ESR-Logos Reit eyes up to S$450m divestments to rejuvenate portfolio; H1 DPU down 6%

THE manager of ESR-Logos Reit on Wednesday (Jul 27) said it has identified up to S$450 million of non-core assets – over 8 per cent of its S$5.5 billion portfolio – for divestment over the next 12-24 months, in an effort to recalibrate its portfolio and unlock value.

“These non-core assets are really small, non-scalable, and have shorter land leases,” Adrian Chui, chief executive officer of the manager of ESR-Logos Reit, said at a briefing accompanying its first half 2022 results announcement.

Proceeds from the divestments may be used to pare down debt or be redeployed towards the acquisition of higher quality new economy assets, the real estate investment trust (Reit) manager said.

The Reit manager added that it has divested 7 properties since the start of 2021, with an average premium of 7.5 per cent over the assets’ fair value.

“As we said during the merger, we have an initial pipeline of very low hanging pipeline assets from our sponsor – in Australia, in Singapore and in Japan – of up to US$2 billion,” Chui said.

“These are really good quality new economy assets that we can look to acquire and improve our overall quality portfolio,” he added. “These assets are actually freehold or have very long leases… which will further drive net asset value (NAV).”

In its first set of financial results released after the completion of the merger of ESR-Reit and Ara Logos Logistics Trust (ALog Trust) in April 2022, ESR-Logos Reit posted a distribution per unit (DPU) of S$0.0146 for H1 ended June, 6 per cent lower than the S$0.01554 recorded in the year-ago period.

This was mainly due to higher utility expenses and the full impact of an enlarged unit base from the equity fundraising completed in May and August 2021. A portion of the funds raised was deployed towards asset enhancement initiatives (AEI) that are still ongoing.

Chui noted that the higher utility costs accounted for up to 80 per cent of the H1 DPU decline.

Starting July, the Reit manager said more than 90 per cent of utilities costs will be on a pass-through cost recovery basis. In addition, it is increasing its service charges to mitigate rising inflationary pressures.

Chui also pointed out that a quarter-on-quarter comparison of DPU would give a fairer picture of the Reit’s performance post-merger. “Comparing year on year, it’s a little bit like apples and oranges,” he said.

For the second quarter ended Jun 30, ESR-Logs Reit posted a 1.9 per cent rise in DPU to S$0.00737, from S$0.00723 in the first quarter.

On the net property income (NPI) and gross revenue front, the Reit saw gains in H1 due to contributions from the merger between ESR-Reit and ALog Trust. However, NPI rose at a slower pace as the surge in global energy prices and higher electricity demand led to higher utility expenses, which increased property expenses in H1. 

NPI for the period rose 18.2 per cent year on year to S$102.8 million from S$87 million, while gross revenue increased 23.3 per cent on the year to S$147.7 million from S$119.8 million.

The amount available for distribution to unitholders stood at S$73.6 million, 29.6 per cent higher than the S$56.8 million recorded in the previous year. This was mainly due to higher NPI and income contributions from 2 property funds held via ALog Trust.

NPI jumped 60.3 per cent to S$63.3 million, while gross revenue rose 47.8 per cent to S$88.1 million in the same period. The amount available for distribution to unitholders for Q2 was 51.2 per cent higher quarter on quarter at S$44.3 million.

A cumulative distribution of S$0.0091 per unit for the period between Jan 1 and Apr 21 was paid on Jun 23. The manager said that the remaining S$0.0055 per unit will be paid on Sep 27, after the record date on Aug 4. It added that ESR-Logos Reit will pay its distributions on a half-yearly basis instead of a quarterly basis with effect from the second half of 2022.

Portfolio occupancy rose to 94.1 per cent in Q2, with the Singapore and Australia portfolio occupancy being 92.6 per cent and 99.4 per cent respectively.

In H1 2022, 196,035 square metres (sq m) of space was leased, 52,776 sq m being from new leases and the rest from lease renewals. Tenants secured during the period include NTS Components Singapore, with existing tenants including EGIS Nanotech and Rhenus Warehousing Solutions renewing their leases.

“Leasing activities remained active with new demand from logistics, manufacturing and electronics sectors,” the manager noted.

The Reit’s weighted average lease expiry as at Jun 30 stood at 3 years. Rental income contributions from the Reit’s top 10 tenants accounted for 27.3 per cent of the entire portfolio, with no single tenant contributing more than 4.7 per cent.

Separately, ESR-Logos Reit’s manager announced on Wednesday that a S$32 million AEI will commence at the Reit’s 16 Tai Seng Street property in August 2022. The manager added that the estimated yield on cost is up to 6 per cent.

The AEI will help create an additional 2,793 sq m of space at the property to bring the total gross floor area to around 22,800 sq m. Post AEI, the plot ratio will increase to 3.5 from 3.08.

Ahead of the AEI’s completion, the manager has bagged an anchor tenant who will occupy 2,274 sq m of space at 16 Tai Seng Street, equivalent to about 12 per cent of the property’s total net leasable area. The space will be used as the tenant’s regional headquarters.

ESR Group has acquired 654,546 shares in ESR-LOGOS Funds Management, the manager of ESR-Logos Reit, from Tong Jinquan, bringing its stake in the manager to over 90 per cent.

The company is also in the process of acquiring an additional 189.9 million ESR-LOGOS units from Tong, and will be the largest unitholder of E-Logos Reit with 14.4 per cent. Before ESR’s acquisition, Tong was the largest unitholder of E-Logos; he has been a shareholder of E-Logos’ manager since October 2018.

ESR-Logos Reit ended flat at S$0.42 on Wednesday.