ESR-Logos Reit eyes acquisitions for growth in 2024 as it looks to deploy S$700 million of capital

ESR-LOGOS Reit is looking to deploy some S$700 million for investments as the real estate investment trust (Reit) seeks both organic and inorganic growth in 2024.

Speaking during a results briefing to media on Thursday (Feb 1), chief executive of the manager, Adrian Chui, noted that actions taken in 2023 – including raising S$300 million in equity, as well as divesting S$440.6 million of non-core assets – have set the Reit up well going into 2024, where the interest rate environment is stabilising.

“It gives us opportunities to now go back to growth – both organic as well as acquisition growth,” Chui said.

He noted that safety had been the theme last year, as the Reit positioned itself to weather a higher-for-longer interest rate environment. Following the equity fundraising and divestments, the Reit’s gearing fell to 35.7 per cent, as at Dec 31, 2023, from 41.8 per cent a year earlier.

“We have about S$700 million of proceeds to deploy for investments, we deployed only about S$100 million, so there is still another S$600 million or so to invest,” he said.

ESR-Logos Reit posted a distribution per unit (DPU) of S$0.01186 for its second half ended Dec 31, 2023, down 23 per cent from S$0.0154 a year ago due to lower income and an enlarged unit base. 

Gross revenue was down 3.1 per cent to S$189.5 million for the second half-year period, from S$195.6 million a year earlier, while net property income (NPI) fell by 6.5 per cent on the year to S$132.3 million.

The lower revenue follows the sale of non-core assets last year, but the manager is not rushing to deploy its capital to buy new assets.

“We still want to make sure the assets that we buy are on strategy: basically longer land leases, newer assets, and in the prime logistics space as well,” Chui said.

The Reit on Thursday announced a US$70 million investment in an ESR Japan Income Fund, which will invest in stabilised core logistics assets and development logistics assets in Japan. The transaction is expected to be 1.8 per cent accretive to DPU.

Its five properties are valued at over S$1.7 billion as at end-2023. They are situated on freehold land across Tokyo, Osaka and Nagoya with a total land area of 353,065 square metres (sq m) along with a gross floor area of 727,557 sq m.

Chui noted that assets in the Japan income fund are large, and investing in the assets via a fund instead of a direct investment allows for a size the Reit can digest without shifting the risk profile as much.

He added that when the Reit gets bigger, it would also be in a position to buy the assets directly from the fund, as it would have visibility on how the assets are performing.

The manager estimates a total transaction outlay of about S$96.9 million inclusive of the subscription amount, other costs with yen-denominated debt, along with the acquisition fee.

ESR-Logos would look to deploy the rest of its capital in Singapore and Japan, and acquisitions would likely come in the second half.

“The deployment of the bulk of S$700 million will be from the sponsor’s pipeline,” Chui said. Apart from acquisitions, the manager is also considering deploying its money for redevelopments of certain properties, as well as asset enhancements.

This includes the planned redevelopment of a logistics asset at 2 Fishery Port Road.

On the divestment front, the Reit will still be divesting non-core assets, and the manager is guiding for S$200 million to S$300 million in divestments this year.

Over the half-year period, the Reit recorded a S$39.2 million loss in fair value of investments, widening from its S$6.9 million loss in the same period a year prior. 

Fair value of financial derivatives also booked a S$12.3 million loss as opposed to a S$3.2 million profit in H2 FY2022, while fair value losses from investment properties widened to S$71.5 million from S$49.6 million the previous year. 

Total income available for distribution fell 11.9 per cent year on year to S$91.2 million from S$103.5 million. This was to be distributed across a 14.4 per cent higher applicable number of units to 7.7 million, compared to 6.7 million units in H2 of FY2022.

The distribution of S$0.01186 per unit for Jul 1 to Dec 31, 2023, will be paid on Mar 27, 2024, following the record date of Feb 9.

For the full year, gross revenue was up 12.6 per cent to S$386.4 million. NPI was up 11.8 per cent at S$273.2 million, while total income available for distribution was up 8.8 per cent at S$192.7 million. 

The higher top line figures came on the back of full-year contributions from ESR-Logos Reit’s merger in April 2022, along with ESR Sakura Distribution Centre, which was acquired in October 2022. 

Full-year DPU nonetheless fell 14.5 per cent to S$0.02564 from S$0.03 due to an enlarged unit base from an equity fundraising exercise along with new units issued as part of the scheme consideration paid for the Reit’s merger. 

DBS research analysts said in a note on Thursday that the full-year DPU is in line with their estimates, and noted that operating metrics remained healthy, with high occupancy and strong rental reversions.

They added that the positive momentum for ESR-Logos Reit continues, supported by ongoing portfolio rejuvenation, which are yielding favourable results. They have maintained a “buy” recommendation, with a S$0.34 target price.

The Reit reported positive portfolio rental reversion of 11.1 per cent in FY2023, driven by logistics and high-spec industrial properties

“We have achieved double-digit rental reversion growth over the last two years,” Chui noted.

“At some point, we will expect the tenants to be more resistant to higher rental growth, but the supply situation is not as if they have a lot of choices.”

He noted that continued geopolitical risks have resulted in persistent supply chain disruptions, driving demand. The manager expects continued positive rental reversion in 2024, but it would likely be in the 7 to 9 per cent range, instead of double digits.

Chui noted that the core strength of the Reit is in logistics and high-specs, and this would be its area of focus over business parks.

Units of the Reit were trading at S$0.305 as at 2.08 pm, down 1.6 per cent from the previous close.