1. Describe E-LOG’s recent financial performance. How does E-LOG plan to maintain top-line and bottom-line resilience amidst macro challenges?
Listed since 2006, ESR-LOGOS REIT (E-LOG) is a Asia Pacific (APAC) S-REIT that invests in income-producing industrial properties in key gateway markets. As of Sept 30, E-LOG has a diversified portfolio of logistics properties, high-specifications industrial properties, business parks and general industrial properties with total assets of around $5.5 billion, comprising 82 properties located across Singapore, Australia and Japan, and investments in three property funds in Australia.
In our 3Q2022 business update, we announced higher gross revenue of $243.9 million for 9M2022 ended Sept 30, an increase of 34.8% y-o-y. Net property income was $172.7 million in 9M2022, an increase of 32% y-o-y. E-LOG’s strong performance was mainly attributed to contributions from ALOG Trust following the completion of the merger in April. While we rode on the accelerated growth of e-commerce from 2020 to 2021, we believe that the looming recession may likely affect demand in the short-term.
2. What is E-LOG’s strategy to mitigate the impact of high inflation and rising interest rates?
We believe the supply crunch is a key reason for the continued rise in inflation and costs. To address rising operating costs, we have raised our service charges and have a pass-through arrangement with our tenants for their utility costs. We have spread out the renewal of our contracts to ensure that any increases in operating expenses (like cleaning, security contracts and insurance premiums) are smoothened over time.
3. What is E-LOG’s acquisition strategy? How does the REIT ensure that it has a pipeline of potential acquisition assets?
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A bugbear for the Singapore industrial sector is the short land leases (maximum of 30 years) which results in a rapid land lease decay which affects the net asset value of the REIT. The short runway also does not allow us to meaningfully redevelop and enhance the asset to meet with required returns. We took strategic steps to diversify our portfolio geographically and now have a presence in Singapore, Australia and Japan.
We recently completed the acquisition of our first asset in Japan — ESR Sakura Distribution Centre, a high-quality New Economy logistics building ocated in Sakura City, Chiba Prefecture, Tokyo. All our Australia and Japan properties are freehold and on land leases longer than 30 years, lengthening the lease expiry profile of our portfolio.
To address rising operating costs, we have raised our service charges and have a pass-through arrangement with our tenants for their utility costs. We have also spread out the renewal of our contracts to ensure that any increases in operating expenses are smoothened over time.
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We have a set of stringent criteria when evaluating overseas acquisitions. First, there must be the rule of law in the country to protect the interests of our unitholders. Funds must be able to flow freely in and out of the country to facilitate the payment of dividends, and there should be ample access to local currency funding to manage capital and currency risks. Finally, the market should be scalable, allowing us to acquire and grow meaningfully. In addition, we also ensure that the markets will be where our Sponsor, ESR Group, has a presence.
4. How does E-LOG strengthen portfolio quality while appealing to and attracting new high-quality tenants in the future?
We continue to enhance the quality of our assets to ensure that they remain relevant to tenants. Through a periodic but rigorous process, our investment managers will evaluate individual properties to ensure that it remain value accretive to the overall quality of our portfolio. Non-core assets are divested and capital is recycled into higher-yielding and value-adding New Economy assets with robust and in-demand real estate attributes. This drive to quality has allowed us to attract new high-quality tenants operating in our core markets.
5. How does E-LOG leverage the Sponsor to enhance shareholder value?
Our Sponsor, ESR Group, is APAC’s largest real asset manager and the third largest listed real estate investment manager globally and manages over US$149 billion ($204 billion) in assets across 28 countries as at June 30.
ESR Group is committed to supporting our transformation into the leading New Economy S-REIT by extending its scale, extensive offerings, capability, and resources to E-LOG. This has been demonstrated at key points since ESR Group acquired a controlling stake in the manager in early 2017. Our sponsor has supported all our capital fundraising transactions, giving assurance to our unitholders through market cycles.
6. What are your views on the outlook for industrial property across E-LOG’s key markets?
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The outlook for the Singapore and Australia logistics sectors remains robust. In Singapore, our 62 properties are close to major transportation hubs within key industrial zones and well-tenanted. Occupancy stood at 90.4% as of Sept 30 (industry average at 90%), and positive rental reversion of 11.4% for our Singapore portfolio in 9M2022. In the midto long-term, we see sustained growth arising from the semiconductor, precision engineering, aerospace, transportation, logistics, pharmaceutical and biomedical sectors. The government’s drive to transform Singapore into a digital economy has also contributed to the demand for high-specs space. The logistics sector is expected to continue to be strong. However, fears of a looming recession will likely pressure business sentiments and the overall growth momentum.
In Australia, our 20 logistics assets are located in key cities along the eastern coast of Australia. Our assets continue to see strong demand from the market. Occupancy was reported at 99.5% as at Sept 30, above the industry average of 99%.
7. How is E-LOG positioned to capture key emerging trends in the “New Economy”?
We continuously recalibrate our portfolio towards in-demand, scalable and quality New Economy Assets. Our three-pillar approach covers (a) asset enhancements and redevelopment, (b) acquisitions, and (c) divestments. We have made excellent progress, with New Economy assets accounting for 62% of our total portfolio. This has allowed us to tap into the growth of “in-demand” sectors such as logistics, high-specs and cold storage.
8. Sustainability is a growing priority for investors; how is E-LOG committed towards sustainability practices and creating value?
We have set committed achievable targets and have aligned the United Nations’ Sustainability Development Goals to which we contribute with our sponsor’s goals.
Environmental: We aim to reduce total energy and water consumption. We have 10 buildings with solar panels installed and are implementing more solar power generation systems at more properties. We can generate an estimated 15MW of power with the current solar panels, representing around 15% of the group’s total consumption capacity. While not all our properties can achieve Green Mark certification due to the age and specifications of the property, our objective is to achieve Green Mark certifications for buildings that undergo Asset Enhancement Initiatives (AEIs) and redevelopment.
Social: We are a signatory to Tripartite Alliance for Fair and Progressive Employment Practices (TAFEP). We maintain high levels of employee satisfaction, and our staff have at least 16 training hours per employee per year to upskill and advance their knowledge.
Governance: We value board and management diversity and are committed to zero lapses in corporate governance. We continue to ensure that procedures and business continuity plans are in place for preparedness and resilience.
9. What is E-LOG’s value proposition to its unitholders and potential investors? What do you think investors may have overlooked about it?
Our primary objective is to improve the overall quality of E-LOG’s portfolio and ensure that our properties remain relevant to our tenants and unitholders over the long-term. We will continue to focus on delivering on three initiatives.
First, we rejuvenate mature assets through AEIs to attract tenants. For example, we will look to enhance and reposition a general industrial property to a high-spec property or redevelop a conventional warehouse to a cold storage facility, thereby attracting higher rent-paying New Economy tenants, which in turn provides rental and valuation uplift. We may also develop an unutilised plot ratio, which will allow us to future-ready our properties and engages tenants in trending industries with long tailwinds.
Second, we seek to divest non-core assets, which are typically small and have short land leases, and the proceeds from the divestments can be used to pare down debt and be redeployed to the acquisitions of higher-quality assets. A lower gearing positions us to capture new investment opportunities faster.
Third, we identify assets for acquisitions which will augment our portfolio. Our preference is to acquire assets in New Economy sectors and overseas assets with freehold or assets with long lease terms to provide an uplift to E-LOG’s distribution per unit and net asset value. We can leverage our Sponsor’s portfolio of New Economy assets, of which we have identified an initial US$2 billion visible and executable asset pipeline in the Asia Pacific. This is a key differentiator for E-LOG in an increasingly scarce environment for logistics assets. We are not short of quality assets to acquire from our Sponsor’s pipeline.
10. By investing in E-LOG, what are the key trends in the “New Economy” investors can ride on?
We believe logistics remain the backbone of consumption in traditional physical stores or e-commerce. E-LOG continues to manage our portfolio and pivot towards New Economy assets actively. Currently, 62.5% of the portfolio are New Economy assets, with the majority of multi-tenanted building leases primed for positive rent reversions. With Covid-19, US-China trade tensions and China’s continued zero-Covid policy have changed the way goods are produced, delivered and consumed. The cost of supply-chain disruption can be more costly than labour costs. Lastmile logistics will become more important, and we are seeing emerging demand from niche logistics sub-sectors such as cold chain logistics. Developing, managing, and operating cold stores require a certain level of skill sets and hence there is a short supply of such facilities. We believe that E-LOG is in a good position to undertake redevelopments of our older conventional warehouse assets into cold-chain facilities.
Emelia Tan is a research analyst with the Singapore Exchange
