In his report dated March 22, the analyst has not factored in the effects of the merger into his forecasts, but he expects that the merger should contribute positively to the REIT’s distribution per unit (DPU).
“We expect the combined REIT to execute its strategy of portfolio optimisation and asset enhancements, which should lead to a rerating,” Natarajan says. “With a strong and supportive sponsor and a healthy pipeline of assets, we see good growth potential.”
According to Natarajan, with the merger, new economy assets such as high-technology and logistics warehouses will take up 66% of portfolio rental income, as opposed to 47% at present.
The merger between both REITs is slated to be completed by the end of the 1HFY2022. It will result in a combined REIT asset size of $5.4 billion, making the merged REIT, ESR-LOGOS REIT, one of the top 10 Singapore REITs (S-REITs) by free float market cap.
Following the merger, the REIT’s sponsor ESR Cayman will remain as a key shareholder with 11.2% of combined entity and the REIT manager.
The analyst likes the merger for three reasons.
Firstly, the sizeable new economy and well-diversified portfolio will reduce concentration risks while resolving the conflict of interest from overlapping acquisition mandates with the sponsor.
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Secondly, it lowers the cost of capital, with the interest cost alone expected to fall by approximately 100 basis points post-merger.
Finally, the merger offers opportunities to transform its portfolio, by accelerating the divestment of its older, shorter-tenure assets and reinvesting the proceeds into modern new economy assets in the Asia-Pacific, with an estimated US$2 billion ($2.7 billion) worth of sponsor pipeline assets.
As at 3.01pm, units in ESR-REIT are trading at 1 cent up or 2.38% higher at 43 cents, at a price-to-book ratio of 1.07x and dividend yield of 7.2%.
