• Stay BUY, unchanged TP of SGD0.53 offers 29% upside with c.7% yield. Post-merger, ESR-LOGOS REIT has emerged stronger, with a well- diversified portfolio largely comprising new-economy assets that put it in a strong position to take on macroeconomic challenges. Its active portfolio recalibration via the divestment of non-core shorter-lease assets and addition of high-quality freehold logistic assets is a step in the right direction. The strong sponsor commitment shown via an increase in its stake and the visible asset injection pipeline is another key positive.

• Maiden foray into attractive Japan logistics market with the proposed acquisition of ESR Sakura Distribution Centre, Chiba for JPY17.8bn (SGD183.5m). Its occupancy rate stands at 75%, with the sponsor providing 12-month rent support for vacant space amounting to JPY236.5m (SGD2.4m). With positive demand-supply dynamics for logistics spaces, management is confident of backfilling the entire space in the next one year. The NPI yield is 4.35% (with rental support) and the asset is DPU-accretive, on both a 100% debt-funded basis and 60:40 debt equity mix. With existing rental rates being c.10% below market rates, we see room for rental rate growth when leases are renewed. The acquisition is subject to shareholder approval (at an EGM), and is expected to completed by Oct 2022.

• Portfolio rebalancing on the right track. EREIT has been active on the divestment front since early 2021, with four assets divested last year (including ARA Logos assets) and another four announced for 2022. The assets have been divested at a c.8% premium on average to their latest valuations (total divestment value: SGD232m). Additionally the REIT has identified up to SGD450m worth of assets that can be divested in the next 1-2 years. We are upbeat on this, as a key investor concern has also been on the assets with shorter land leases and value erosion from lease decay. In addition, its embarking on five asset enhancement initiatives to boost asset value, with an estimated ROI of 6-8% .

• Sponsor ESR Group upped its stake by 3% (to 14.4%), at SGD44.7 cents per share (c.9% premium) in end-July, and became EREIT’s biggest equity holder. This was done via an off-market purchase from another major shareholder, Tong Jinquan, whose stake post transaction will be reduced to 3.6%. In addition, the sponsor also acquired another 25% stake in the manager to total 92.3%. ESR Group is the largest player in new-economy assets (portfolio: >USD 59bn) in the Asia-Pacific and has provided the REIT with an initial visible asset pipeline worth USD2bn for potential acquisition across Singapore, Australia and Japan. ESR Group had also demonstrated its commitment in the past via backstopping equity fund-raising.

• We update FY22-24F numbers to reflect the successful merger. As our ESG score for the REIT is 3.1 – a notch above the country median – we apply a 2% ESG premium to our intrinsic value to derive our TP.

Source: RHB Research - 1 Sep 2022