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Simons Trading Research

Author: simonsg   |   Latest post: Mon, 8 Aug 2022, 9:09 AM

 

ARA LOGOS Logistics Trust - Financial Prowess Through Merger to Enhance Scale

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  • ESR-REIT has offered to acquire all units of ARA LOGOS Logistics Trust for S$0.095 in cash and 1.6765 new ESR-REIT units. The merger more than doubles total assets to S$5.4b, enabling ARA LOGOS Logistics Trust to leapfrog from the 19th position to become the ninth-largest S-REIT.
  • New sponsor ESR Group provides New Economy pipeline exceeding US$50b, of which US$2b is visible and executable. Pro forma 2020 DPU is estimated to increase 8.2% to 5.512 cents due to lower cost of debts and payment of upfront land premium.
  • ACCEPT OFFER.

The Creation of ESR LOGOS REIT

  • ESR-REIT (SGX:J91U) has offered to acquire all units of ARA LOGOS Logistics Trust (SGX:K2LU) via a Trust Scheme conditional upon the completion of the ESR Cayman and ARA Asset Management merger to form ESR Group. ARA LOGOS Logistics Trust unitholders will be entitled to S$0.095 in cash and 1.6765 new ESR-REIT units issued at S$0.51 for each unit of ARA LOGOS Logistics Trust. Based on the issue price of S$0.51 per ESR-REIT unit, the scheme consideration is S$0.95 per unit.
  • With scale comes financial prowess. ARA LOGOS Logistics Trust’s total assets will increase 2.7x to S$5.4b. Its free float market cap doubles to S$2.5b, leapfrogging from the 19th to the 9th largest S-REIT. It will gain from larger weightage in the FTSE EPRA Nareit Developed Asia index.
  • Laser-like focus on New Economy. ESR LOGOS REIT’s core focus is the New Economy with logistics and high-specifications industrial properties accounting for 65.7% of gross rental income as of Jun 21. Post-merger, ESR LOGOS REIT will divest selected non-core assets over the next 18 to 24 months for portfolio rebalancing. It will recycle and redeploy capital to New Economy properties. In terms of geographical mix, ESR LOGOS REIT targets to allocate 40% of AUM to overseas markets, comprising Australia, China and Japan (currently, 13% of AUM is located in Australia).

Super-charged Growth From Sponsor Pipeline

  • ESR LOGOS REIT is backed by developer-sponsor ESR Group, the largest real estate manager in the Asia Pacific region with a fully integrated platform and global tenant network. It will become the flagship REIT of ESR Group. ESR Group has AUM of US$131b, of which New Economy AUM exceeds US$50b and work-in-progress development value is above US$10b. An initial New Economy pipeline of US$2b is visible and executable.

The Merger Is Value Accretive to ARA LOGOS Logistics Trust's Unitholders

  • Pro forma 2020 DPU leverage as of Dec 20 is expected to increase from 39.8% to 42.1%.

Indicative Timeline

  • ARA LOGOS Logistics Trust EGM and scheme will be delisted and become a sub-trust of ESR-REIT.

Financial Prowess Through Merger to Enhance Scale

  • We recommend is based on DDM (cost of equity: 6.5%, terminal growth: 1.5%).
  • ARA LOGOS Logistics Trust provides attractive 2022F
    • distribution yield of 5.8% (Frasers Logistics & Commercial Trust (SGX:BUOU): 5.2%, Mapletree Logistics Trust (SGX:M44U): 4.3%) and
    • P/NAV of 1.39x (Frasers Logistics & Commercial Trust: 1.33x, Mapletree Logistics Trust: 1.53x).

Source: UOB Kay Hian Research - 18 Oct 2021

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