Logistics assets in Australia continue to be in demand. ESR Cayman and GIC announced their joint venture right after ARA LOGOS Logistics Trust completed the acquisition of five logistics properties for $225.9 million and notable stakes in two property funds with a combined holding of five logistics properties for $178.5 million in January.
On April 18, ESR Cayman announced plans to jointly acquire with GIC Realty a A$3.8 billion ($3.9 billion) portfolio of logistics assets in Australia from Blackstone subject to the relevant approvals. ESR Australia partnered with GIC for the acquisition under a newly formed investment vehicle ESR Milestone Partnership (EMP), in which ESR holds 20% and GIC 80%.
The portfolio comprises 45 income-producing assets across Australia’s major capital cities. With a land area of 3.6 million sq m and gross leasable area of 1.4 million sq m, the site cover is just 38% which means there is much scope for potential development. At the acquisition price, the property portfolio has an initial yield of 4.5% and a Weighted Average Lease Expiry (WALE) of 6.9 years
“A prized portfolio at a fine price,” says DBS Group Research. “We view this Australian portfolio as a rare opportunity to gain a significant foothold in the logistics and industrial space in Australia, supported by robust consumption growth within a largely domestic driven economy, fuelled by increasing adoption of e-commerce.” DBS reasons that the entry property yield of 4.5% is tight because of the portfolio’s strong operating metrics and long WALE.
The tenants are blue-chip tenants with names such as Woolworths, Lineage Logistics, Toll Holdings, Daimler Benz, Australia Post, Mazda and WesTrac.
Low cost of capital an advantage
Of course, the ESR Cayman-GIC JV was not the only party bidding for this portfolio. It so turns out that Mapletree Logistics Trust’s (MLT) manager was also bidding for the portfolio on behalf of the REIT. When asked how far she was from the winning bid, Ng Kiat, CEO of MLT’s manager, gamely answered, “Not that far but far enough. I think we were No 2. It was a large portfolio and a few percentage points difference [separated us],” she says referring to the property portfolio.
There are two parts to the acquisition, the property portfolio and the management company.
“As far as MLT was concerned, we were prepared to go to a level of 1%–2% accretion but other than that we were not prepared to go further,” Ng elaborated during a results briefing on April 21.
ESR Cayman paid an additional A$13 million for the management company, which was its NAV. The management company has not had any business operations or generated any profits since its establishment, according to ESR Cayman’s announcement.
When asked if there was a floor to a particular property yield MLT would pay, Ng said, “we have kept to gearing of 40%.” Whether an acquisition is accretive depends on MLT’s unit price and its debt cost. MLT’s yield based on its annualised DPU is 4.4% while yield based on historical DPU is 4.24%. “Now, we can do accretive deals at 4%, so there is not a floor MLT will be satisfied with,” she indicates. MLT’s weighted average borrowing cost in 4QFY2021 ended March was 2.2% per annum. As a result, blended cost of funding an acquisition could be quite low. “The most important thing is to ensure the DPU continues to grow and investors continue to have faith in us and that translates into share price appreciation and if the low interest rate environment continues we can push that floor,” Ng reasons.
Planning to grow by another billion
For MLT’s current financial year, Ng is prepared for acquisitions in the range of $600 million to as high as $1 billion. In FY2021, for the 12 months to March 31, MLT acquired $1.6 billion of logistics properties across Asia-Pacific, including in China, Vietnam, Korea, Japan and most recently, India.
“In terms of growth the obvious pipeline is from the sponsor. China, Malaysia and Vietnam will continue to come in from the sponsor’s pipeline,” Ng says.
Between development and acquiring an income-producing property, Ng prefers the latter. “Our financial position is not unlimited and we have to come out to market to do EFR (equity fund raising). If there is an opportunity to put dollars into an income generating portfolio that is accretive, the preference is in that direction. I don’t intend to turn into a semi developer,” she remarks.
In terms of divestments, MLT could look at around $200 million from these transactions. They are likely to be older properties with limited upsides and modest gains.
As a result of MLT’s acquisitions in FY2021 and gains in valuations for selected properties, AUM rose to $10.8 billion, translating into NAV per unit of $1.33 as at end March, up 9.9% y-o-y. DPU gained 2.3% y-o-y to 8.326 cents.
