ESR-LOGOS REIT

Price target: DBS Group Research ‘buy’ 34 cents

Divestment at above valuation

DBS Group Research has kept its “buy” call and 34 cents target price on ESR-LOGOS REIT (E-LOG) following the divestment of a property in Australia at a significant premium to valuation.

On April 11, E-LOG announced the sale of 182– 198 Maidstone Street for A$65.5 million ($57.3 million), which is at a 7.4% premium to valuations. Since FY2023, E-LOG has divested around $500 million worth of assets, fetching an average premium of just 1% to valuations.

As this property accounts for just 2.2% of its portfolio value and 0.6% of its revenue, the sale is not expected to materially impact E-LOG’s NAV (net asset value) or DPU (distribution per unit).

Upon completion of the divestment, E-LOG’s portfolio will consist of 71 properties, excluding 48 Pandan Road held through a joint venture, located across Singapore, Japan and Australia, as well as investments in three property funds in Australia.

In its April 11 note, DBS say proceeds from the divestment can be used to pare down debt, finance acquisitions, fund asset improvements and meet general capital working needs.

Following this divestment, E-LOG’s gearing is expected to remain just below 35%, providing sufficient headroom to redeem this series of perpetual securities of $150 million carrying a coupon of 6.63% and to be called on May 3.

“Considering the divestment yield falling between 3.5% and 4%, compared to the coupon rate of the perpetual securities, utilising the proceeds for redemption could potentially result in some accretion to DPU,” says DBS.

Moreover, this divestment underscores the ability of S-REITs to capitalise on the pricing gap between asset values in the physical and public markets, with the current P/B multiple of 0.9 times, thereby strengthening their balance sheets, adds DBS. —