SGX Market Dialogues

Author: SGX   |   Latest post: Wed, 25 Jan 2023, 10:09 AM


10 in 10 With ESR-LOGOS REIT - Futureproofing With New Economy Industrial Assets

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10 Questions for ESR-LOGOS REIT

Company Overview

Listed since 2006, ESR-LOGOS REIT (E-LOG) is a leading New Economy and future-ready Asia Pacific S-REIT which invests in income-producing industrial properties in key gateway markets. As at 30 September 2022, E-LOG has a diversified portfolio of logistics properties, high-specifications industrial properties, business parks and general industrial properties with total assets of c.S$5.5 billion comprising 82 properties located across Singapore, Australia and Japan, with a total gross floor area of c.2.0 million sqm, as well as investments in three property funds in Australia.

1. Describe E-LOG’s recent financial performance. How does E-LOG plan to maintain top-line and bottom-line resilience amidst macro challenges?

  • In our 3Q2022 business update, we announced higher gross revenue of S$243.9 million for 9M2022, an increase of 34.8% year-on-year (YoY). Net property income was S$172.7 million in 9M2022, an increase of 32.0% YoY. E-LOG’s strong performance was mainly attributed to contributions from ALOG Trust following the completion of the Merger in April 2022. While we rode on the accelerated growth of e-commerce in 2020-2021, we believe that demand in the short term may likely be affected by the looming recession.
  • COVID-19 had greatly accelerated the e-commerce growth story and while there may be some tapering of demand as world economies start to recover, e-commerce has now achieved new heights to continue its growth. Since the COVID-19 period, we have consistently collected over 95% of our rental collections. To further drive growth over the next few years, we continue to position E-LOG as a New Economy Future Ready REIT with proactive asset management, proficient investment management and prudent capital management

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. As the world – and China eventually – opens its borders fully, supply side issues will be expected to improve and reduce inflationary pressures. In addition, interest rates have been rising to help curb inflation.  
  • 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 (e.g. cleaning, security contracts and insurance premiums) are smoothened out over time.

3. What is E-LOG’s acquisition strategy? How does the REIT ensure that it has a pipeline of potential acquisition assets?  

  • 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/or enhance the asset to meet with required returns. As such, we took strategic steps to diversify our portfolio geographically and we now have a presence in Singapore, Australia and Japan.  
  • About 24% of our assets are in Australia and we recently completed the acquisition of our first asset in Japan – ESR Sakura Distribution Centre, a high-quality New Economy logistics building. All our Australia and Japan properties are either freehold and/or on land leases longer than 30 years, lengthening the lease expiry profile of our portfolio.
  • We have a set of stringent criteria when evaluating overseas acquisitions. First, there must be rule of law in the country to protect the interests of our Unitholders. In addition, 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 in a meaningful way. In addition, we also ensure that the markets will be where our Sponsor, ESR Group, has a presence in.

4. How does E-LOG strengthen portfolio quality, while appealing to and attracting new high-quality tenants in the future?  

  • As experienced asset managers, we understand that tenants drive rental, and rental drives value. To this end, we continue to enhance the quality of our assets to ensure that they remain relevant to tenants with fast growing businesses or operating in up-and-coming industries.
  • Through a periodic but rigorous process, our investment managers will evaluate individual properties to ensure that the properties remain value accretive to the overall quality of our portfolio. Through this process, we recalibrate our portfolio and shape it towards a modern and quality portfolio. Non-core assets are divested, and capital is recycled into higher yielding and/or 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 on 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 in assets across 28 countries as at 30 June 2022.
  • 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 the time ESR Group acquired a controlling stake in the Manager in early 2017. Our Sponsor has supported all our capital fund raising transactions, giving assurance to our Unitholders through market cycles. Furthermore, we can tap into our Sponsors’ portfolio of c.38 million sqm of quality assets, which includes US$59 billion of New Economy Assets.

6. What are your views on the outlook for industrial property across E-LOG’s key markets?  

  • The outlook for the Singapore and Australia logistics sectors remains robust as more occupiers and industrialists are building up inventories of just-in-case storage to manage unforeseeable supply chain disruptions. This continues to underpin the higher demand for industrial and logistics space.
  • In Singapore, our 62 properties are located close to major transportation hubs within key industrial zones and are well tenanted. Occupancy stood at 90.4% as at 30 September 2022 (industry average at 90.0%) and positive rental reversion of 11.4% for our Singapore portfolio in 9M2022. We see sustained growth arising from the semiconductor, precision engineering, aerospace, transportation, logistics, pharmaceutical and biomedical sectors in the mid to long term. The government’s drive in transforming Singapore into a digital economy has also contributed to demand for high-specs space. The logistics sector is expected to continue to be strong, however, fears of a looming recession are likely to put pressure on business sentiments and the overall growth momentum.
  • In Australia, our 20 logistics assets are located in key cities along the eastern coast of Australia – Brisbane (10 properties), Sydney (1 property) and Melbourne (9 properties). Our assets continue to see strong demand from the market. Occupancy was reported at 99.5% as at 30 September 2022, above the industry average of 99.0%.

7. How is E-LOG positioned to capture key emerging trends in the “New Economy”?

  • We continuously recalibrate our portfolio towards indemand, 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 to-date 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.
  • As of 30 June 2022, we have a well-diversified tenant base of 453 tenants, anchored by New Economy industrialists. This, along with our multi-tenanted leases, provides the potential for organic rental growth given the positive demand and supply dynamics in our core markets.

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 in which we contribute to, with the goals of our Sponsor.
  • Environmental – We have goals to reduce total energy and water consumption across our multi-tenanted buildings. We have 10 buildings with solar panels installed and are in the process of implementing more solar power generation systems at more properties. With the current solar panels, we can generate an estimated 15MW of power, which represents c.15% of the Group’s total consumption capacity. While not all our properties are able to 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/or 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?  

  • We have a proven track record of value creation across the various real estate practices, and 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. To this end, 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-specs property or redevelop a conventional warehouse to a coldstore facility thereby attracting higher rent paying New Economy tenants which in turn provides rental and valuation uplift. We may also develop unutilised plot ratio which will allow us to future ready our properties and engage tenants in trending industries with long tailwinds.
  • Second, we seek to divest non-core assets which are typically small and/or have short land leases and the proceeds from the divestments can be used to pare down debt and/or 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/or 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 on our Sponsor’s portfolio of New Economy assets, of which we have identified an initial US$2 billion of visible and executable asset pipeline in 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 that logistics remain the backbone of consumption, be it in traditional forms of physical stores or in ecommerce. E-LOG continues to actively manage our portfolio and pivot towards New Economy assets. Currently, 62.5% of the portfolio are New Economy assets with majority multi-tenanted building leases primed for positive rent reversions.
  • With COVID-19, US-China trade tensions and the continued zero-Covid policy of China have changed the way goods are produced, delivered and consumed. The cost of supply-chain disruption can be more costly than labour costs. Last mile logistics will become more important, and we are starting to see emerging demand from niche logistics subsectors such as cold chain logistics. Developing, managing, and operating cold stores require 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.

10 in 10 – 10 Questions in 10 Minutes with SGX-listed companies  

Designed to be a short read, 10 in 10 provides insights into SGX-listed companies through a series of 10 Q&As with management. Through these Q&As, management will discuss current business objectives, key revenue drivers as well as the industry landscape. Expect to find wide-ranging topics that go beyond usual company financials.

This report contains factual commentary from the company’s management and is based on publicly announced information from the company.

For More, Visit Sgx.com/research.  

For more company information, visit www.frasersproperty.com/reits/fct

Click here for Frasers Centrepoint Trust’s 2H FY2022 results presentation.

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Chart Stock Name Last Change Volume 
ESR-LOGOS REIT 0.38 0.00 (0.00%) 17,560,100 

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