ESR-Logos Reit not in financial distress; divestment of assets in line with strategy: manager

THE manager of ESR-Logos Reit (E-Log) said on Friday (Jul 14) that the divestment of seven non-core assets is in line with its strategy, and dismissed “speculation or insinuation” that the real estate investment trust (Reit) was in financial distress.

The Reit manager issued the statement following a commentary in The Business Times, which called for the manager to justify the decision to sell these assets below valuation.

Last month, E-Log announced a proposed divestment of seven non-core assets in Singapore and Australia for around S$337 million. These included a portfolio of five assets that were being divested for S$313.5 million, representing a 5.1 per cent discount to valuation.

The manager said on Friday that the strategy of E-Log is to “rejuvenate the portfolio by divesting non-core assets that the manager believes will underperform when compared to the rest of the portfolio, and pivoting to higher-quality new economy assets”.

It noted that this is in line with its “4R strategy”, comprising portfolio rejuvenation, capital recycling, recapitalising its balance sheet and reinforcing sponsor support.

The portfolio of the five Singapore assets in the proposed divestment have an average weighted remaining land lease tenure of around 25 years.

The manager noted that as the land lease tenure runs down, the rate of decline in the value of properties will accelerate exponentially. It thus determined that the proposed divestment with a portfolio discount of 5.1 per cent was in the best interest of its unitholders.

It added that it took into consideration the potential impact of continued rising interest rates on the capitalisation, and the discount rates used for the valuation of properties.

“While there is a possibility of waiting for interest rates to stabilise in order to obtain a potentially higher sale price, it is difficult to predict when interest rates will stabilise or decrease, thus creating a potential double whammy on property valuations while land lease decay continues amid higher interest rates,” the manager said.

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It noted that there was a price-discovery process, in which CBRE was appointed to “obtain the best possible price for the five Singapore non-core assets”. Of the more than 35 potential parties identified, eight investors participated in the non-binding expression of interest for the portfolio. 

The manager added that it “remains confident of the financial stability of E-Log and dismisses any speculation or insinuation of E-Log being under financial distress”.

E-Log reported an aggregate leverage of 41.6 per cent as at Mar 31, 2023. The Reit’s pro-forma aggregate leverage as at Dec 31, 2022 is expected to reduce to 33.6 per cent upon completion of the proposed divestments, assuming that the net proceeds would be used to repay outstanding debt.

“This reduced aggregate leverage and unencumbered portfolio will provide E-Log significant debt headroom and the flexibility to optimise its capital structure and recycle capital towards rejuvenating its portfolio to higher-quality, new-economy assets,” the manager said.

Units of E-Log rose 3 per cent to close at S$0.34 on Friday.