful investing requires discipline and patience. But with the right knowledge and temperament, ordinary investors can achieve extraordinary results. These articles are her journals on stocks and the investing journey toward financial freedom in 2030.