Ara Logos-ESR-Reit merger NAV dilutive at first but may mitigate decline over time: ESR

DESPITE being dilutive to net asset value, the merger of Ara Logos Logistics Trust and ESR-Reit would boost the merged entity's financial flexibility to take on longer leases that will mitigate the erosion of NAV over time, ESR Funds Management said.

It said this in a statement to the Singapore Exchange on Oct 25 to address frequently asked questions by unitholders that the merger - subject to unitholders' approval - would allow ESR-Reit to increase its proportion of freehold portfolio properties to 10.7 per cent from zero while also increasing its land lease expiry profile from 31 years to almost 38 years.

It also explained that by having freehold assets and longer land lease expiry profile, there will be a smaller decline in NAV per unit over time due to land lease expiry of JTC industrial land that is under a fixed 30-year lease tenure.

After merging, the enlarged unit will have a stronger financial profile through more competitive cost of financing, longer weighted average debt expiry (WADE) and access to wider pools of capital.

Hence, the merged entity can have greater financial flexibility to acquire assets with longer land lease tenures to mitigate the reduction in NAV per unit arising from shorter 30-year leases of JTC industrial land.

The 6-page response statement is the manager's second to unitholders' frequently asked questions in 10 days as ESR Funds Management continues to tout the proposed union.

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It has attempted to clarify and elaborate some points that were mentioned in the first statement dated Oct 15 including the factors considered to determine the exchange ratio of 1.863 tim which arguably disadvantages ARA Logos unitholders.

ESR Funds Management also stated that the merger between ESR-Reit and Viva Industrial Trust has lowered its capital cost, increased investor confidence and increased trading liquidity, in response to whether that merger has been value accretive since completion in 2018.

It also explained to unitholders why there is a need to make an upfront land premium of about S$87.9 million to JTC if the merger goes through.

Ara Logos units ended flat at S$0.885 while ESR-Reit units were up S$0.005 to S$0.48 on Oct 25, before this set of responses was released.