SINGAPORE (June 24): On June 18, demand for ESR-REIT’s placement was so good that the manager upsized the offering. In an earlier announcement, ESR-REIT had said it planned to raise not less than $75 million and not more than $100 million from the placement. In fact, the real estate investment trust raised $99.999 million through a placement of 194.17 million shares at 51.5 cents apiece. The REIT owns 57 industrial properties — all in Singapore — valued at $3.03 billion.
The overnight placement on June 18 was part of a funding exercise that included a non-renounceable preferential equity offering to existing unitholders on a pro rata basis to raise not more than $50 million. The REIT has stated that it does not want to raise more than $150 million. ESR Cayman, the sponsor, which owns 9.4% of ESR-REIT, will provide an undertaking to take up its pro-rata entitlement of the preferential offering.
Of the monies raised, ESR-REIT plans to use $44.4 million, or 29.6%, to fund the acquisition of 48 Pandan Road; $45.7 million, or 30.5%, to fund asset enhancement initiatives (AEIs) at 7000 Ang Mo Kio Avenue 5 and UE BizHub East; and $56.8 million, or 37.9%, to pare debt. The remaining $3.1 million will be used to pay expenses.
On June 17, ESR-REIT announced the acquisition of 48 Pandan Road in partnership with Poh Tiong Choon Logistics for $225 million. ESR-REIT will hold a 49% stake and Poh Tiong Choon 51%, with $146 million to be funded by debt.
The AEIs of 7000 Ang Mo Kio Avenue 5 and UE BizHub East are expected to provide an estimated yield on cost of up to 9%. Of the two properties, 7000 Ang Mo Kio appears to have more potential. Based on the property’s plot ratio of 2.1 compared with the current built-up plot ratio of 1.7, it has an unused gross floor area of around half a million sq ft. ESR-REIT plans to develop an eight-storey building on the site of a car park at the property with a GFA of 227,000 sq ft, subject to approvals. The REIT will retain 225,000 sq ft of unused GFA for future use.
To ensure that the new building can support high-value businesses from the new economy and tenants such as data centres and health tech companies, the REIT will build an additional substation to provide an additional power source. The manager is in advanced negotiations with various prospective tenants to take up the available area at the new building. The REIT hopes to start construction in 4Q2019 and complete it in 18 to 24 months.
UE BizHub East’s AEI will be more of a refresh and rejuvenate, and tenants will remain in the property during the works. The drop-off area will be redesigned to improve traffic flow into the property. The office lobbies will be reconfigured to improve accessibility. The internal food street will be given a facelift to better cater for the needs of the professional community surrounding the development. AEI works at UE BizHub East are expected to commence in 4Q2019 and be completed a year later.
Poh Tiong Choon Logistics Hub at 48 Pandan Road — the property that will be jointly acquired by ESR-REIT and Poh Tiong Choon Logistics — is a six-storey ramp-up warehouse with 1.093 million sq ft of GFA and a land tenure of 24 years and four months from July 1 this year. The property will be 100% leased to Poh Tiong Choon for 10 years with a fixed rental escalation per annum.
While the acquisition and AEIs are accretive to distribution per unit (see table), adding as much as 0.8%, or a DPU of 4.059 cents, to an annualised 1QFY2019 DPU of 4.028 cents, the total effect of the transactions, including the acquisition, AEIs, fundraising and debt repayment, is marginally dilutive. The REIT plans to pare debt to an aggregate leverage of 40.3% from 42.1% previously. As a result, pro forma DPU after the transactions is mildly dilutive, excluding the impact of fixed rental escalations from 48 Pandan Road.
Soochow CSSD Capital Markets research has maintained its “buy” recommendation on ESR-REIT, with an unchanged price target of 61 cents. ESR-REIT’s pro forma DPU of 3.984 cents translates into a yield of 7.38%. The attraction for medium- to long-term investors is that the REIT has no foreign exchange risk, industrial sector rents are at a trough and supply has eased.
