ESR-Logos Reit’s manager must justify decision to sell assets below valuation

MIGHT ESR-Logos Reit be in financial distress that it needs to be selling assets at a loss?

In late-June, the trust said it is selling seven industrial properties in Singapore and Australia for about S$337 million in total. The proposed sale of assets includes a portfolio of five assets in Singapore, which will be sold for S$313.5 million – a 5.1 per cent discount to the portfolio’s latest valuation of S$330.4 million.

As part of the above proposed divestment, ESR-Logos Reit will provide net property income support for 36 months at an estimated cost of S$4.8 million.

After accounting for the divestment costs and applicable Goods and Services Tax, the net proceeds from the proposed sale of the five assets amount to about S$299.3 million, and the resulting net loss is about S$30.7 million. 

Contrast the above proposed sale of the five assets with the trust’s sale of 49 Pandan Road in the west of Singapore at 15.1 per cent above valuation, which was completed earlier this year.

Case for holding on

ESR-Logos Reit looks to be financially healthy. As at end-March, the trust’s gearing was 41.6 per cent, and it had debt headroom of S$859.5 million. The trust’s debt maturity was well staggered and 72.7 per cent of interest rate exposure was fixed.

Maybe ESR-Logos Reit should simply hold on to the five assets – four of which are predominantly warehouses and one of which is mainly an industrial cum warehouse facility. 

If the trust continues owning the said assets, it will not incur any divestment costs. The trust can also hope to achieve better pricing before selling. 

Should interest rates start to stabilise, property buyers may have greater clarity and be more willing to make sizeable investments. Moreover, warehouse assets here benefit from Singapore’s strong positioning as a logistics hub and some shifting in investor demand from homes to non-residential properties because of hefty Additional Buyer’s Stamp Duty for residential investors.

Compelling opportunities

Perhaps ESR-Logos Reit is expediting asset sales because its manager sees compelling opportunities to use the proceeds raised.

Chief executive officer and executive director of ESR-Logos Reit’s manager Adrian Chui said the proposed asset sales will enable ESR-Logos Reit to recapitalise for growth as asset valuations begin to correct, and improve portfolio quality with in-demand new-economy assets.

As an ESR-Logos Reit unitholder, I wait eagerly to see if ESR-Logos Reit can make great new purchases. Can the trust make distribution per unit-accretive buys of high-specification modern warehouses in Singapore at below valuation? 

Crucially, ESR-Logos Reit’s manager needs to get investors to re-rate the trust due to its building of a higher-quality portfolio with good growth prospects.

While logistics assets are ESR-Logos Reit’s largest contributor, the trust trades at an inferior book value multiple versus its peer Mapletree Logistics Trust . As at Jul 11, the former traded at a discount to end-December 2022 net asset value (NAV) of 8 per cent, while the latter traded at a premium to end-March 2023 NAV of 13.2 per cent.

Selling assets at opportune times can be key to a listed property trust’s growth strategy. Sell an asset for a juicy premium to valuation. Use proceeds raised to reward unitholders and/or redeploy into exciting new opportunities. All this makes perfect sense.

Deal-related fees

However, selling assets below valuation when a trust is not under financial duress calls for greater scrutiny. 

The interest of the manager of a trust may not be completely aligned with that of unitholders in property transactions. Some managers may be keen to churn assets because they can earn acquisition and divestment fees. 

I object to paying managers such fees. Transacting assets as part of portfolio reconstitution should fall within the normal job scope of any manager of a property trust, who is typically paid recurring fees based on portfolio value and/or income.

Recently, the management arrangements of listed property trusts here have been in the spotlight. Could having internal managers that are owned by unitholders be better than current arrangements of having external managers, which are often owned by sponsors of the trusts?

Activist investor Quarz Capital has requisitioned an extraordinary general meeting (EGM) – slated for Aug 4 – to remove Sabana Real Estate Investment Management as manager of Sabana Industrial Real Estate Investment Trust and replace it with an internal manager. 

Quarz argues that there will be cost savings from replacing the ESR Group-owned external manager with an internal manager. ESR Group has filed a court application to prevent the holding of this EGM.

Hong Kong-listed ESR Group also owns 99 per cent of the manager of ESR-Logos Reit. Like groups such as CapitaLand Investment , Mapletree Investments and Frasers Property , ESR Group has prospered from owning the manager of listed trusts. Typically, this business generates high-quality recurring fee income and enjoys healthy profit margins.

This lucrative business could be under threat if the listed property trust sector here moves from using external managers to having internal management, which is common in the United States.

As scrutiny grows over the value that external managers bring to listed trusts and higher interest rates dampen the appeal of property trusts, external managers must do more to demonstrate that they are always acting in the best interests of all unitholders as well as deliver good returns for investors. The jobs of external managers will be safe only if they can truly value-add.