The manager of ESR-REIT, on Feb 9, released answers to a list of frequently asked questions (FAQ) in relation to the proposed merger of ESR-REIT and ARA LOGOS Logistics Trust (ALOG).
Within the list, the REIT manager explained that growth for both REITs are likely to be “negatively impacted” should the conflicts of interest arising from being under a common sponsor are not resolved.
Following the completion of the proposed ARA acquisition on Jan 20, the ESR Group, which is the sponsor of ESR-REIT, is now an indirect majority controlling shareholder of the LOGOS group.
As such, ESR-REIT and ALOG now have overlapping mandates in terms of asset pipeline, tenant and operational network, and financial resources, says the REIT manager in its statement on Feb 9. With the same sponsor, both REITs may have to compete for new assets and financial resources from the group.
“Such conflicts of interest will also result in uncertainties arising from the type and amount of asset pipeline tenant and operational network and financial resources and to be provided by the sponsor,” reads the statement.
Should the merger go through, it will address the issues stated above and allow better economies of scale in addition to safeguarding the interests of unitholders of both REITs.
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Should the merger not be successful, the ESR Group may resolve the conflicts of interest by selling the manager of either ESR-REIT or ALOG to a third party.
“In such an instance, the manager, and by reference the REIT, that is sold will not be able to leverage the ESR Group's asset pipelines, tenant and operational network and financial resources, or the divestment of either REIT's portfolio of assets, some of which are under non-sale moratoriums imposed by JTC Corporation,” says the manager via the statement.
“It is the manager's opinion that either of such options is not in the interests of either REIT's unitholders as it would curtail such REIT's growth prospects which may result in either REIT losing its current premium to net asset value (NAV) pricing,” it adds.
See also: CICT's manager proposes to acquire ION Orchard at $1.85 billion, subject to EGM
In addition, a sale of the manager will trigger the change in control provisions in ESR-REIT's existing debt facilities of some $1.29 billion.
“Any potential buyer of the manager is likely required to obtain debt financing to replace such existing debt facilities, and there is no guarantee that the new financing terms will be more favourable than ESRREIT's current financing terms,” continues the manager.
Revised scheme consideration to ‘seek balance’ between both unitholders
The revised scheme consideration came about after it was found that the original terms of the scheme were not attractive enough for ALOG unitholders.
Proxy advisers, Glass, Lewis & Co and Institutional Shareholder Services also issued reports recommending that ALOG unitholders voted against the scheme under its original terms.
On Jan 22, the manager of ALOG announced that ESR-REIT will pay a higher scheme consideration, where the cash component has been increased by 2.1% and the number of consideration units increased by 5.8%.
The gross exchange ratio has also increased by 5.8% to 1.970 times from 1.863 times.
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While ESR-REIT unitholders see the revised consideration as overpaying for ALOG, the consideration is deemed fair by ESR-REIT considering it allows the manager to address the underlying short land lease issue and benefit from ALOG’s Australian logistics portfolio among other reasons.
“As the revised scheme consideration of 97 cents per ALOG Unit is higher than the 52-week high, for the purpose of deriving the revised issue price of the consideration units, the manager has considered the following for ESR-REIT: the ESR-REIT Unit price performance over the last six months up to Oct 14, 2021; and brokers' / investment research houses' average target price consensus,” says the manager.
Within the statement, the REIT manager also stressed the importance of solving the potential conflicts of interest with a common sponsor, in addition to highlighting the benefits of the enlarged REIT.
The new REIT will be the “leading new economy APAC REIT that is backed by a committed sponsor with strong sponsor resources”, says the manager.
“Importantly, the strategic merits of the merger still remain intact. With the revised scheme consideration, the merger continues to be financially attractive for ESR-REIT Unitholders with a DPU accretion of 4.7% on a FY2020 pro forma basis,” it adds.
“While the pro forma NAV of the Merger is dilutive by approximately 8.5% on a FY2020 basis, we believe that the DPU accretion plus the access to ALOG's freehold and longer land tenure logistics portfolio which is benefitting from the strong performing Australia logistics sector will be beneficial for ESR-REIT Unitholders to balance the land lease decay of the leasehold nature of ESR-REIT's portfolio.”
Merger ‘similar’ to acquiring single assets or portfolio of assets
The time and resources that have gone into the current merger is “similar” to ESR-REIT acquiring a portfolio of assets or multiple single assets of $100 million each, reveals the REIT manager.
In comparison, the merger is deemed “less risky from an execution and financing perspective”, says the manager, in answer to unitholders’ query on the rationale of merging both REITs as opposed to acquiring a single asset or a portfolio of logistics properties directly from the sponsor’s pipeline.
Additional costs to be funded by unsecured bank facilities
The additional acquisition costs of $27 million under the revised scheme consideration will be paid in new ESR-REIT units with the remaining 10% in cash.
The cash portion will be funded by the unsecured bank facilities by DBS Bank, Maybank and Sumitomo Mitsui Banking Corporation Singapore Branch. There will be no increase in pro forma gearing of 42.1% post-merger, says the manager.
On the manager’s acquisition fee considering that the merger will be dilutive to ESR-REIT unitholders on an NAV basis, the manager maintains that a sponsor’s “strong support is important and highly correlated to the growth of a REIT”.
“Given the sponsor is a listed real asset fund manager and developer, it will have to demonstrate to its shareholders that it has received returns from providing the Sponsor Resources and support to the enlarged REIT on a continuous basis,” says the manager.
In addition, the manager believes that the benefits from the enlarged REIT’s continued access to the sponsor resources and support from the sponsor, which includes access to the initial pipeline of approximately US$2.0 billion of visible and executable Asia Pacific New Economy assets from the ESR Group, “far supersedes the acquisition fee payable for the merger, which is estimated to be approximately $15.6 million based on the scheme consideration”.
Units in ESR-REIT and ALOG closed at 43 cents and 83 cents respectively on Feb 8.
Photo: ESR-REIT
