On May 5, ESR-LOGOS REIT (E-LOG) started trading on the Singapore Exchange, replacing ESR-REIT. E-LOG was formed from the merger of ESR-REIT with ARA-LOGOS Logistics Trust following the merger between ESR Group and ARA Asset Management.
The merger transformed the former ESR-REIT into the 12th largest out of 42 S-REITs, and the fifth largest out of eight industrial S-REITs. Its total asset size is now $5.5 billion as at June 30, comprising 83 properties (excluding 48 Pandan Road held through a joint venture) of which 62 are in Singapore, and 21 in Australia, with a total GFA of 2.3 million sqm. As the New Economy gains traction and importance, the manager is pivoting E-LOG’s portfolio towards logistics, life science and high-tech properties. As at end-June, New Economy assets including cold storage make up some 62.7% of assets by effective gross revenue.
“Our assets must be future-ready to accommodate different tenants and you are seeing a conversion from general industrial buildings to high-specs buildings which are better for MNCs. The economic fabric of Singapore is changing and our buildings need to be redeveloped to cater to the fabric that is coming into the country,” says Adrian Chui, CEO and Executive Director of E-LOG’s manager.
E-LOG has been selling off its older general industrial buildings to reinvest in higher-yielding New Economy assets. During a results briefing for 1H2022 ended June, Chui indicated that E-LOG will be selling some $450 million of non-core properties to recycle the money into higher value, better specs buildings with either longer land tenures or freehold property. The divestment target may sound like a sizeable amount but to Chui, this is achievable as it is like divesting 10 non-core assets for $45 million each.
Testament to the Manager’s expertise and ability to divest a majority of its non-core assets at premiums to or at their book values, E-LOG announced it has agreed to sell 49 Pandan Road to ST Logistics for $43.5 million, a 15.1% premium to the $37.8 million book value of the property which has a land lease balance of 17.2 years. On July 22, E-LOG completed the divestment of 3 Sanitarium Drive, Berkeley Vale, for A$55 million ($53.23 million), representing an 18.5% premium to fair value. The divestment proceeds may be used to pare down debt or redeployed towards higher quality New Economy assets.
Since 2021, E-LOG has divested $188.8 million of non-core assets at an average 7.5% premium to their book value. Meanwhile, three asset enhancements initiatives (AEI) are in progress for two high-spec industrial buildings and one general industrial property. “We are exploring three logistics assets for AEI or redevelopment,” Chui says. “We are not asset hoarders but we are not traders either. We want our assets to be good for today, with the ability to do AEIs and redevelopments in the longer term.”
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A big disadvantage for industrial REITs with Singapore assets is the relatively shorter land tenure ascribed to industrial land of around 30 years, compared to 99-year, 999- year or freehold commercial and residential properties. For example, for 30-year leasehold land, by the time the industrial property is built, two years would have passed which leaves 28 years. A tenant or master lessee may sign a contract to rent for 10 years. By the time the rental lease expires, the property has 18 years of land lease left.
AEIs increase valuation of existing assets
Part of E-LOG’s strategy is to enhance properties with longer land tenures and divest older non-core properties with shorter land leases. In April, E-LOG announced the AEI of 21B Senoko Loop into a build-to-suit high-specification facility for NTS Components Singapore. The estimated cost of the AEI, expected to be completed by 1Q2024, is $38.5 million with a yield on cost around 6.6%.
See also: CICT's manager proposes to acquire ION Orchard at $1.85 billion, subject to EGM
In July, E-LOG announced the AEI of 16 Tai Seng Street, which started in August. The AEI will maximise the unutilised plot ratio to create an additional 2,793 sqm of space and include extensive façade upgrading works to enhance tenant experience, taking the total GFA to 22,800 sqm. Once the AEI is completed, the plot ratio will increase from 3.08 to 3.50. The asset rejuvenation will also include the improvement of drop-off points and lift lobbies, the addition of two new passenger lifts, toilet upgrading, and a new covered external linkway to Tai Seng MRT Station. The property will be fitted out with electrical vehicle charging docks and is part of the Manager’s pipeline of assets for its solar panel installation plan. The property is also expected to achieve BCA Green Mark “Gold” certification.
Scheduled for completion in 4Q2023 with an expected yield on cost of 6.0%, the Manager has secured an anchor tenant who will occupy 2,274 sqm or 12% of NLA for 10 years with built-in rental escalations of 2.5% a year. The property will serve as the tenant’s regional headquarters with warehousing, R&D and central kitchen functions.
Other AEI projects in progress include 7002 Ang Mo Kio Ave 5 where a standalone block with an additional 24,600 sqm GFA from unutilised plot ratio is being built and expected to be completed by 3Q2023. The estimated yield on cost is around 7.1%. In Australia, expansion works for an additional 10,100 sqm of warehouse space, with a 16,230 sqm of container-rated hardstand, is underway at 53 Peregrine Drive. The additional space will be fully leased to the incumbent tenant ACFS Port Logistics for a long-term lease. The project is expected to be completed by 4Q2022 and has an estimated yield on cost of 7.5%.
Acquisition pipeline
“We have a big pipeline of assets from within the ESR Group, which itself is a closed loop system,” Chui says. In such a closed loop system, the assets are sourced, built, leased and operated within the ESR Group through its funds and REITs. This integrated business model of owner, developer, operator, and asset and investment management as a Sponsor to the REIT is increasingly viewed as a hallmark of the Singapore external manager S-REIT model and key to its success. In addition, E-LOG can leverage ESR Group’s presence and expertise in new markets to de-risk its entry, with access to new tenants.
“Assets from our development funds can be made ready to inject into our core funds or REITs. Before the development reaches completion, we would know where it is destined to go and we can plan for it,” Chui says. One of the reasons for the merger is that ESR Group’s US$2 billion ($2.78 billion) pipeline in Asia Pacific is ready for injection into E-LOG. ESR Group has US$140 billion of AUM of which US$59 billion are in New Economy assets. Of the AUM, US$9.2 billion is in Japan, US$15.0 billion in Australia and New Zealand, and US$9.4 billion in Korea.
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The timing of acquisitions will depend on the pricing, yield, cost of debt and the state of the equity market if there is a need to raise capital, says Chui. “We can still go for bite-sized acquisitions. At different points in time, our portfolio will have different needs. We have been undertaking a lot of AEIs and pushing leasing because that is where our daily bread is.”
Operationally, E-LOG’s metrics continue to improve post-pandemic. Portfolio occupancy increased to 94.1% in 2Q2022 versus 93.7% in 1Q2022. The portfolio achieved positive rental reversions of 14.3% and 11.4% for 2Q2022 and 1H2022 respectively. A total of 196,035 sqm of new and renewed leases were secured in 1H2022.
Although M&As grab headlines, Chui knows full well that the success of E-LOG and the growth of its distributions per unit and net asset value depend on keeping the portfolio up-to-date and future-ready and leasing out its properties well.
