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Industrial REITs - Size really matters!

Shared By Stock Fanatic on Tuesday, January 30, 2018 | 30.1.18

• A giant awakes in the industrial mid-cap space

• Short the acquirer, long the acquired? Not this time

• Size matters as the combined entity could see further re-rating on “liquidity“ premium

A giant awakes in the industrial space. The proposed merger of ESR-REIT (ESR) and Viva Industrial Trust (VIVA) puts the M&A spotlight back into the mid-cap industrial REITs, which have been struggling to grow meaningfully through acquisitions. We remain excited about prospects of the combined entity (ESR-VIVA) as we see both sets of unitholders able to benefit and ride together with a potentially fourth largest industrial REIT (S$1.7bn mkt cap, S$3.1bn AUM) in Singapore, backed by a reputable sponsor in E-shang Redwood, which offers a sizeable pipeline of acquisition prospects and deal flow.

Short the acquirer; long the acquired? Not this time. With the target “VIVA” trading at a premium to NAV of 1.24x vs 1.0x for ESR, we see limited upside to play the “acquired” theme. In fact, VIVA’s implied portfolio yield of 5.7% is already lower than ESR-REIT’s portfolio yield of 6.0%, meaning that to bring about a win-win solution to both unitholders, a delicate balance must be sought. We estimate that a share swap at current price for VIVA (S$0.95/share) and at NAV (S$0.59/share) for ESR-REIT is appropriate as the post consolidated entity will result in (i) higher dividend yields for both sets of unitholders, (ii) minimal dilution to NAVs, and (iii) lower gearing, implying ample capacity to still expand through debt-funded acquisitions. Our call is to BUY ESR-REIT with TP of S$0.63; with potential further re-rating upon completion of this M&A.

Size matters! ESR -VIVA could re-rate by 15%-20% upon completion. Investors have historically accorded large-cap REITs (1.36x P/NAV) with premium valuations compared to mid-cap industrial REITs (1.05x P/NAV), while ESR-REIT trades at the lower end of 0.96x P/NAV. Upon potential combination of both REITs, we see that ESR-VIVA may trade higher towards the higher multiples that the larger cap industrial REITs are trading at.

Who is next? We believe that other mid-cap industrial REITs will be accorded an “acquisition premium” post this M&A as investors speculate the next target. On that front, Soilbuild REIT is an interesting targets given similar Sponsor and shareholder structures respectively. However, the timing and certainty of any deal is tough to identify. (Read Report)

Source : DBS Group Research

Posted on Tuesday, January 30, 2018 | 30.1.18
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