The extraordinary general meeting (EGM) for the ESR-REIT and ARA Logos Logistics Trust (EREIT-ALOG) merger has been set for March 21. CGS-CIMB Research analysts Eing Kar Mei and Lock Mun Yee see more merits from the REITS merging than on a standalone basis.
In a March 7 note, Eing and Lock are maintaining “add” on both REITS, which are trading at 6-7% distribution per unit (DPU) yields.
CGS-CIMB sees a target price of 92 cents for ARA Logos Logistics Trust, against an 81.5 cent close on March 6; and a target price of 50 cents for ESR-REIT, against a 42 cent close that same day.
“Based on the revised offer, ESR-REIT is offering 97 cents per ALOG unit (10% cash and 90% units), which values ALOG at 1.45x P/NAV (based on an issue price of 49 cents). Based on ESR-REIT’s current price of 42 cents, ESR-REIT is still valuing ALOG at 84 cents, or 1.26x P/NAV, above ALOG’s five-year historical, one-year historical and current P/NAVs of 1.12x, 1.26x or 1.2x respectively,” write the CGS-CIMB analysts.
For the merger to go through, ESR-REIT requires more than 50% of the total number of votes cast from shareholders, while ALOG requires more than 50% of total number of votes cast and at least 75% in value of ALOG units. If the merger is approved, the scheme will be effective by end April 2022.
The issue of conflict of interest arose after the proposed ARA acquisition by ESR Group was completed on Jan 20. With both ESR-REIT and ALOG now sharing a common sponsor and having overlapping mandates, there will be conflicts of interest if both REITs continue to operate as different entities, write Eing and Lock.
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“For instance, both REITs may have to compete for the same assets from the sponsor/third parties in the future. We understand that both REITs were often the direct competitive bidders for the same assets recently. In addition, the sponsor has to split its operational and finance sources between the two REITs, and both REITs may also need to compete for the same pool of tenants, all of which could impact the growth of both REITs negatively,” they add.
Eing and Lock believe a merger brings more benefits, such as diversification and ability to grow, in the longer term, in particular when other REITs are also scaling up their portfolio size for diversification and to compete for growth. “We think ESR-REIT is valuing ALOG fairly and the merger provides 12.8% and 5.3% DPU and NAV accretion, respectively, to ALOG. Although the deal is DPU accretive but NAV dilutive for ESR-REIT, ALOG’s portfolio could strengthen the portfolio of the merged entity with its pure logistics assets in Singapore and freehold land exposure in Australia.”
They add that logistics assets in both countries have been seeing “strong demand” and an increase in valuation would offset ESR-REIT’s initial NAV dilution from the merger in the longer term.
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Meanwhile, RHB Group Research analyst Vijay Natarajan is maintaining “buy” on ESR-REIT, with a target price of 53 cents, higher than CGS-CIMB’s 50 cents.
“ESR-REIT is inching closer to its merger with ARA Logos Logistics Trust, with proxy advisors who opposed previous deal terms now recommending to vote in favour of the revised offer. We maintain that a sizeable, well-diversified portfolio with unwavering backing from its sponsor is crucial for the REIT to navigate increasing market uncertainties. Operationally, it remains resilient, benefitting from the increase in industrial sector demand,” he writes in a March 8 note.
ESR-REIT’s operating metrics continue to improve, says Natarajan. Its occupancy rate in 4QFY2021 rose by 0.8 percentage points q-o-q to 92%. This is the highest since 1QFY2019, on strong leasing demand from the logistics and engineering sectors.
Its rental reversion also narrowed to -1.7% (3QFY2021: -2.2%), excluding certain large renewals for the business parks segment which is facing some pressure, it would have been +3%.
Management is guiding for flattish reversion rates this year. Net gearing dipped to 40% (FY2020: 41.6%), with 92% of debts hedged against interest rate hikes for the next two years.
As at 2.55pm, units in ARA Logos Logistics Trust are trading flat at 81.5 cents; while units in ESR-REIT are trading flat at 42 cents.
