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ESR-LOGOS REIT: 4 Things To Know About The Merger Between ESR REIT and ARA LOGOS Trust Logistics Trust

The merged ESR-LOGOS REIT will contain $5.4 billion in total assets across 87 portfolio properties in Singapore and Australia

41-51 MILLS ROAD, BRAESIDE, VIC (Photos from ARA LOGOS Logistics Trust)

In October, ESR-REIT and ARA LOGOS Logistics Trust announced a merger proposal for S$1.4 billion. ESR-REIT will acquire all of ARA LOGOS’ units in exchange for a combination of cash and new units.

The proposed merger will result in a merged REIT entity – ESR-LOGOS REIT. Existing ARA LOGOS unitholders will receive $0.95 per ARA LOGOS units they own. This would comprise $0.095 in cash, and 1.6765 new ESR-REIT units, to be issued at $0.51 apiece.

ESR-REIT merger with ARA LOGOS Logistics Trust

Source: Proposed merger with ARA LOGOS Logistics Trust (“the Merger”)

 If the merger is approved, the merged ESR-LOGOS REIT will contain $5.4 billion in total assets across 87 portfolio properties in Singapore and Australia, as well as 41 properties owned via investment funds in Australia.

This constitutes 58 properties owned by ESR-REIT that include business parks, logistics and warehouses, with an aggregate property value of $3.2 billion. ARA LOGOS’ 29 logistics warehouses in Singapore and Australia valued at around $1.8 billion would be injected into the merged REIT.

ESR-LOGOS REIT merged property portfolio

Source: Proposed merger with ARA LOGOS Logistics Trust (“the Merger”)

Post-merger, the enlarged ESR-LOGOS REIT will continue to be managed by the ESR-REIT manager. Mr. Adrian Chui – who is the manager’s existing CEO – will continue as CEO. Meanwhile Ms. Karen Lee – who is the existing CEO of the manager of ARA LOGOS Logistics Trust– will join the ESR-REIT manager as Deputy CEO.

We had an exclusive interview with both Mr. Adrian Chui and Ms. Karen Lee to get further insights and perspectives on how the merger will affect respective stakeholders and unitholders, and what can be expected through this partnership.

#1 Focus On “New Economy” Businesses

The focus of the newly formed ESR-LOGOS REIT will be in “New Economy” properties, where due to COVID-19, has resulted in a sectorial and requirement shift in the logistics space.

Commercial opportunities and sectorial growth tailwinds such as increased e-Commerce penetration, Digitalisation of the Economy, Transformation of Global Supply Chain Manufacturing has driven demand for Logistics & High-Specs Space and is on track for further exponential growth in the coming decade.

Both Managers has also concurred that it is important for the merged ESR-LOGOS REIT to take advantage of this opportunity to further grow and focus on providing additional value to their tenants. Many of which have differing requirements such as higher specifications clean-room, space configuration for last-mile 3rd party logistics (3PL) delivery providers, and other infrastructure requirements.

ESR-LOGOS REIT tenant base

Ms Karen Lee mentioned that “tenants now have more specific requests, from incorporation of temperature-controlled rooms for the storage of inventory, to having advanced technology ready in plug & play modules”.

Mr Adrian Chui added that it is essential for logistics operators to also adapt and start embracing technology. “As the world evolves with COVID-19, companies have also moved from Just-in-Time (JIT) to Just-in-Case (JIC) where suppliers or manufacturers now aim to have more inventories on hand and are more prepared for any uncertainty or scenarios.”

In addition, international multinational corporations (MNCs) have also requested for further ESG efforts and to ensure that the buildings are Green Mark and building owners are continuously investing in green initiatives.

Mr. Chui also highlighted that they will be taking the opportunity in the next 18-24 months to enhance its value by paring down its portfolio of non-core legacy assets. This should unlock capital which could be redeployed into more quality assets – catered to “New Economy” tenants.

#2 Leveraging on Sponsor’s Network for International Scale 

The merger will allow ESR-LOGOS REIT to leverage off the ESR Group’s fully integrated New Economy focus platform and allow benefits such as the access to Sponsor’s global tenant network, expanded operational expertise, scale and network, and to de-risk when it comes to new market entry into key Asia Pacific markets where the Sponsor has market-leading presence.

The Sponsor has a pipeline of US$50 billion, and a work-in-progress development of US$10 billion seeking to scale across various developed markets such as Singapore, Australia, China, Japan, and India. This brings across value, capabilities, and strong quality assets that will bring further value to the expanded REIT.

Both Mr Adrian Chui and Karen Lee shared that the Sponsor has committed US$2 billion in pipeline for deployment in the next 12-18 months to further expand the portfolio and proceed with a strategic asset purchase and allocation.

Benefits of REIT merger

ESR-LOGOS sponsor property portfolio pipeline

Through the wide outreach and network, tenants can leverage onto the global reach that the Sponsor, ESR is able to provide. An example shared by Mr Adrian Lee and Ms Karen Lee: “Say that there is a tenant currently operational in Singapore or Australia, and now they wish to expand to India, they are now able to do it through the Sponsor, ESR and the Group where there can be more on-ground operational support to assist. This allows for more value creation, and ability to maintain continuity and longevity of professional working relationships between the Group and the tenant.”

The role of the Sponsor was also highlighted and that ESR is able to support in providing a backstop for unsubscribed preferential offering units in the case of any future potential fundraising exercise.

There were two filings prior in July and August where ESR committed for the raising of gross proceeds that were used for debt repayment and to partially finance its asset enhancement initiatives at 16 Tai Seng Street and 7000 Ang Mo Kio Avenue 5. The backstop gives certainty to the issuer, and it also acts as a form of “insurance” to Unitholders. This creates certainty in the transaction and guarantees that the REIT can raise the necessary proceeds that’s required for further application.

In addition, ESR Group has the reputation of being the largest Asia Pacific real estate fund manager with assets under management (“AUM”) in Asia Pacific of US$131 billion.

41-51 MILLS ROAD, BRAESIDE, VIC (Photos from ARA LOGOS Logistics Trust)

Source: 41-51 MILLS ROAD, BRAESIDE, VIC (Photos from ARA LOGOS Logistics Trust)

#3 Value Accretive to Existing Unitholders Of ESR-REIT And ARA LOGOS Logistics Trust

Through the merger, the Managers has established a series of transactions that will be beneficial to current Unitholders of both ESR-REIT and ARA LOGOS Logistics Trust (ALOG).

Refinancing of Debt

ALOG’s total borrowings of approximately $768.7 million were refinanced with new banking facilities of approximately $618.7 million at a weighted average “all-in” competitive finance cost of 2.25% per annum.

Perpetual securities of $101.5 million were redeemed and approximately $251.5 million of new perpetual securities at an illustrative coupon rate of 4.50% per annum is issued.

As ALOG is rolled up into the enlarged entity, the existing interest on loan borrowings and perpetual securities are further reduced as ESR-LOGOS REIT can leverage on its size to further negotiate with financial institutions to offer a more competitive rate. This results in a net accretion outcome for all Unitholders. Reduced interest and increased tenure, reduction of exposure to short land leases in Singapore allows for more efficient cost of capital, which allows for more efficient deployment across capital expenditure intensive projects. This unlocks value for all Unitholders and provides for further growth.

This has resulted in the overall cost of debt lowered by 40 basis points at 2.84% while the weighted average debt expiry to 3.4 years.

Upfront Land Premium to JTC

The estimated upfront land premium that is payable to JTC Corporation “JTC” is approximately S$87.9 million. This is funded by the new banking facilities at a finance cost of 2.25% per annum.

The upfront land premium is incurred when there is a sale to 3rd party facility provider where JTC requires the buyer to pay this upfront land premium. By paying the total land premium sum, ESR-LOGOS Logistics can save in recurring land rental that is typically paid to JTC which results in better margins and bottom-line for the business in the longer term. Equity is refunded by new debt at 2.25% and serve to give Unitholders further upside.

ESR-LOGOS REIT reduced cost of capital

Illustration of Improved Debt, Capital Structure

Improved Operational Metrics

The enhanced size and scale through the merger bring about opportunities for operational synergies and portfolio optimisation potential. The collective expertise that both companies bring about allows various departments in marketing, leasing, asset management platform to perform, creating integration and optimisation of property management services.

An example would be through the collective groups and clusters comprising various tenants and logistics units in the same proximity, ESR-LOGOS is able to further raise its bargaining power with service providers to further bring down operational costs. This allows cost-savings to be provided to tenants in the form of competitive rents.

Distribution per Unit (DPU) Accretive

For current Unitholders, the Distribution per Unit (DPU) is then able to be increased as more value is unlocked through the various strategies above. This is shown below, as a representation.


Illustration of DPU Accretion, ARA LOGOS

ESR-LOGOS REIT distribution accretive

Illustration of DPU Accretion, ESR-REIT

Ms Karen Lee also mentioned that post-merger, “this would be a value-accretive transaction to current ARA LOGOS Logistics REIT Unitholders. Rolling up into the enlarged platform through the merger allows further exposure to projects that are of bigger scale, entering potentially larger markets, and the scheme is offered at the peak of ALOG’s 52-week high trading price of S$0.95”. She also added that the enlarged entity allows for more exposure and awareness from institutions and retailers who use the benchmark index as a reference for purchase, resulting in more liquidity and trading volume for the stock.

#4 Value Of An Enlarged ESR-LOGOS REIT Entity

The Merger adds 17 freehold and 3 leasehold Australia logistics properties, including stakes in 2 Australia logistics-focused funds. The additional 17 freehold Portfolio Properties increases its proportion of freehold Portfolio Properties to 10.7% and increase its land lease expiry profile from 31.0 years to 37.9 years. The exposure to these freehold assets allows the company to further preserve the value of the REIT portfolio.

This addition of Australia logistics properties increases the geographical exposure and diversification in the country to 13% in the overall combined portfolio, providing exposure to the market. This is in line with ESR-REIT’s strategy is to scale up presence in developed markets.

As a combined entity, there is also lower portfolio risks with increased diversification. The merger results in the addition of 29 logistics Portfolio Properties which allows ESR-LOGOS REIT to own 87 Portfolio properties. The increase of 17

Post-Merger, ESR-LOGOS REIT will enjoy increased portfolio resilience, and income stability with occupancy increasing from 91.7% to 94.5%. The Weighted Average Lease Expiry (WALE) also increases from 2.8 years from 3.2 years. The WALE is a strong signal of tenancy risk of a property, and this increase gives more certainty to the commitment by tenants’ occupied area and income.

Through this merger, it allows ESR-LOGOS REIT to grow in terms of market capitalisation. ESR-LOGOS REIT’s market capitalisation is expected to increase by approximately 77.1% to S$3.3 billion with free float expected to increase by approximately 91.3% to S$2.5 billion. Being in a position of strength allows ESR-LOGOS to broaden its access to a wider, deeper, and more diversified investor base.

The inclusion into indexes such as the FTSE EPRA Nareit Global Real Estate Index and other global REIT indexes allows ESR-LOGOS to be in an position of strength, where the entity is able to broaden its access to wider, deeper, more diversified and strategic investor base. The exposure to larger institutional funds also allows the flexibility in the case of raising additional capital in the future through various instruments, i.e., commercial bonds, convertible notes, or preferential offerings.

There will also be increased analyst coverage, higher trading liquidity and volume, and the increased size also allows for a larger weightage in the EPRA index, which can result in a potential positive re-rating.

ESR-LOGOS REIT stronger after merger

Again, both Mr Adrian Chui and Ms Karen Lee mentioned that there will be an enlarged support from both sides of Sponsors – ESR and ARA. This includes, but not limited to – network of strong investors, financial institutions, more funding options, fund management operational expertise.

In addition, through the merged entity, there is more pooling of resources to have a consolidated expansion strategy, whereas in the past, both REITs might be bidding for the same project thus driving up the cost. The merger also allows for the tenant concentration risk to be further reduced.

Building A Leading Future-Ready S-REIT

The synergies by both ESR-REIT & ARA LOGOS Logistics Trust allows for the ease of integration as they are in similar sectors in the Manufacturing and Logistics space.

Both Mr Adrian Chui and Ms Karen Lee brings across complementary skillsets to the merged team. Having decades of experience between them in the Asset Management space, this allows them to bring different capabilities (capital markets, operational and systems processes, etc.) to the table to further support stakeholders and unitholders.

As the world gradually moves towards the adoption of living with COVID-19, the investment and reallocation to support “New Economy” players could also lead to further impetus of growth for the company. Companies adopting and adapting to new technologies have higher demands and requirements and REITs such as ESR-LOGOS would have to be ready to meet these needs.

To accelerate the growth in the New Economy pipeline, ESR Group has also committed to the initial pipeline of approximately US$2 billion which can be deployed as ESR-LOGOS REIT seeks to grow into a leading future-ready APAC S-REIT.

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