ESR-LOGOS REIT (E-LOG) announced the proposed acquisition of 100% of ESR Yatomi Kisosaki Distribution Centre, Nagoya, Japan, for JPY38 billion ($338 million) and 51% of 20 Tuas South Avenue 14 (20TSA). The agreed value for (100%) of 20TSA based on a net property income yield of 6.1% is $840 million.
Both properties are being acquired at a 2.3% discount to the valuation. For ESR Kisosaki, the acquisition price is also 5.9% below the valuation of comparable properties in Nagoya. The total acquisition cost is approximately $772.6 million and the acquisitions are expected to be +1.8% DPU accretive.
ESR Kisosaki comprises a land area of 79,096 sq m, with a weighted average lease expiry (WALE) of 2.71 years as of June 30. The property was completed on April 28, 2022 and has one of the highest sustainability ratings in Japan. Its committed occupancy is 89.4%.
“We are in advanced negotiations with a tenant to take up space and we hope the occupancy will go up to 93%. The NPI yield is 4%, and we are acquiring the property at a 2.3% discount on the valuation,” says Adrian Chui, CEO of E-LOG’s manager.
ESR Kisosaki will be E-LOG’s second property in Japan. In 2022, E-LOG acquired the ESR Sakura Distribution Centre in Chiba, Greater Tokyo, for $183.5 million, including rental support. Acquiring ESR Kisosaki DC will boost E-LOG’s logistics assets in Japan from 3.7% to 8.9% and provide E-LOG with exposure to the Nagoya logistics market. This move will enhance E-LOG’s geographical diversification, strengthen its network within Japan and increase its scalability in the Japanese logistics sector.
The Japanese property is located in northeastern Mie Prefecture, in the Bay Area of Greater Nagoya. It offers good road connectivity to the Nagoya Container Terminal (Port of Nagoya) and the Ise-Wangan Expressway. Greater Nagoya, situated in central Japan, is a key hub connecting Greater Tokyo and Greater Osaka, making it crucial for the movement of people and goods. According to an E-LOG press release, the property’s strategic location enhances Greater Nagoya’s transportation and logistics capabilities and provides excellent access to both domestic and international markets.
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Rent stability
The Tuas property stands out in Singapore due to its 44-year lease tenure. It also boasts a committed occupancy rate of 99.7% and is near Tuas Megaport. The high-specification space, which accounts for 60% of the net lettable area, is 100% leased to REC Solar as an anchor tenant on a long-term lease of approximately 19 years with an option to renew for a further 20-year lease. This provides long-term rent stability and sustained organic growth through annual contracted rent escalations averaging 1.15% annually.
The multi-tenanted ramp-up logistics warehouses comprise 40% of 20TSA and are leased to prominent companies like Schneider Electric Asia, Maersk Logistics and Services Singapore and DSV Solutions. With current rents below market rates, there is potential for rental growth.
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Chui also defends E-LOG’s move to expand internationally. “Singapore will be 75% of our portfolio after the acquisition. For Singapore industrial property, there is a challenge in terms of the underlying land leases of 30 years. You will not see us suddenly become less than 50% in Singapore.”
He acknowledges that Singapore is seen as a safe haven due to its rule of law, transparent regulations, stable currency and reliable government. “While we plan to acquire overseas assets, if there is a good opportunity here from the sponsor with a long land lease, we will consider that.”
The 1.8% DPU accretion is based on the funding structure for the acquisition. For Japan, E-LOG has arranged and confirmed the financing and the equity fundraising for the properties.
Since E-LOG’s portfolio is largely unsecured, E-LOG will fund 100% of ESR Kisosaki with yen debt. “We can get onshore debt for 60% of the property value,” Chui says, with the remaining 40% of yen debt obtained offshore. Offshore, we can still get a loan based on our unsecured portfolio. So, in effect, we are using 100% Japanese yen borrowing on the asset, which is similar to Sakura,” Chui says.
This form of capital hedge worked for ESR Sakura. Even though the yen has depreciated, the asset’s capital value has not changed. “Not only is yen debt cheaper, but the sector allows us to hedge capital. There is no risk of NAV declining,” Chui adds.
However, loan-to-value in Australia is capped at 50%, exposing the capital values to risk. On the other hand, fluctuations between the Australian dollar and the Singapore dollar are less volatile. E-LOG has four-year loans for both ESR Kisosaki and ESR Sakura. Distributions coming back to Singapore will be hedged on a 12-month basis.
Equity fundraising
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E-LOG has announced an equity fundraising (EFR) comprising a fully underwritten preferential offer to unitholders to raise $194 million. ESR Group has committed to subscribe for $140 million of E-LOG units priced at 30.5 cents, which is the REIT’s NAV.
Ivanhoé Cambridge, a unit of Caisse de dépôt et placement du Québec (CDPQ), which manages the Québec Pension Plan, is an investor in the private equity fund that owns 20TSA. Ivanhoé Cambridge has committed to subscribing to $54 million units worth at 30.5 cents apiece.
Chui says the 30.5 cents pricing is higher than the market price at the end of July. “If we used the market price, it would be NAV and DPU dilutive and doesn’t help our ability to transform ourselves. Our share price is undervalued. Our sponsor is paying 30.5 cents to demonstrate a clear alignment of interest as they believe our share price is undervalued.”
Since ESR Group manages the funds that own ESR Kisosaki and 20TSA, the transaction is an interested party transaction that requires an EGM in which ESR can’t vote. Ivanhoé Cambridge owns 3% of E-LOG and can’t vote for the 20TSA acquisition.
“The EGM is in mid-October and if approved, we will launch the preferential offer. There is a long time to decide,” Chui adds. The fund that owns 20TSA has five investors, including ESR. Although the transaction is likely to raise E-LOG’s aggregate leverage to 41%, it will likely keep its average cost of debt at 4.03%. In 1HFY2024, for the six months to the end of June, E-LOG’s average cost of debt crept up to 4.03% from 3.91% as of the end of December 2023.
When asked about divesting ESR BizPark @ Changi, Chui stated that no assets are off-limits and that he will evaluate all options. “We are not opening ourselves to brokers; this is not an invitation.” However, Chui is open to divesting the asset if he receives an irresistible offer.
In the meantime, Chui has guided analysts that rental reversions for the portfolio are expected to be in the high single digits, closer to 10% than 8% for the year, following an 11.2% increase in 1H2024.
Despite the growing supply of logistics properties in 2025, supply chain disruptions will drive demand. Businesses will also need to consider interest rates. “If interest rates come down in 4Q2024, business costs will be lower. People will be more confident about business expansion once the cost of doing business comes down. I’m still cautious because we don’t know what will happen in the US elections,” he adds.
