SINGAPORE (Jan 30): DBS Group Research is excited about the proposed merger of ESR-REIT and Viva Industrial Trust (VIT).
See: ESR-REIT announces merger plans with Viva Industrial Trust
The research house sees both sets of unitholders able to benefit from potentially the fourth largest industrial REIT in Singapore with $1.7 billion market cap and $3.1 billion AUM.
The combined entity will also be backed by sponsor in E-shang Redwood, which offers a sizeable pipeline of acquisition prospects and deal flow.
With the target VIT trading at a premium to NAV of 1.24x vs 1.0x for ESR, DBS lead analyst Derek Tan sees limited upside to play VIT. VIT's implied portfolio yield of 5.7% is also lower than ESR-REIT’s portfolio yield of 6.0%.
But assuming a share swap of VIT shares at 95 cents each and ESR-REIT's NAV at 59 cents per share, Tan says the post-consolidated entity will result in higher dividend yields for both sets of unitholders, minimal dilution to NAVs, and lower gearing.
Upon potential combination of both REITs, Tan sees the post-consolidated entity may trade higher towards the higher multiples that the larger cap industrial REITs are trading at.
"Our call is to 'buy' ESR-REIT with target price of 63 cents; with potential further re-rating upon completion of this M&A," says Tan.
According to Tan, investors have historically accorded large-cap REITs at 1.36x P/NAV with premium valuations compared to mid-cap industrial REITs at 1.05x P/NAV, while ESR-REIT trades at the lower end of 0.96x P/NAV.
Looking ahead, the analyst believes other mid-cap industrial REITs will be accorded an “acquisition premium” after the successful completion of this M&A as investors speculate on the next target.
On that front, Soilbuild REIT is an interesting target given similar sponsor and shareholder structures though the timing and certainty of any deal is tough to identify.
As at 11.15am, units of VIT are trading at 96 cents while units of ESR-REIT are trading at 57 cents.
