SINGAPORE (Sept 17): ESR-REIT will emerge as the fourth largest Singapore-listed industrial REIT with $3 billion in assets after consolidation with Viva Industrial Trust (VIT).
The implied acquisition yield of 5.8-5.9% for VIT’s portfolio is at the lower end of peers’ range of 5.1-6.8%, reflecting the acquirer’s optimism over longer-term prospects and synergies that the REIT can extract.
Analysts say within ESR and VIT’s respective asset portfolios lies untapped potential – including at least two assets with unutilised GFA and several others with potential for conversion into higher-spec facilities.
Therefore, one of the immediate benefits arising from the merger would be the enlarged REIT’s ability to be more active on the redevelopment and AEI front, driving shareholder value.
In a Monday report, DBS Group Research analyst Carmen Tay says while temporary near-term dilution from the absence of income support for VIT starting FY19 and issue of new units takes the house’s DCF-based target price slightly lower to $0.59, “we believe the merits of an enlarged vehicle will prevail over time”.
And although paying a 26.4% premium to VIT’s NAV appears high, Tay believes that benefits from the injection of VIT’s higher-quality portfolio with lower financing costs and trust-level savings, and merits of an enlarged vehicle should prevail.
Sustainability in earnings and NAVs of the ESR-REIT will now hinge on the manager’s ability to drive portfolio earnings to compensate for decline in income support for VIT’s UE BizHub.
“Maintain “buy” with a lower target price of $0.59,” says Tay, “Estimates are reduced to account for dilutive impact in the immediate term as new units are issued to fund the proposed acquisition. We have also assumed conservative estimates for the incoming VIT portfolio.”
Units in ESR-REIT are trading 50 cents, implying an FY19 forecast distribution yield of 8.1%.
