Hot stock: ESR-Reit tumbles as much as 9.8% after proposed acquisitions, fundraising

SHARES of ESR-Reit hit a five-month low on Friday amid heavy trading, one day after the manager announced plans to raise about S$150 million to fund a Singapore acquisition and asset enhancement initiatives (AEIs).

The real estate investment trust (Reit) also obtained a S$68.5 million unsecured loan to finance the acquisition of a 10 per cent interest in a GIC-majority-owned Australian logistics investment for A$60.5 million (S$62.4 million).

The counter resumed trading for Friday and dropped to an intraday low of S$0.37 right after the market opened, down S$0.04 or 9.8 per cent. The last time the counter closed near this level was on Nov 16, 2020.

ESR-Reit was the third most traded by volume on the Singapore bourse on Friday, with 93.7 million units changing hands. It eventually closed at S$0.39, down by S$0.02 or 4.88 per cent.

Annual rental escalations and positive reversions for an under-rented portfolio were among earnings drivers flagged by analysts after the Singapore and Australia acquisitions were announced.

For Citi, these moves may even put behind any negative implications of an earlier-failed proposed merger with Sabana Shari'ah Compliant Industrial Reit (Sabana Reit), according to a research note on Wednesday.

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Citi is projecting a "decent" distribution per unit (DPU) accretion of 1-2.5 per cent, as the Reit moves ahead with alternative inorganic growth plans.

SooChow CSSD Capital Markets (SCCM) is expecting a DPU accretion in a similar range of 1-2.3 per cent, while CGS-CIMB is estimating an "all-in" 1 per cent DPU accretion.

ESR-Reit's maiden acquisition from its sponsor has also demonstrated its ability to tap the sizeable sponsor pipeline, Citi and SCCM said.

SCCM said the 10 per cent stake also allows ESR-Reit to be privy to the portfolio performance, thus providing it an edge on further fund or underlying asset acquisition opportunities in Australia.

Management plans to convert 46A Tanjong Penjuru into an air-conditioned warehouse may also result in rental upside for the Reit, analysts from CGS-CIMB and SCCM noted.

SCCM said the move could potentially generate 10 to 11 per cent yield on the S$6 million to S$8 million AEI cost. It reiterated "buy" on the Reit, with a target price of 47 Singapore cents.

CGS-CIMB has reiterated "add" on ESR-Reit, with an unchanged target price of 49.4 cents, while Daiwa Capital Markets has a "hold" rating with target price of 39 cents.

Citi said it likes the Reit for its "sizeable exposure" to high value-add industrial space, including two unique mixed-use business parks, UE BizHub East and Viva Business Park.

These properties will not only benefit from the ongoing business park rental recovery amid benign supply growth, but also from the resilience and rental upside from their sizeable embedded hotel component and retail space, respectively, Citi said. It has a "buy" call on ESR-Reit with a target price of 45 cents.

Separately on Friday morning, ESR-Reit's manager said the private placement to raise S$100 million was 3.4 times subscribed following a book-building process. The upsized option was also fully exercised.

The issue price was fixed at 37.2 Singapore cents per new unit, the lower end of its indicative range of 37.2 cents to 38.4 cents. This represents a discount of about 8.9 per cent to the volume-weighted average price of 40.84 cents per unit for all trades done on Thursday, up to the time of the signing of the placement agreement on Thursday.

As part of the S$150 million fundraising, ESR-Reit's manager plans to undertake a non-renounceable preferential offering of new units to raise no more than S$50 million, it said in a separate announcement on Thursday.