REITs have not had an easy time grappling with the twin headwinds of soaring inflation and elevated interest rates.
This challenging environment has made it tougher for REITs to conduct suitable acquisitions to grow their portfolios and distributions.
ESR-LOGOS REIT (SGX: J91U), or ELR, has bucked this trend.
The industrial REIT recently announced a major acquisition of two properties in a transaction worth S$772 million.
The REIT will purchase a 100% interest in a modern logistics facility in Nagoya, Japan, and a 51% stake in a manufacturing facility cum logistics warehouse at 20 Tuas South Avenue 14 in Singapore.
Here are five highlights from this purchase that income investors should take note of.
Acquisitions are in line with the REIT’s 4R strategy
First off, these acquisitions are in line with ELR’s “4R Strategy”.
As a recap, the 4R Strategy involves Rejuvenating the portfolio, Recapitalising for growth, Recycling capital, and Reinforcing ELR’s sponsor’s commitment.
ELR has already rejuvenated the portfolio and recapitalised the REIT through selective asset enhancement initiatives (AEIs) and divestment of non-core assets.
This transaction will help to recycle capital into higher-yielding assets of better quality while reinforcing the sponsor’s commitment by tapping into the latter’s property pipeline.
At the same time, ELR’s asset and earnings quality will improve and fulfil the “rejuvenation” goal as well.
Accretive to DPU
Dividend investors will be pleased to note that the transaction is accretive to distribution per unit (DPU).
2023’s DPU looks set to increase by 1.8% from S$0.02564 to S$0.02609.
However, the REIT’s net asset value (NAV) will dip slightly by 0.3% to S$0.319.
Also, the pro-forma aggregate leverage for ELR will rise from 35.7% as of 31 December 2023 to 41% post-acquisition.
Attractive purchase prices and NPI yields
Both assets were acquired at attractive valuations along with good net property income (NPI) yields.
The Nagoya asset was acquired at a 2.3% discount to its valuation of JPY 38.9 billion and the property sports an NPI yield of 4%.
The purchase price was also a 5.9% discount to the average value per square metre for comparable properties in Greater Nagoya.
Over in Singapore, the property was acquired at a 2.3% discount to its valuation of S$859.4 million.
This asset has an attractive NPI yield of 6.1% along with 44 years remaining for its land lease.
Tapping into the sponsor’s pipeline of assets
ELR’s sponsor, ESR Group (HKSE: 1821), has demonstrated its commitment to helping the REIT to evolve into a new economy REIT.
ESR Group is an asset manager with assets under management of US$156 billion as of 31 December 2023 with more than 49 million square metres of gross floor area under its belt.
The two acquisitions came from ESR Group’s pipeline of properties and ELR’s access to this pipeline means that there is good potential for the REIT to grow further over time.
The sponsor has also committed to subscribing up to S$140 million of units for a preferential offer of units at an issue price of S$0.0305, a premium to the REIT’s last closing price of S$0.27.
This issue price represents the NAV per unit for ELR.
Improved portfolio metrics
The inclusion of the two new properties also serves to improve ELR’s portfolio metrics.
The REIT’s exposure to new economy assets will increase from the current 63% to 70% by gross rental income (GRI) post-acquisition.
The weighted average land lease expiry will also increase from 40 years to 44.3 years.
In addition, ELR’s weighted average lease expiry is slated to improve from 3.3 years to 4.4 years.
Importantly, the acquisition will help the industrial REIT to pivot towards green assets that are future-ready.
Because of these assets, the REIT managed to secure green financing with more attractive interest rates.
In addition, the Nagoya property will increase ELR’s exposure to the Nagoya logistics market where Greater Nagoya has access to both domestic and international markets.
For the Singapore property, the lease includes rental escalations of 1.5% per annum from 1 December this year which will contribute to organic rental growth.
Its tenant is a wholly-owned subsidiary of a Fortune 500 company, Reliance Industries Limited (BSE: RELIANCE), with a US$253 billion market capitalisation, thus assuring investors that the tenant is financially sound.
Get Smart: Financing the acquisition
ELR will finance these acquisitions with a mix of equity and debt financing.
The preferential offer will pay for S$194 million of the total sum while debt financing will take care of S$564.8 million.
The remainder will be covered by the issuance of ELR consideration units and the payment of the acquisition fee (in units).
The final decision on the proportion of debt versus equity will be disclosed by the manager of ELR in due course.
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Disclosure: Royston Yang does not own shares in any of the companies mentioned.
