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ESR-REIT and ARA Logos to be a Top 5 Industrial S-REIT in S$1.4 Billion Merger Bid

·5-min read
Merger and Acquisition
Merger and Acquisition

On Friday, ESR-REIT (SGX: J91U) and ARA Logos Logistics Trust (SGX: K2LU) announced a S$1.4 billion merger in its bid to become Singapore’s fifth-largest industrial REIT by assets size.

Singapore’s REIT space has witnessed several interesting mergers in the last few years.

As the REIT space grows more crowded, these combinations have inevitably arisen so that the enlarged REITs have the size and clout to compete more effectively for deals and investor attention.

Back in December 2019, there was a merger between Frasers Logistics & Industrial Trust and Frasers Commercial Trust to form Frasers Logistics & Commercial Trust (SGX: BUOU).

And then there was the mega-merger in September last year between CapitaLand Mall Trust and CapitaLand Commercial Trust to form the S$13.9 billion CapitaLand Integrated Commercial Trust (SGX: C38U).

Now, it’s ESR-REIT’s turn, and it isn’t its first time.

Back in June last year, ESR-REIT attempted to merge with Sabana REIT (SGX: M1GU), but the deal was scuppered after unitholders of Sabana REIT voted against the merger.

Here are five things that investors should know about this mega-deal.

1. A stock and cash offer

ARA Logos Logistics Trust will be offered both a cash and stock consideration for their holdings in the REIT.

For every 1,000 units of the REIT, unitholders will receive S$95 in cash and 1,676 units of ESR-REIT in exchange.

Of note, the new ESR-REIT units will be issued at a unit price of S$0.51, which represents the 52-week share price high for the REIT.

Assuming the merger is approved, the combined REIT will be renamed “ESR-Logos REIT” with the sponsor, ESR Cayman Ltd (SEHK: 1821), owning around 10.9% of the enlarged REIT.

Just two months ago, ESR Cayman announced the acquisition of ARA Asset Management, the sponsor for ARA Logos Logistics Trust, for US$5.2 billion.

2. Increased exposure to new economy assets

The merger will enable REIT to increase its proportion of new economy properties within its portfolio.

“New Economy”, in this case, refers to logistics and warehouse properties including those with high specifications.

Before the merger, around 47% of ESR-REIT’s portfolio by gross rental income (GRI) comprised new economy assets.

After the merger, the proportion of new economy asset will make up almost two-thirds of its GRI..

This increase is important as the jump in e-commerce penetration will support long-term sustained demand for modern logistics facilities in the Asia-Pacific region.

3. Improvement in portfolio metrics

The merger will also improve a slew of portfolio metrics for ESR-Logos REIT.

First off, portfolio occupancy will increase from 91.7% currently to 94.5% post-merger.

The larger REIT will also enjoy a higher weighted average lease expiry of 3.2 years, up from 2.8 years.

By merging with ARA Logos Logistics Trust, ESR-REIT will also diversify its geographic exposure from being purely Singapore to around 13% Australia, 87% Singapore.

There will also be a jump in the number of tenants from 360 to 437, while its top 10 tenants will contribute to 26.3% of GRI, down from the current 29.4%.

4. Creating a stronger and larger REIT

ESR-REIT’s market capitalisation will also enjoy a significant jump from the current S$1.9 billion to S$3.3 billion, while free float percentage will increase to 76.5% from 70.8%, leading to improved liquidity for its units.

A larger market capitalisation will also garner increased analyst coverage and allow the REIT to occupy a larger weighting in the FTSE EPRA Nareit Global Developed Index.

After the merger, ESR-Logos is set to become the fifth largest industrial S-REIT by assets, up from its original sixth position.

After the merger, the pro-forma gearing for the merged REIT will be 42.1%.

That said, the merged REIT will enjoy a lower cost of debt at 2.84% versus 3.24% previously, and its weighted average debt expiry will be lengthened from 2.6 years to 3.4 years.

5. A boost to DPU

Unitholders can also look forward to larger payouts in the future. 

Distribution per unit (DPU) for the REIT for fiscal 2020 will also rise by 5.8% from S$0.02775 to S$0.02935.

Income-seeking investors should cheer this move as they will receive an increase in their passive income without having to increase their shareholding.

Get Smart: A big leap forward

If this deal goes through, it’s set to be a game-changer for ESR-REIT.

After its failed attempt to merge with Sabana REIT, sponsor ESR Cayman has come up with a new scheme that will benefit unitholders.

Still, unitholder approvals are needed for both REITs before this deal can be consummated.

Both extraordinary general meetings are slated for January 2022 and if successful, ARA Logos Logistics Trust will be delisted a month later.

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Disclaimer: Royston Yang owns shares of Frasers Logistics & Commercial Trust.

The post ESR-REIT and ARA Logos to be a Top 5 Industrial S-REIT in S$1.4 Billion Merger Bid appeared first on The Smart Investor.

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