The Motley Fool

What You Need to Know About ESR-REIT’s Acquisition Proposal

ESR-REIT (SGX: J91U), an industrial real estate investment trust (REIT) with 57 properties across Singapore, announced its plans to acquire a warehouse in Jurong through a limited liability partnership (LLP), jointly held by ESR-REIT and Poh Tiong Choon Logistics Limited (PTC). The proposed acquisition consideration is S$225 million. Here are some of the details of the acquisition that investors should be aware of.

Property details

The acquisition property is described as a six-storey ramp-up general warehouse with ancillary facilities and has a land lease tenure that expires 24 years and four months from 1 July 2019. The total land area is 437,436 square feet and the built-up gross floor area is 1.09 million square feet.

Savills Valuation & Professional Services Pte Ltd has valued the property at S$225.0 million, which is also the purchase consideration price. The property will then be leased back to the purchasing LLP as a master tenant for a term of 10 years with a fixed rental escalation per annum.

Structure of the purchase

The property will be purchased through the LLP, which ESR-REIT has a 49.0% stake in. PTC is expected to fund S$40.2 million of the purchase, with ESR-REIT forking out S$38.6 million either through cash or a mixture of cash and units. The additional S$146.2 million will be funded by debt taken by the LLP.

The total acquisition cost to ESR-REIT is estimated at S$44.4 million, comprising the purchase consideration and ESR-REIT’s share of the stamp duty and debt-related transaction cost and other costs amounting to S$3.3 million, S$0.6 million and S$1.9 million respectively.

Where the cash is coming from

To fund the cash outlay, ESR-REIT will raise funds through an equity fundraising. The REIT plans to raise S$150 million through a rights offering. A total of S$44.4 million of the funds raised will be used to fund the acquisition, with S$45.7 million used for two asset enhancement initiatives (AEIs) and the remaining used to pay off existing debt.

According to management, the repayment of debt is expected to decrease the REIT’s aggregate leverage from 42.0% to 40.3%. The equity fundraising includes a private placement to a group of investors and preferential offering for existing unitholders. Pertinent information of the fundraising is listed in the table below:

Source: Author’s compilation of data from ESR-REIT Private Placement Announcement

Impact on existing unitholders

According to pro forma calculations by ESR-REIT, the proposed acquisition and fundraising would have increased annualised first quarter 2019 distribution per unit (DPU) to 4.044 Singapore cents from 4.028 Singapore cents and net asset value (NAV) per unit will remain unchanged.

The Foolish takeaway

ESR-REIT has demonstrated that it is going to continue its aggressive expansion policy as it seeks to grow its assets under management. But investors should note there remains some uncertainty surrounding the eventual impact of this latest acquisition and equity fundraising.

While the acquisition is DPU-accretive according to pro forma calculations, the issuance of new units to pay off debt might have a dilutive impact on DPU once all the deals are finalised. The larger unit base might eventually result in a lower DPU.

There are also unknown details about the acquisition, such as the initial capitalisation rate, cash-on-cash yield, and the private placement price. Investors will have to keep an eye out for upcoming announcements and earnings results where more details should be revealed.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn't own shares in any companies mentioned.