[SINGAPORE] ESR-Reit has priced S$125 million in subordinated perpetual securities at 5.75 per cent under its S$750 million multicurrency debt issuance programme.

 

The net proceeds arising from the issue of its securities will be used to refinance or repay existing borrowings or to finance or refinance ESR-Reit&rsquo s acquisitions and investments, or for asset enhancement works, working capital and capital expenditure required, the Reit&rsquo s manager said on Thursday (Mar 13).  

 

DBS and OCBC will be joint lead managers for the issue. 

 

Holders will receive distributions in arrears and may redeem the perpetual securities on the first reset date of Mar 20, 2030, or any distribution payment date falling after the first reset date.

 

The distribution rate will be reset on the first reset date and every five years thereafter. 

 

This will be at a rate equal to the Singapore Overnight Rate Average Overnight Indexed Swap plus the initial spread of 3.512 per cent. The distribution will be paid twice a year.

 

The perpetual securities are expected to be issued on Mar 20. 

 

ESR-Reit also announced it will be redeeming all of the outstanding Series 006 perpetual securities issued previously. The securities amount to S$75.25 million at a rate of 6.632 per cent.

 

&ldquo The net proceeds arising from the issue of the Series 011 perpetual securities will be used for the redemption of the more expensive Series 006 perpetual securities,&rdquo the Reit manager said.

 

This will allow ESR-Reit to achieve cost savings and optimise its capital structure, aligning with its strategy to adapt to shifts in the interest rate environment.

 

[SINGAPORE] ESR-Reit has priced S$125 million in subordinated perpetual securities at 5.75 per cent under its S$750 million multicurrency debt issuance programme.

 

The net proceeds arising from the issue of the securities will be used to refinance or repay existing borrowings or to finance or refinance ESR-Reit&rsquo s acquisitions and investments, or for asset enhancement works, working capital and capital expenditure required, the Reit&rsquo s manager said on Thursday (Mar 13).  

 

DBS and OCBC will be joint lead managers for the issue. 

 

Holders will receive distributions in arrears and may redeem the perpetual securities on the first reset date of Mar 20, 2030, or any distribution payment date falling after the first reset date.

 

The distribution rate will be reset on the first reset date and every five years thereafter. 

 

This will be at a rate equal to the Singapore Overnight Rate Average Overnight Indexed Swap plus the initial spread of 3.512 per cent. The distribution will be paid twice a year.

 

The perpetual securities are expected to be issued on Mar 20. 

 

Units of ESR-Reit closed up 2.1 per cent or S$0.005 at S$0.245 on Thursday before the announcement. 

ESR Reit : J91U -2% Management bought back 2.5 million units of ESR Reit on Feb 18 at an average price of S$0.249 per unit. This took the number of units acquired on the current buyback mandate to 26.5 million units or 0.345 per cent of the outstanding issued units.

 

On Feb 10, the Reit&rsquo s management proposed a unit consolidation which would see one consolidated ESR Reit unit granted for every 10 existing units in the Reit at a date to be determined.

 

The proposal received approval in principle from Singapore Exchange (SGX) on Feb 13, subject to compliance with SGX&rsquo s listing requirements for consolidated units, and unitholders&rsquo approval at the Reit&rsquo s forthcoming extraordinary general meeting over the proposed move.

 

ESR Reit Management believes the proposed unit consolidation will reduce trading fluctuations, decrease market capitalisation volatility, and better align unit price movements with general market trends.

 

Director transactions

The five trading sessions saw less than 40 director interests and substantial shareholdings filed for more than 20 primary-listed stocks.

 

Directors or chief executive officers filed nine acquisitions and no disposals, while substantial shareholders filed one acquisition and nine disposals.

ESR-REIT has launched and priced $100.0 million unsecured fixed rate notes at 4.05% per annum (p.a.) due 2030, as part of its capital management strategy. 

 

The offer will be issued under the $750 million Multicurrency Debt Issuance Programme with proceeds going towards the refinancing or repayment of existing borrowings, financing or refinancing acquisitions, investments, developments and/or asset enhancement works and financing of general working capital and capital expenditure requirements.

 

The offer was 2.5 times subscribed and about 75% of the offer was placed to institutional investors. The gearing of ESR-REIT will remain unchanged pre-and-post transaction. 

 

&ldquo This offer is a key part of our capital management framework to tap into alternative pools of capital when market conditions are conducive. By seizing the window of opportunity presented by stabilising interest rates, we have reinforced our balance sheet, positioning ESR-REIT for sustainable, long-term growth,&rdquo says Adrian Chui, CEO and executive director of the manager of ESR-REIT. 

The manager of ESR-REIT has announced a proposed unit consolidation of 10 existing units to one unit, held by unitholders of ESR-REIT. 

 

The rationale for the proposed unit consolidation is to reduce the magnitude of fluctuation in ESR-REIT&rsquo s unit trading price and reduce excessive volatility in its market capitalization, and allow for unit price movements that are more consistent with general market movements in terms of percentage changes. 

 

As an illustrative example, since Jan 1, 2022, ESR-REIT has traded in the range of 24.5 cents to 48.5 cents. Using a rounded unit trading price of 26 cents within the range mentioned above, the mandated Singapore Exchange (SGX) bid-ask spread of 0.5 cents for counters below $1/unit will result in a 1.9% change in unit trading price. 

 

With the consolidation ratio, the new theoretical price of a unit would be $2.60. With a unit trading price above $1/unit, a 1 cent bid-ask spread will now apply, resulting in a much smaller impact of 0.4% change in unit trading price. 

 

The REIT says that the proposed unit consolidation will also reduce interest from share speculators or punters, and short sellers on the units. 

 

As the aforementioned group often speculate on a stock&rsquo s decline, they bet and profit from a drop in prices of a financial instrument by borrowing a security and selling it on the open market, planning to repurchase it later for less money. 

 

The group says that its trading range of 24.5 cents to 48.5 cents since Jan 1, 2022 has resulted in share speculators or punters and short sellers showing keen interest in trading ESR-REIT as a &ldquo penny stock&rdquo . 

 

In addition, the proposed unit consolidation will also result in higher unit price denomination, therefore reducing brokerage trading costs as a percentage of each board lot of consolidated units. 

 

The proposed unit consolidation will rationalise the capital of ESR-REIT by reducing the large number of units in issue from 8,049,164,215 existing units in issue as at Feb 10, to at least 804,916,422 consolidated units following the completion of the proposed unit consolidation.

 

Although ESR REIT&rsquo s FY2024 distributions per unit (DPU) fell by 17% y-o-y to 2.119 cents, DPU is set to rebound this year. &ldquo We expect 2024 to be the trough,&rdquo says Adrian Chui, CEO of ESR REIT&rsquo s manager.  

 

In 2023 and 2024, ESR REIT restructured and rejuvenated its portfolio. It divested $535 million of assets. As a result there was no income from these divestments. Secondly, ESR REIT held an equity fund raising (EFR) in 2024, raising $300 million, increasing the number units in issue.

 

Proceeds from the EFR were used to acquire 20 Tuas South Ave 4 and ESR Yatomi Kisosaki Distribution Centre. The acquisitions were completed in December 2024. The two acquisitions will contribute a full year of income in 2025. 

 

In addition, ESR REIT decommissioned 2 Fishery Port in preparation for redevelopment into a cold storage facility. 

 

The rejuvenation of ESR REIT&rsquo s portfolio has lengthened its land lease to 43.8 years in 2024, from 37.4 years in FY2022. The portion of assets on freehold land and/or land lease of more than 30 years comprises 71.6% in FY2024. &ldquo In terms of portfolio land lease, underlying land lease two years ago was 37.4. Today, it&rsquo s close to 44 years, and this will help to reduce the land lease decay problem that affects Singapore portfolios of industrial land that usually has 20 or 30 years land lease remaining,&rdquo Chui says.  

 

New economy assets accounted for more than 70% of total assets in 2024. &ldquo New Economy, essentially means logistics and high specs,&rdquo Chui adds.  

 

On the capital management front, ESR REIT&rsquo s gearing has crept up to 42.8%. However, average cost of debt has fallen from 4.03% during 1HFY2024 to 3.84% for FY2024 due to early refinancing of existing 2025 debt at margins that were 15 bps lower. The loans for 20 Tuas South Avenue 14 and ESR Kisosaki Distribution Centre were done at cheaper margins than existing loans while refinancing of existing portfolio hedges were done at lower rates. 

 

&ldquo We expect interest cost to trend down because we are working at 2026 debt at lower margins for the $420 million of expiring debt. We have $75 million of expensive perpetual securities that we plan to either refinance with cheaper debt or use divestment proceeds to redeem,&rdquo Chui says, adding that he plans to divest a further $200 million of assets this year.

 

With a lower cost of debt, full-year contribution from the acquisitions and AEIs such as 7002 AMK, and double-digit rental reversions, NPI is likely to be higher y-o-y this year. On the cost front, 90% of utilities will pass through to the tenants. Repairs and maintenance costs are expected to rise but this amount is likely to be offset by an increase in service charge.  

 

In an update, CGS International says management expects these two acquisitions to be 3.0% DPU-accretive on a pro-forma basis. &ldquo As ESR REIT continues to rejuvenate its portfolio, we believe a recovery in earnings should start to gather momentum from FY2025. We maintain our Add rating for ESR REIT on attractive FY2025 dividend yield of 8.4%,&rdquo CGS says.

ESR-REIT has reported a distribution per unit (DPU) of 0.997 cents for the 2HFY2024 ended Dec 31, 2024, bringing its FY2024 DPU to 2.119 cents. On a y-o-y basis, the REIT&rsquo s 2HFY2024 DPU and FY2024 DPU declined by 15.9% and 17.4% respectively.

 

In 2HFY2024 and FY2024, the REIT reported losses of $113.7 million and $127.8 million respectively.

 

In FY2024, gross revenue fell by 4.1% y-o-y to $370.5 million while net property income (NPI) fell by 4.2% y-o-y to $261.7 million.

 

The declines for both were mainly due to the loss of income from the REIT&rsquo s divested non-core assets, 182-198 Maidstone Street in Australia and 81 Tuas Bay Drive in Singapore. The Australian property was divested in 2Q2024 while the Singaporean property was sold in 4Q2024. The decommissioning of the REIT&rsquo s property at 2 Fishery Port Road also contributed to the lower revenue. The divestments were partly offset by contributions from the acquisitions of ESR Yatomi Kisosaki Distribution Centre and 20 Tuas South Avenue 14 which were both completed in November 2024, as well as the asset enhancement initiatives (AEIs) for 7002 Ang Mo Kio Avenue 5 and 21B Senoko Loop. The AEIs were completed in 3Q2023 and 1Q2024 respectively.

 

Distributable income for the year fell by 14.9% y-o-y to $164.1 million due to the lower revenue and NPI as well as lower distribution of capital gains from the sale of investment properties in the previous years.

 

The applicable number of units for distribution in FY2024 rose by 3% y-o-y to 7.74 billion.

 

Meanwhile gross revenue for 2HFY2024 stood relatively stable at $189.6 million from $189.5 million in 2HFY2023 although NPI rose by 1.1% y-o-y to $133.8 million.

 

2HFY2024 distributable income fell by 14.7% y-o-y to $77.8 million while the number of units rose by 1.5% y-o-y to 7.8 billion.

 

As at Dec 31, 2024, the REIT reported positive rental reversion of 10.3%, compared to FY2023&rsquo s 11.1%. Its occupancy rate stood at 92.3%, down from FY2023&rsquo s 92.8%. Its weighted average lease expiry (WALE) stood at 4.2 years.

 

Gearing stood at 42.8% as at the same period while the REIT&rsquo s MAS adjusted ICR stood at 2.5 times. MAS refers to the Monetary Authority of Singapore while ICR refers to interest coverage ratio. The MAS streamlined its leverage requirements in November 2024.

 

As at Dec 31, 2024, cash and cash equivalents stood at $70.2 million.

 

In its release, Adrian Chui, CEO of the REIT manager, notes that the REIT&rsquo s &ldquo 4R strategy&rdquo is &ldquo beginning to deliver income growth&rdquo and is expected to translate into revenue and DPU growth. The four Rs refer to the REIT capitalising its balance sheet, rejuvenating its asset portfolio, recycling capital and reinforcing its sponsor&rsquo s support.

 

&ldquo Our portfolio' s quality has continued to stand out as we reported a positive 10.3% rental reversion &ndash underscoring the effectiveness of our portfolio rejuvenation strategy of divesting dated, non-core assets while maintaining a resilient and in-demand portfolio amidst evolving market conditions,&rdquo he says. &ldquo In addition, we successfully recycled the divestment proceeds into two transformational acquisitions: ESR Yatomi Kisosaki Distribution Centre in Japan and a 51% interest in 20 Tuas South Avenue 14 in Singapore, which are expected to be +3.0% DPU accretive on a pro forma basis.&rdquo

 

While Chui expects the REIT&rsquo s improved portfolio fundamentals to translate into NPI and DPU contributions in FY2025, he remains &ldquo cautiously optimistic&rdquo about demand for real estate, rental growth and operating costs in 2025 amid macroeconomic uncertainties, policy shifts in the US and inflation concerns.

It expects the divestment to be completed in Q1 2025

THE manager of ESR Real Estate Investment Trust (ESR Reit) has entered into a contract to divest an industrial building for about S$9.9 million.

 

The consideration represents a 1.5 per cent premium above its valuation of S$9.7 million, said the manager in a bourse filing on Wednesday (Jan 15).

 

The divestment is expected to be completed in the first quarter of 2025, and is not expected to have a material impact on ESR Reit&rsquo s net asset value and distribution per unit for the financial year ending Dec 31, 2025.

 

The property, located at 79 Tuas South Street 5, is a general industrial building in the Tuas Industrial Estate, with a gross floor area of 6,312 square metres.

 

The manager said: &ldquo Net proceeds from the divestment will be deployed to repay outstanding borrowings, finance potential acquisitions, asset enhancement initiatives and redevelopments and/or fund general working capital requirements.&rdquo

 

Upon completion of the divestment, the Reit&rsquo s portfolio will consist of 71 properties &ndash excluding one at 48 Pandan Road, which is held through a joint venture &ndash in Singapore, Japan and Australia, as well as investments in three property funds in Australia.

Even if the price fetched is below the end-2023 valuation, it may be worthwhile for the Reit to strike a deal for its hotel and convention centre next to Expo MRT station

 

PROPERTY investors seem to have become more receptive to buying Singapore hospitality and commercial properties on short-land-tenure sites over the past year. This provides an opportune exit for the owners of such properties.

 

In late 2023, Viva Land sold the former SO/ Singapore hotel on a site in Robinson Road with about 47.5 years&rsquo balance lease. This was sold to a consortium that included the Tan family behind Sunray Woodcraft Construction and Mini Environment Service. Mingtiandi reported the price at around S$170 million to S$180 million.

 

This year, Paragon Real Estate Investment Trust (Reit) managed to sell The Rail Mall, in Upper Bukit Timah Road, on land with a balance lease of about 21 years and nine months. The Yong family behind Woh Hup Holdings picked up the single-storey strip mall for S$78.5 million.

 

Frasers Property sold the 313-room Capri by Fraser Changi City, near the Expo interchange MRT station, for about S$171.8 million to a consortium comprising family office Atelier Capital Partners Singapore, TPG Angelo Gordon, Heeton Holdings and Far East Consortium International (FEC). The hotel is part of an integrated project on a site with a balance term of about 45 years.

 

A similar situation may be under way at the integrated development next door, owned by ESR-Logos Reit : J91U -1.69%. ESR BizPark@Changi, formerly known as UE BizHub East, sits on a site zoned as Business Park-White, with up to 40 per cent of the overall gross floor area allowed for &ldquo white&rdquo uses including shop, restaurant, office or hotel.

 

ESR BizPark@Changi comprises two business park buildings (with some retail space), the 251-room Park Avenue Changi hotel, and a convention centre.

 

Word in the market is that last year, the ESR-Logos Reit appointed JLL to help it find a buyer for the hotel and convention centre. It makes sense for the Reit to dispose of the hospitality portion of the complex as the group&rsquo s focus is on industrial real estate assets.

 

A potential buyer is understood to be doing due diligence on the hotel and convention centre.

 

According to ESR-Logos Reit&rsquo s annual report, the hotel and convention centre in the complex were valued at S$155 million as at Dec 31, 2023. At the time, the remaining land tenure on the site was 44 years and two months.

 

Two key differences

There are at least two significant differences between the two developments in Changi Business Park.

 

The Changi City project, developed by the then Frasers Centrepoint and Ascendas Land (Singapore), is on a site awarded by JTC Corporation with a straight 60-year leasehold term from April 30, 2009.

 

ESR BizPark@Changi was developed by United Engineers (UE) on a site awarded by JTC with a 30-year leasehold term with an option to extend for a further 30 years.

 

The initial 30-year term kicked in on Feb 1, 2008 this leaves a balance of about 13 years and four months. The option to extend the lease for 30 years will take the lease expiry to Jan 31, 2068 this is expected to entail a substantial land premium payment to JTC.

 

To recap, UE BizHub East was completed in 2012 and sold by UE to Viva Industrial Trust as part of the stapled group&rsquo s flotation on the Singapore Exchange in 2013.

 

In 2018, Viva Industrial Trust was merged with ESR-Reit. In 2022, ESR-Reit merged with ARA Logos Logistics Trust to become ESR-Logos Reit.

 

The second difference between the two developments is that the Changi City project is strata titled, which facilitated the sale of the various components in separate deals: One@Changi City (business park), the Changi City Point mall and the Capri by Fraser Changi City hotel.

 

On the other hand, the whole of ESR BizPark@Changi is still held under a single property title. It is not strata subdivided the various components do not have their own strata titles.

 

So how can ESR-Logos Reit dispose of the hotel and convention centre, separately from the rest of the business park complex?

 

Strata subdivision or plot subdivision?

One possibility could be to propose a strata subdivision to carve out a strata unit for the hotel/convention centre component of the complex, and issue a long lease on the strata unit to match the lease expiry on the site.

 

There may be another solution: site subdivision.

 

ESR BizPark@Changi sits on two plots of land. The two business park buildings &ndash at 6 and 8 Changi Business Park Avenue 1 &ndash occupy the smaller plot of nearly 1.2 hectares (ha) and extend to part of the larger plot of 1.7 ha.

 

The larger plot could be split into two, to separate the hotel/convention centre (at 2 and 4 Changi Business Park Avenue 1) from the business park buildings.

 

All of these will require approval from the authorities.

 

Market observers expect ESR-Logos Reit to hold discussions with JTC, the Singapore Land Authority and other government agencies on how to structure a sale, even as due diligence by the potential buyer is ongoing.

 

ESR BizPark@Changi took its present name following the completion of asset enhancement works in the first quarter of 2021.

 

Although UE divested UE BizHub East in 2013, it continues to operate the hotel &ndash besides the 251 guest rooms, there are some serviced office suites &ndash and the convention centre under its Park Avenue hospitality brand.

 

The convention centre has a seating capacity of about 650 people the single-level facility is suitable for wedding banquets, concerts, conferences, corporate meetings and other events.

 

Depending on the profile of the buyer, there could be a change in operator. For instance, if the buyer is a co-living operator, it is almost certain to want to manage the hospitality asset itself.

 

Investment appeal of short-tenure assets with strong cashflow

Despite their relatively short balance site leases, such assets have their appeal to investors. For a start, the absolute price quantum is smaller than if the asset had a much longer or freehold tenure.

 

This pushes up rental yield.

 

Investors may be willing to buy a retail or hospitality asset in a prime location with connectivity and generating strong rental cashflow, even if it is on a site with a short balance leasehold tenure.

 

Some may be looking at holding the property for about five years. Others could be prepared to hold on to the asset for much longer, if their calculations show they can recoup their investment and make a decent return, before the site lease runs out.

 

Some businesses may also be eyeing a property with a shorter balance site lease to use for their own operations. Or to manage it. A case in point would be Hong Kong-listed FEC&rsquo s subsidiary Dorsett Hospitality International (DHI), which took a stake in the consortium that bought the Capri by Fraser Changi City. DHI has been appointed by the consortium to operate the hotel, which has been rebranded Dorsett Changi City Singapore.

 

For ESR-Logos Reit, it remains to be seen if it can seal a deal to sell the hotel/convention centre of its business park project next to Expo MRT station, the Singapore Expo and in proximity to Changi Airport. Even if the price is below the end-2023 valuation, it would be worthwhile for the Reit to strike a deal and focus on its core industrial property business.