Analysts are positive about ESR-LOGOS REIT (E-LOG) in light of its recent maiden entry into Japan with its acquisition of ESR Sakura Distribution Centre.
The REIT had announced the acquisition of 100% of the trust beneficiary interest in ESR Sakura Distribution Centre (ESDC) for a purchase consideration of approximately $183.5 million, inclusive of rental support, on Aug 29.
See: ESR-LOGOS REIT moves into Japan with DPU-accretive acquisition of ESR Sakura distribution centre
The team from DBS Group Research has kept a “buy” rating on the REIT with a target price of 50 cents as it awaits for further details on the proposed acquisition and E-LOG’s extraordinary general meeting (EGM) pertaining to the acquisition.
As the transaction will require approval from unitholders at an EGM, the analysts believe the earliest the acquisition that can be completed will be in October.
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With this proposed acquisition, the analysts believe it underlines ESR-LOGOS REIT’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 E-LOG 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,” writes the team. “The 12 month rental support will also help stabilise the property’s earnings in the near-term as E-LOG works on back-filling the approximate 25% of net lettable area (NLA) that was recently vacated by a tenant in May.”
On E-LOG’s two possible funding scenarios, the analysts believe scenario B is a more prudent approach as a funding structure, as gearing will only inch up to around 40.6%. “While the market may be focused on the potential equity fund raising, we note that the need to raise approximately $75 million is a very manageable amount for E-LOG given its market cap of around $3.0 billion, which would not place any major overhang on the REIT.”
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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%, the analysts add.
Citibank Research analyst Brandon Lee has also kept a “buy” rating on E-LOG with a target price of 47 cents.
Lee observes that the acquisition paves the way for the REIT to enter Japan’s strong logistics sector, which currently enjoys low vacancies between 0% and 0.4%, increasing rents and favourable supply-demand dynamics. “We believe that newer and modern logistic facilities such as ESDC should witness better rent growth prospects in view of limited stock (13% of total supply),” he writes.
That being said, Lee points out that rental support for the property’s 25% vacancy is a surprise given the market’s strong supply-demand dynamics, as the analyst thought the REIT could easily lease it within six months, which is the typical period for newly completed facilities to achieve full occupancy.
Lee values the REIT’s properties at a weighted average cap rate of 5.1%, comprising 5.7% and 4% for those in Singapore and Australia respectively.
RHB Group Research analyst Vijay Natarajan has also kept a “buy” rating on the REIT with an unchanged target price of 53 cents.
Natarajan points out the REIT’s active portfolio recalibration via the divestment of non-core shorter-lease assets and addition of high-quality freehold logistic assets is a step in the right direction. “The strong sponsor commitment shown via an increase in its stake and the visible asset injection pipeline is another key positive,” he adds.
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The analyst also notes how E-LOG has been active on the divestment front since early 2021, with four assets divested last year (including ARA Logos assets) and another four announced for 2022. The assets were divested at an approximate 8% premium on average to their latest valuations, with a total divestment value of $232 million.
Additionally the REIT has identified up to $450 million worth of assets that can be divested in the next one to two years. In addition, it is embarking on five asset enhancement initiatives to boost asset value, with an estimated ROI of 6-8% .
“We are upbeat on this, as a key investor concern has also been on the assets with shorter land leases and value erosion from lease decay,” writes Natarajan.
Meanwhile, CGS-CIMB Group Research analyst Lock Mun Yee has kept an “add” rating on E-LOG with an unchanged target price of 51 cents.
Lock notes that the deal will stand to expand the proportion of the REIT’s ‘new economy” assets to 63.4% of portfolio value and lengthen the underlying land lease expiry of the portfolio to 40.8 years.
E-LOG intends to fund the total transaction cost of $187 million. Lock observes that when the purchase of ESDC is completed, it will likely enable ESR-LOGOS REIT to replace the income vacuum from divested assets while proceeds from the $120 million worth of properties sold year-to-date (ytd) that could also be recycled or used to pare down some of its debt.
Some downside risks Lock foresees include a slow pace of asset recycling activities and forex volatility that could impact dividends from its Australian-sourced income.
The analyst leaves her FY2022-FY2024 DPU estimates unchanged, pending unitholders’ approval during the EGM and completion of the transaction. “We continue to like E-LOG for its attractive FY2022 yield of 7.3%,” she adds.
As at 11.26am, units in ESR-LOGOS REIT are trading at 0.5 cents down or 1.22% lower at 40 cents at a FY2022 P/B ratio of 1.14x and dividend yield of 7.32%
Photo: ESR-LOGOS REIT
