ESR LOGOS REIT

[Shrivathsa]

I came across this REIT as it oddly stood out as a large holding in a large local mutual fund and of course, the headline estimated yield of 9% odd based on its closing price of 0.3 SGD on 17th November.

One of the things that I try and do is to find reasons to not buy a stock. For that, Valuebuddies is quite invaluable, as reading through the postings about the stock, it does give a good idea on what are the red flags and what can and should be swerved.

When I dug deeper into ESR Logos REIT (from its Cambridge days) what was fascinating was that it had a unit base of 512 million odd units and an IPO price of SGD 0.68 back in 2006.

Fast forward to today and its unit base is 7.7 Billion units, growth by 14 times and a price of SGD 0.3, roughly 44% decline in price.

Therre is a lot of rights issues to raise funds, so, one has to either pony up or get diluted.

Now, nothing wrong with fund raising to grow, per se as generally fund raising is supposed to deliver yield accretive income,. (It is amazing though that, very many times, it does not really seem to pay off as I have seen over the years so many so-called yield accretive acquisitions yield pain in the form of lease defaults, unknown risks etc.)

The collective result of all that is that Nett Income for Distribution grew from 7 million odd to 71 million, about slightly less than 10 times.

As other buddies have said, unlike other REITS which are stable dividend income yielding assets, this REIT is more of a dive in when it is irrationally low and exit when it is exuberantly high.

Hence, will be avoiding this, even though the headline yield of 9% does look very tempting.

[ghchua]

Hi Shrivathsa,

In general. industrial REITs with assets in Singapore tends to trade at a higher yield mainly because of their shorter land lease. Which means, part of the yield can be considered as "compensation" for decaying land leases as they approach expiry.

Therefore, to do a fair comparison, you must look at other industrial REITs with mostly assets in Singapore and consider whether 9%pa yield is enough to compensate you for the risk taken. Also, do remember that ESR Logos REIT is not really a blue chip REIT but rather a mid size one. So, your data points must also be those that are of a similar size, while giving it a risk premium if you want to compare with a blue chip industrial REIT.

Hope that the above helps a bit in your REIT hunting.

[weijian]

The collective result of all that is that Nett Income for Distribution grew from 7 million odd to 71 million, about slightly less than 10 times.

Mgt fees are paid based on a % of the revenue/distribution income. So no surprise who largely benefited from the increase in distribution income and/or unit size.

[weijian]

ESR REIT is investing in a fund managed by parent. This RPT looks slightly different from the traditional ones we encounter on the local REIT/Trust scene.

In general, the traditional ones are sponsor divesting their assets onto the REIT's books (most REITs do that) or both sponsor/REIT co-buy into the asset/fund (like Frasers Property and FCT did)

While the investment is relatively small (~3% of NAV), it seems like ESR is becoming a "fund of funds"? While the circular says that duplicated fees will not be charged, but I am certain the fund mgt and asset mgt fees are different and will be separately charged..

US$70.0 MILLION INVESTMENT IN ESR JAPAN INCOME FUND

The JIF General Partner and its affiliates are entitled to charge and receive from JIF, pursuant to relevant agreements, an investment management fee, a general partner fee, an asset management fee, an acquisition fee, an income incentive fee, a leasing fee, a property management fee and a project management fee (collectively, the “Fund Fees”).

Where the amount of Fund Fees payable to the JIF General Partner and its affiliates overlaps with the fees the Manager would be entitled to under the deed of trust constituting E-LOG (the “Trust Deed”), the Manager will reduce, or waive, the Manager’s Base Fee, Performance Fee or Acquisition Fee under the Trust Deed (as the case may be).

To the extent applicable, the Manager will ensure that there is no double counting of fees. For the avoidance of doubt, the property management fee, project management fee and leasing fee that the JIF General Partner and its affiliates are entitled to charge and receive from JIF will not overlap with any of the fees the Manager will be entitled to under the Trust Deed and other management agreements entered into between E-LOG and related entities of the Sponsor.

https://links.sgx.com/FileOpen/E-LOG%20-%20US$70m%20Investment%20in%20ESR%20Japan%20Income%20Fund%20Announcement.ashx?App=Announcement&FileID=785514

[ghchua]

Hi weijian,

The problem of "fund of funds" structure is actually not the fees. Normally, fees will be rebated back by the fund manager.

The problem is actually tax transparency, and this becomes more important for Singapore listed REITs since distributions are not taxed. If the REIT invested in fund, there must be a way for it to receive income, normally in a form of dividend out from it. Therein lies the question - How efficient is the tax structure of the underlying funds that they invested in? Will it be taxed? Normally, it will and that becomes a problem. Why I want to invest in a REIT structure to be taxed on income?

[weijian]

Hi weijian,

The problem of "fund of funds" structure is actually not the fees. Normally, fees will be rebated back by the fund manager.

The problem is actually tax transparency, and this becomes more important for Singapore listed REITs since distributions are not taxed. If the REIT invested in fund, there must be a way for it to receive income, normally in a form of dividend out from it. Therein lies the question - How efficient is the tax structure of the underlying funds that they invested in? Will it be taxed? Normally, it will and that becomes a problem. Why I want to invest in a REIT structure to be taxed on income?

hi ghchua,

Becoming a "fund of funds" was posted as an AGM Q&A. The issue of "tax transparency" was not bought up in the answer by ESR.

As usual, the question is posted to AI with the below results from Microsoft's co-pilot:

Similar to private equity funds, many private real estate funds in APAC adopt pass-through structures. Investors report their share of income (or losses) on their individual tax returns.

So it seems that LPs (limited partners) will be handling the tax bills instead. So if the REIT continues to pay out >90% of income, it will still be tax exempt. 

ANNUAL GENERAL MEETING TO BE HELD ON 30 APRIL 2024 DETAILED RESPONSES TO KEY QUESTIONS FROM UNITHOLDERS

10) Is investment into funds a feasible long-term strategy for the REIT?

• As most of the Sponsor’s overseas assets are held in various funds, investment in these funds would provide the REIT with access to overseas asset pipeline which are freehold or have long land lease tenures. 
• Often times as the fund portfolio size is large (JIF’s gross asset value is c.S$1.8 billion7 with individual assets as large as c.S$600 million7 ), buying a stake in the fund ensures that the investment size is appropriate for the REIT and balances out the risks and returns.
• The underlying properties in the fund may in future become potential pipeline assets for the REIT to hold directly should the fund decide to divest any of the assets. Being a fund investor puts ESRLOGOS REIT in a favourable position as we would have knowledge of the underlying asset’s performance over the years. 
• Importantly, on an ongoing basis, there is no “double charging” of fees. As these funds are already charged a fund management fee (“Fund Fees”), the REIT Manager waives off the equivalent fee charged to ESR-LOGOS REIT. As such, Unitholders will not be worse off from a fund investment as compared to a direct asset investment.

https://links.sgx.com/FileOpen/E-LOG%20-...eID=798094

[weijian]

Hi Shrivathsa,

In general. industrial REITs with assets in Singapore tends to trade at a higher yield mainly because of their shorter land lease. Which means, part of the yield can be considered as "compensation" for decaying land leases as they approach expiry.

Therefore, to do a fair comparison, you must look at other industrial REITs with mostly assets in Singapore and consider whether 9%pa yield is enough to compensate you for the risk taken. Also, do remember that ESR Logos REIT is not really a blue chip REIT but rather a mid size one. So, your data points must also be those that are of a similar size, while giving it a risk premium if you want to compare with a blue chip industrial REIT.

Hope that the above helps a bit in your REIT hunting.

Regardless of land lease tenure, industrial properties have a "useful lifetime" of avg 15 years.

A hospitality or retail real estate which has much lower obsolescence risks, will be able to enjoy benefits of inflation. But industrial real estate are limited by either their short land lease (Spore) or useful lifetime (anywhere).

A hospitality, office or retail real estate will be able to enjoy capital appreciation based "location, location, location". But industrial real estate are generally remotely located and they actually have high risks if their location is "good".

MINUTES OF ANNUAL GENERAL MEETING

Rejuvenation of assets encompasses two components: (i) quality and relevance of the assets and (ii) increase in returns through growth in rental income. Both factors would impact NAV and DPU respectively.

The average useful life for industrial properties is approximately 15 years before technology changes, new and emerging business sectors and new user requirements would render assets irrelevant. In the today’s context, Management and Board must also consider sustainability and green features to remain relevant.

https://links.sgx.com/FileOpen/ESR-LOGOS...eID=804834

[weijian]

This is probably one of the worst rights take-up that I have seen. A total of 289mil shares (valid acceptances and excess applications) representing ~93.9% of the rights were applied for. And out of these, ~280/289~97% were taken up by directly by the Sponsor themselves.

RESULTS OF THE PREFERENTIAL OFFERING

Pursuant to the Preferential Offering, a total of 289,180,327 Preferential Offering Units at the issue price of S$0.305 per Preferential Offering Unit will be issued to raise gross proceeds of approximately S$88.2 million.

In connection with the Preferential Offering, e-Shang Infinity Cayman Limited (“e-Shang Infinity”) 5 has subscribed for 280,770,589 Preferential Offering Units amounting to approximately S$85.6 million pursuant to the irrevocable undertaking provided by the Sponsor.

https://links.sgx.com/FileOpen/Results%2...eID=824422

[owq]

This is probably one of the worst rights take-up that I have seen. A total of 289mil shares (valid acceptances and excess applications) representing ~93.9% of the rights were applied for. And out of these, ~280/289~97% were taken up by directly by the Sponsor themselves.

RESULTS OF THE PREFERENTIAL OFFERING

Pursuant to the Preferential Offering, a total of 289,180,327 Preferential Offering Units at the issue price of S$0.305 per Preferential Offering Unit will be issued to raise gross proceeds of approximately S$88.2 million.

In connection with the Preferential Offering, e-Shang Infinity Cayman Limited (“e-Shang Infinity”) 5 has subscribed for 280,770,589 Preferential Offering Units amounting to approximately S$85.6 million pursuant to the irrevocable undertaking provided by the Sponsor.

https://links.sgx.com/FileOpen/Results%2...eID=824422

It may be one of the worst take-up, but I see it as a plus for OPMIs. 
1. Since the rights were fairly priced at NAV, OPMIs do not feel the need to pony up capital. 
2. Sponsor contributes the capital and also increases stake which may align their interests(?).
3. No need to do private placement to outside investors which is usually at a discount.

It also appears that they are listening, judging from their response to a question about raising funds... Extract from AGM Apr 2024 questions: "From earlier discussions, Management understands unitholders’ concerns on the constant issuance of new units..." (see original for full context)

My only question is, why did they not do a placement to the sponsor, and decide to backstop a right issue instead?

[weijian]

Hi owq,

Thanks for giving more context to the background of this rights, since I had not followed it closely. Indeed, pre or even post rights, ESR still don't have ownership closer to 20%. Maybe they have learnt from their Sabana REIT saga.

As for your question of "direct placement" to Sponsor, I think it is just to be fair to OPMIs. There is a huge difference in optics between "given the chance" and "no chance", even though it is "expected" that OPMIs will not take the chance, isn't it?