• BUY, new TP of SGD0.34 from SGD0.35, 24% upside with c.9% yield. ESR- LOGOS REIT’s proposal to acquire two sponsor assets checks all the right boxes in its stated long-term portfolio rebalancing strategy. In addition, the sponsor’s underwriting preferential offering – at a 11% premium to current share price – is a positive signal. Gearing, however, will move back to c.41% levels, which we believe is likely to be an investor concern, at this juncture. 1H results missed expectations, on lower-than-expected income top-ups.

• Proposed acquisition of two modern warehouse and high-specification assets in Japan and Singapore from sponsor. ESR Yatomi Kisosaki Distribution Centre, Nagoya is a freehold warehouse asset completed in Apr 2022 and will be acquired for JPY38bn (SGD322m, 2.3% discount to valuation). It has a committed occupancy rate of 89.4% with advanced negotiations for another 4%, and will be acquired at initial NPI yield of 4% (including rent guarantee for vacant spaces). While its WALE is relatively short at 2.7 years from five tenants, management attributed this to the first cycle of lease signings and expects the majority of tenants to stay. Average passing rent of the property is slightly below current market rates. EREIT will also acquire a 51% stake in 20 Tuas South Avenue 14, a high-specification manufacturing facility (60%) and ramped-up warehouse (40%) for an agreed- upon value of SGD840m, based on a 100% stake, at 2.3% discount to valuation. The asset is 99.7%-occupied, with a blended long WALE of 11.2 years, and comes with lease extension options and built-in rent step-up of c.1%. As both assets are acquired from its sponsor, the transaction will be subject to EGM approvals, with a likely completion by end-November.

• DPU accretion of 1.8% (pro-forma FY23) with c.73% of the acquisitions expected to be funded by debt and the remaining SGD194m via a preferential equity offering at a premium of SGD0.305/unit. This will be fully underwritten by its sponsor ESR for up to SGD140m and Ivanhoe Cambridge for the remaining SGD54m. Post-acquisition gearing, though, is expected to climb to 41% (from 35.7%), but EREIT guided that it is still working on SGD200-300m of potential divestments that should lower gearing further.

• 1H DPU down 19% YoY due to divestments, decommissioning of assets for redevelopment, and pending contributions from redevelopments along with lower income top-ups. NPI on a same store basis(1H) rose marginally by 0.5%. EREIT has also raised utility charges across the majority of Singapore assets, which will add SGD250k per month to income.

• We trim FY24-26F DPU by 2-3% by lowering capital top-up assumptions. We have yet to factor in acquisitions, pending shareholder approvals. EREIT’s ESG is on par with the country median, so a 0% ESG premium/discount has been applied to its intrinsic value to derive our TP.

Source: RHB Research - 1 Aug 2024