ESR-LOGOS REIT - Joining The Big Leagues
- The successful merger with ALOG has transformed ESR-LOGOS REIT (SGX:J91U) into the fifth largest industrial S-REIT by total assets. With an enlarged market cap and free float, ESR-LOGOS REIT is en-route to joining the league of large cap S-REITs. With trading liquidity expected to increase, and its weightings in the FTSE EPRA NAREIT Developed Asia Index likely to double by as early as September 2022, we believe that this calls for a rerating of ESR-LOGOS REIT. The forward yield of ~7.3% and P/NAV of 1.1x also makes ESR-LOGOS REIT the most attractive large cap industrial REIT on a valuation basis.
- Through the merger, ESR-LOGOS REIT’s portfolio has been substantially “upgraded” into one with a higher concentration of logistics properties and increased diversification into the Australian market. Given the significant cap rate compression for logistics properties over the past two years, no other industrial S-REIT has been able to grow its logistics portfolio by ~S$2.0bn in a single transaction. Moreover, the merger gives ESR-LOGOS REIT access to more than S$1bn of logistics facilities in Australia that would have otherwise been impossible given the current negative cap rate spreads.
- Although ESR-LOGOS REIT’s gearing is currently at ~41%, it enjoys more favorable credit terms given its larger portfolio and more diversified sources of funding. Its all-in cost of borrowings improved from 3.34% in 1Q22, to ~2.7% after the merger. As ESR-LOGOS REIT works towards obtaining a credit rating, it will also likely have more favorable margins in the debt capital markets.
- As the merger has just been completed, ESR-LOGOS REIT could undertake a portfolio revaluation as of 30 June 2021. With continued positive rent reversions across its portfolio and assuming that cap rates remain stable, ESR-LOGOS REIT’s portfolio could potentially report some revaluation gains. Depending on the revaluation of its portfolio, ESR-LOGOS REIT could potentially report some improvement in its gearing as well as uplift in NAV together with its 2Q22 results.
- Future growth prospects of ESR-LOGOS REIT are also looking very favourable despite it being increasingly challenging for industrial REITs to source for accretive acquisitions. Its Sponsor’s enlarged pipeline provides ESR-LOGOS REIT with a visible and executable pipeline in the medium term that is valued at ~US$2.0bn. More specifically, the pipeline assets in Singapore and Japan are what we are watching out for as cap rate spreads in both markets remain positive. As ESR-LOGOS REIT transits into the large cap league, we could soon see exponential growth of S$1bn in acquisitions annually, similar to its large cap peers with Sponsor pipelines.
- We resume coverage on ESR-LOGOS REIT following its successful merger, we remain positive on its earnings projections. Although we only expect a modest ~0.5% DPU growth in FY22 due mainly to assumptions of higher utility and refinancing costs, we expect DPU growth to accelerate in FY23 onwards. This will largely be driven by organic growth of income through continued positive rental reversions and its portfolio rejuvenation strategy bearing fruits. As such, we maintain our BUY recommendation on ESR-LOGOS REIT with a target price of S$0.50.
Above is the excerpt from report by DBS Group Research.
Clients of DBS may access the full report in PDF @ https://www.dbs.com/insightsdirect/.
Dale LAI DBS Group Research | Derek TAN DBS Research | https://www.dbs.com/insightsdirect/ 2022-07-04 2022-07-04
Read also DBS's most recent report:
2022-10-27 ESR-LOGOS REIT - Positive Rental Reversions Maintained.
Previous report by DBS:
2022-10-14 ESR-LOGOS REIT - Into The Land Of The Rising Sun; Portfolio Rejuvenation To Drive Growth.