Last Thursday, Global Logistic Properties (GLP) announced that it had entered into a conditional agreement to acquire 34 assets in Brazil for BRL3.2b (US$1.4b) or BRL2,650psm from BR Properties. The announcement led GLP shares to break out of their inertia and move 1.8% in the last two days of the week. These gains however, were wiped out yesterday as Asian stocks were engulfed by a sea of red.
 
In a note released on 6 March, Macquarie Equities Research (MER) took a closer look at the Brazilian acquisition and why they maintain an Outperform rating over the stock.

Impact
Transaction details. With a 99% lease ratio, the portfolio comprises 1.2m sqm of completed logistics properties, of which over 86% is located in Sao Paulo and Rio de Janeiro. Acquisition yield of 9.4% is slightly higher than current cap rate of circa 9%. Prior to this announcement, WTGoodman (50:50 joint venture (JV) between Goodman Group and WTorre) had announced in November 13 that it was in exclusive due diligence to purchase this portfolio, hence MER believes the exclusivity agreement had expired.
 
Brazil exposure enlarged. The acquisition will enlarge GLP’s completed Brazil portfolio by 89% to 2.6m square metres (sqm), in addition to 0.8 sqm of development pipeline. To recap, GLP first entered into Brazil via the formation of 2 JVs with CPPIB, CIC and GIC, which purchased 2 portfolios of logistics facilities from Prosperitas for BRL2.9b (US$1.5b) in Nov 12. Aside from strengthening its market leadership in Brazil, the acquisition will expand its customer base and enhance the tenant network effect. BR Properties is the second largest logistics player in Brazil.
 
Potential impact on financials. Based on MER’s estimates, the acquisition could potentially add S$0.02 (+0.5%) to MER’s Revised Net Asset Value (RNAV), assuming gross rent of BRL23 psm/mth, net operating income margin of 90% and cap rate of 9%. Brazil will also account for 14% of RNAV, vs. 5% previously. The acquisition will be funded by cash and/or debt, without any equity issuance. As at 3QFY14, GLP has cash of US$1.3b, with net gearing of 15%. Optimal gearing of 40% implies ample debt headroom of US$2.3b. While the acquisition is expected to be completed by 31 August 2014, it remains subject to satisfactory results of due diligence (including valuation), receipt of required regulatory/third-party approvals and board approval.
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MER’s action and recommendation
GLP offers a direct proxy to China’s (60% of RNAV) growing logistics sector, which is well-supported by a rising urbanisation rate and resilient domestic consumption. Since the landmark agreement on the partial divestment of its China business in Feb 14, GLP has announced 6 strategic alliances with leading domestic companies, which MER believes will accelerate its leasing momentum. Aside from more alliances, catalysts to its share price include more capital recycling activities and higher-than-expected development starts in China.
 
MER maintains its Outperform rating on GLP, with a 12-month target price of $3.34.

Source: Macquarie Research - 11 Mar 2014