The week of Aug 2 to 6 started off with the announcement on Aug 2 that Keppel Corp plans to acquire Singapore Press Holdings (SPH) — excluding its media business — for $2.237 billion, of which $1.08 billion is in cash and the remainder in Keppel REIT units.
The Keppel Corp transaction, which includes SPH shareholders receiving 0.782 SPH REIT units for each SPH share, prices SPH at a price to net asset value (NAV) at a multiple of one.
A couple of days later on Aug 4, ESR Cayman announced that it plans to acquire ARA Asset Management for US$5.2 billion ($7.01 billion), of which 90% will be in shares. The share exchange will be done with each ESR Cayman share at HK$27 ($4.69).
ESR plans to issue 1.23 billion shares to raise US$4.3 billion, and will issue 111.5 million vendor loan notes to raise US$387 million. The vendor loan notes are to be converted at $27 a share.
A further US$519 million will be raised through issuing new placement shares to Sumitomo Mitsui Banking Corp (SMBC) for US$250 million, and the company will raise debt of US$269 million. The new shares, SMBC shares and VLN shares together represent 46.5% of ESR’s shares outstanding.
The SMBC placement is at HK$25.35. ESR will also assume ARA’s outstanding debt. This comprises US$504 million of debt, and US$705 million of perpetual securities. In Singapore dollars, ARA has — at December year end — reported a net profit of $156.8 million in FY2020.
According to ESR’s document in 1HFY2021, ARA’s net profit was US$166 million, giving a 12-month trailing net profit of US$271.9 million. Based on reported numbers, the price to earnings multiple (P/E ratio) that ESR is paying for ARA is 44 times on a historic basis for FY2020 and 19 times on a trailing net profit basis.
The net profit figures display a degree of volatility. As at Dec 31 last year, ARA’s net asset value excluding its perpetual securities, was $1.03 billion. As at June 30, ESR shows that ARA’s NAV excluding perpetual securities, and comprising share capital, retained earnings, and reserves was US$1.08 billion.
Hence, ESR is paying P/NAV of 7 times on FY2020’s NAV, and 5 times on June 30’s NAV. These metrics are at the high end of valuations of real estate investment managers (REIM).
ESR chairman Jeffrey Perlman explains that ARA is not a developer but a fund manager. “Fund managers trade at multiples of their book value because they don’t have hard assets on their balance sheet.” ESR, for instance, trades at 3–4 times book, he says in an interview with The Edge Singapore, adding: “In the fund management business there is human capital that gets valued because it produces fees.”
Fund managers such as ARA and the likes of Brookfield Asset Management and Goodman Group are valued by their EV/Ebitda multiples which are more relevant to their valuation because of the efficiency of the balance sheet, given their asset light strategies.
Using this metric, Perlman points out that the price ESR is paying for ARA is quite sensible, at 19 times EV/Ebitda. “If you look at the comparables for and start with logistics players such as Prologis and Goodman Group, Prologis is trading at 30 times EV/Ebitda this year, and 35 times EV/Ebitda next year; Goodman is at 26 times this year and 32 times next year,” he says.
“ARA is so capital efficient with its balance sheet intensity. In ARA’s balance sheet, investment as a portion of total AUM is 2%. For ESR it is 17.7%. So ARA is generating Ebitda fees with lower capital investment,” Perlman adds.
In a presentation to investors and analysts, Perlman also points out that 50% of ARA’s AUM “is in perpetual and core capital vehicles delivering strong, recurring, highly dependable and high margin funds management income”. These are generally REITs and listed vehicles that hold assets. ARA’s attraction to ESR, is LOGOS, the logistics platform which is sponsor to ARA LOGOS Logistics Trust, in which ARA holds an 80% stake.
“LOGOS is a very close peer in [our] real estate platform, and the parties have known each other for a long time. To bring this together to form a dream team for Asia is something that cannot be replicated over time,” Perlman says. “LOGOS is so complementary to what we’re doing on the ESR side,” he adds.
“Creating the dominant real estate asset manager in Asia with the largest exposure to the new economy is incredibly powerful, and with a growth profile that is hard to match,” Perlman says. “The enlarged ESR Group is in a league of its own, and enhances our capacity to declare and pay dividend after the completion of the proposed transaction,” Perlman continues.
He claims the combined group’s AUM of US$129 billion is over 2 times its next closest peer. “With the benefit of enhanced perpetual capital we feel it enhances our earnings resilience,” he adds.
In addition to ARA LOGOS Logistics Trust, the attraction ARA offers ESR is its ability to generate fees from its holdings of the management companies of its REITs, and the fee income from its private equity funds. “ARA has delivered growth with minimal balance sheet requirement through minimum balance sheet intensity. Its NAV as a percentage of AUM is just 3%,” says ESR group CFO Cho Wee Peng. Clearly, Cho points out that there will be cost synergies, with reduced back-office infrastructure costs and streamlined overlapping country platforms.
On the cost of capital front, ESR is looking at lower debt and equity costs given its larger size. In addition, Perlman points to revenue, tenant and capital partner synergies. He also adds that the enlarged group will be run by ESR co-CEOs, while the co-founders of LOGOS will run LOGOS until it is further integrated down the road.
Cromwell Property Group and Japanese REIT manager Kenedix, two companies in which ARA has associate stakes, will be kept for the time being. However, the focus — as stressed by ESR’s management — is on new economy sectors such as logistics and data centres, and not office and retail.
Impact on the REITs
The enlarged group will have 14 listed REITs between them. It is clear that ESR will be keen to support ARA LOGOS Logistics Trust, and ESR-REIT which carries its name. In Singapore’s external manager model, sponsors provide a development pipeline, and support its REIT with equity fund raising, acquisitions, developments and redevelopments. To date, ESR has supported ESR-REIT in its endeavours.
Since the ESR-ARA announcement on Aug 4, questions have been asked about Sabana Shari’ah Compliant REIT, which was the subject of an all share merger with ESR-REIT last year. Perlman says that it will continue to support its three listed REITs — ESR Kendall Square REIT in Korea, ESR-REIT and Sabana REIT in Singapore, and ARA’s REITs which include ARA LOGOS Logistics Trust and Suntec REIT in Singapore, and Fortune REIT, Prosperity REIT and HuiXian REIT — which are listed in Hong Kong.
“Altogether we will have 14 REITs. You are seeing the financialisation of real estate in Asia, and we are going to be an active participant of that in the REIT space. A lot of that will be from the new economy sector. We’re developing US$4.5 to US$5 billion of new projects a year and that can be worth US$7 to US$8 billion [when ready] and those properties have the opportunity to go into our REITs and private core funds,” Perlman says.
The acquisition provides a neat exit for ARA’s shareholders. Private equity firm Warburg Pincus holds 46.1% of ARA and will rollover its shares into ESR holdings to own 9.6% of ESR. ARA’s founder John Lim will own 3.3%, and SMBC 4.6%.
Most of the ARA shareholders in ESR have a lock-up period of six months. “Some see this investment as strategic and will want to see the enlarged entity grow, and there will be some that ultimately divest because it creates greater free float for the stock. ESR is so closely held by institutions, so it’s not a bad thing [to have more liquidity],” Perlman says.
