Exclusive Insights: Interview with ALOG REIT CEO, Ms Karen Lee

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In this coverage of the ESR-REIT and ARA LOGOS Logistics Trust merger, I had the opportunity to speak to Ms Karen Lee, CEO of ALOG REIT on the 8 November 2021.

Proposed merger of ESR REIT with ARA LOGOS Logistics Trust: Resources

 
 

Cold Storage Logistics


[Editors note: Cold Storage Facilities are facilities that store frozen or chilled goods, such as frozen food, chilled food and pharmeceuticals. Demand for such facilities around the world is high, especially nowadays since the COVID-19 Vaccines are in high demand and most of them require such facilities.]

Kenny: I heard that Cold Storage Logistics are a new asset class, just like Data Centres. What do you think about the future growth of this sector, and would there be any rerating of the REIT as this asset class is added into your portfolio?

Karen: I wouldn’t say Cold Storage and Data Centres are the same, but they are both specialised sectors. If you look across the other Industrial REITs in Singapore, not many of them have dedicated Cold Storage facilities. ALOG has one such facility (ALOG Cold Centre at 2 Fishery Port Road). Depending on industrial requirements, these facilities can be configured accordingly (freezer, chiller, ambient etc.). Right now, especially because of COVID, there is a shortage of Cold Storage facilities islandwide, meaning our facility has an occupancy close to 100%.

However, landlords typically do not build such facilities because the capex is very high. Some dedicate only a portion of their property to have Cold Storage facilities. Since our current sponsor is a logistics developer (LOGOS), they have experience in building specialised facilities such as Cold Storage.

Kenny: For Cold Storage Facilities, which countries have higher demand for such facilities?

Karen: All countries have high demand for such facilities. Due to COVID and the supply chain disruption, there’s a shortage in Cold Storage. You’ll be surprised at how much frozen food and pharmaceutical products are being stored in the event of future supply chain disruptions. 

Kenny: So in the near term, is ALOG planning for acquisitions of Cold Storage Facilities (or conversion to such facilities) or only when the Merger with ESRREIT is complete?

Karen: Right now we are at a standstill (due to the ongoing merger) but we do have tenants who are enquiring about converting to Cold Storage facilities and, we are still exploring those on a case-by-case basis.

 

Merger of ESR REIT and ARA LOGOS Logistics Trust


Kenny: Regarding the Merger, is there a Plan B for ALOG, in case the merger with ESR REIT does not go through?

Karen: If the merger doesn’t go through, it’ll be business as usual for ALOG. Having said that, we are quite confident the merger will go through, as we have articulated the merits of the merger for both REITs. On our own, we can still grow, albeit at a slower pace. ALOG, as a relatively small REIT, can’t possibly acquire large transactions at one go, we’ll have to break it up. However, a larger REIT will benefit from the economies of scale. Investors need to see that scale is very important for REITs to grow.

Post-merger, we have a clear path to grow ESR-LOGOS REIT. Our enlarged sponsor has over US$50 billion in New Economy AUM and US$10 billion in Development Work-in-Progress New Economy pipeline. It is a very large pipeline for any REIT sponsor to offer. I have also been communicating to investors that for ALOG holders, you are not selling out, but rather you are rolling over 90% of units to an enlarged platform, as well as capitalising on existing returns with the 10% cash.

Kenny: Only a little more than a year ago, you took over as ALOG’s CEO. Is this succession and the merger pre-planned?

Karen: Back when I took over as CEO of ARA LOGOS Logistics Trust (Formerly Cache Logistics Trust), the only transaction that happened was only ARA’s acquisition of LOGOS in March last year. The decision to merge with ESR REIT was as recent as 2 months ago, where Adrian and I discussed the merits of a potential merger between the two REITs after the proposed merger of ESR Cayman and ARA Asset Management was announced.

The biggest challenge moving forward is how quickly we can execute the plans and strategies we have been articulating to the unitholders, in terms of acquisitions.

Kenny: What do you think will be the biggest challenge that your team will face post-merger, and how will your team plan to resolve them? 

Karen: We have been quite busy with the transaction, therefore we are still in the midst of discussions about the integration process. We need to evaluate the talents available on both sides and pick the best man for the job, for the new roles the enlarged REIT will have. 

I would say the biggest challenge moving forward is how quickly we can execute the plans and strategies we have been articulating to the unitholders, in terms of acquisitions. We have not been given a timeline to do so but it will be important for us to execute them quickly so that we would be credible in delivering what we said we would do. We would also set out to be included in more indices in the future, improving trading liquidity and visibility to institutional investors, and in time to come, be in the same league as some of the bigger players.

Kenny: Investors and Analysts are looking at whether you can execute what you have promised.

Karen: I think Adrian and I have delivered what we have promised for our respective REITs. For ALOG, we articulated 3 key tasks we would do, namely Acquisitions, Divesting Non-Core Assets and AEIs. Once we delivered them, ALOG had a good re-rating after we carried out these corporate actions.

Kenny: Would you foresee immediate acquisitions to be carried out post merger?

Karen: Out of the over US$50 billion in New Economy AUM and US$10 billion in Development Work-in-Progress New Economy pipeline across 10 countries where the Sponsor has presence in, US$2 billion of these are core assets that are immediately visible and executable. Adrian and I will look at the c.S$2 billion of immediately visible and executable New Economy pipeline we have been talking about, to identify which assets are ready to be injected into the REIT.

 

Performance of ARA LOGOS Logistics Trust


 
ARA LOGOS Logistics Trust’s stellar performance compared to other Industrial S-REITs.
 

In the past 18 months, we have maintained high portfolio occupancy rates, achieved positive rental reversion, divested non-core assets to rebalancing our portfolio, and managed to reduce leverage and lower our all-in financing costs. We executed Asset Enhancements to ensure our assets remain competitive and relevant to our tenants.

Kenny: I would like to congratulate you on the great performance of ALOG for the past year, beating other Industrial S-REITs. What do you think you have done right?

Karen: I must thank you for these kind words. When I took over in August 2020, the immediate task was to improve the performance of the REIT. Prior to me taking over, the rebranding of Cache Logistics Trust to ARA LOGOS Logistics Trust signified a fresh start, with a new sponsor (LOGOS) onboard. LOGOS demonstrated its commitment to grow the REIT, and alignment of interests with unitholders, via asset injection. We completed our first portfolio acquisition in Australia earlier this year, and LOGOS backstopped the entire preferential offering when we did the fund raising for that acquisition. 

Coming from an operator background, it is really important to strengthen the portfolio operating metrics. In the past 18 months, we have maintained high portfolio occupancy rates, achieved positive rental reversion, divested non-core assets to rebalancing our portfolio, and managed to reduce leverage and lower our all-in financing costs. We executed Asset Enhancements to ensure our assets remain competitive and relevant to our tenants. The market can see that we have put in significant efforts to deliver these results, and the results have shown. I am proud of my team in helping us to deliver the stellar results of ALOG, creating value for our unitholders. Once again, being transparent to our unitholders and delivering what we have outlined is very critical. For the enlarged REIT itself, we would be following a similar strategy.

 

Kenny Loh is a Senior Financial Advisory Manager and REITs Specialist of Singapore’s top Independent Financial Advisor. He helps clients construct diversified portfolios consisting of different asset classes from REITs, Equities, Bonds, ETFs, Unit Trusts, Private Equity, Alternative Investments, Digital Assets and Fixed Maturity Funds to achieve an optimal risk adjusted return. Kenny is also a CERTIFIED FINANCIAL PLANNER, SGX Academy REIT Trainer, Certified IBF Trainer of Associate REIT Investment Advisor (ARIA) and also invited speaker of REITs Symposium and Invest Fair.  You can join my Telegram channel #REITirement – SREIT Singapore REIT Market Update and Retirement related news. https://t.me/REITirement

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Exclusive Insights: Q&A during Manulife US REIT Operational Update

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On 3 November 2021, Manulife US REIT (“MUST”) [SGX:BTOU] released its operational updates for the third quarter ended 30 September 2021. I have been invited for a call with the management team for updates on MUST’s 3Q 2021 operations as well as on the U.S. office landscape. I would like to thank Manulife US REIT for this opportunity.

 

Q&A Section


In this section I’ll be touching on selected questions regarding MUST’s operations, and their outlook moving forward.

Q: Just wondering, what is your outlook on acquisitions, will you be able to complete an acquisition this year or maybe by next year?

A: We’ve looked through 46 properties this year, and we are definitely getting closer to finding properties that we would be interested in acquiring.

Q: There were some occupancy exits in Q3 2021. How would you characterize these tenants at this point of time?

A: The most notable occupancy exit would be a tenant in Atlanta, they had an option to terminate a floor relating to the tenant’s IT department. Although this department has already been working remotely distributed since pre-COVID, and COVID has only accelerated that transition. Therefore they took the option to terminate that lease.

However, this particular tenant is notably one of our biggest tenants in terms of occupied square footage, and also has very long lease terms. Therefore this drop in occupancy shouldn’t be due to overall market sentiment changes toward the US office market.

Less than 20% of buildings in the US are currently green. In the next couple of years, when regulation on carbon emissions kick in, there will be an inevitable rush to ‘green’ your buildings in the near future.

Q. I noticed you have conservatively recorded portfolio devaluations for the past few years. Just wondering if we can expect a turnaround within the next year.

A: We do feel that our values are conservative, but we cannot rule out the possibility that there will still be a decline. Broadly speaking however, the US office market has been flat but is starting to see positive signs in the leasing market (in terms of rent growth etc), and that should be reflected as we approach our next round of valuation. Furthermore, independent third-party valuers that conduct valuation on our properties may have different views on how valuation is conducted, although we are optimistic.

Q: I am quite heartened to see that MUST is a proponent of going green, and are aiming to achieve 100% of your properties with green certification. Can you give us a sense of how much capex to expect from greening your portfolio (and in the future maintaining the status)?

A: Certainly we won’t be seeing additional discernable capex spending to get to the 100% goal (of seeing our entire portfolio green-certified) next year. We’re looking at the one remaining building, specifically the Energy Star award which takes a year to achieve. Our policy in the future is to ‘green as we go along.’ Recently for example, we renewed energy contracts and moved them to renewable energy sources. The gradual switching to greener and more sustainable options shouldn’t impact capex dramatically, as these are costs that we would have already taken into account anyway.

Also, 8 out of 9 properties in our portfolio are already green (meaning they are LEED and/or Energy Star certified). This means that these properties are already meeting the standards, meaning no additional capex is needed to make it greener. That being said, additional capex to ‘green’ existing buildings which do not meet the above-mentioned standards can be relatively significant.

Large, corporate tenants are already looking beyond energy ratings and green building certifiations. They want to know your environmental philosophies and goals as a sponsor.

Q: Generally, are tenants particular about looking for green and sustainable buildings?

A: Definitely we are seeing an increase in the number of tenants who are looking for green buildings. It has been quite slow in America but it has been steadily increasing. One relatively large tenant in particular has been specific in terms of getting to know about MUST’s green prospects. Big corporate tenants are already looking beyond things such as certification.

One key point to take note is that a lot of American government agencies actually do not allow their office spaces to be in non-green buildings. With USA pledged to net-zero by 2050, steps have already been taken to ensure its goals are met. In New York by 2024, building owners can incur fines if their carbon emissions exceed a certain level.

 

Growth in the US Office Sector


Recovery of Leasing Activity

MUST: We have hardly any more leases coming due in 2021, having executed ~490,000 sq ft in leases from 1 Jan to 25 Oct 2021 – a significant volume which shows that tenants are now more certain about their space needs and are ready to sign leases again. This is a change from when COVID-19 first started last year and leasing activity slowed drastically.

Surge in New Leases

MUST: In particular, we have seen new leases jumping from 3.3% in 1H 2021 to 32.3% from 1 July to 25 Oct 2021, which shows that there is new demand for our office space in the market (i.e. we are not just renewing existing leases). This demonstrates healthy fundamentals in the U.S. office market and good demand for our buildings.

Reduction of Subleasing

MUST: Finally, our performance dovetails with what’s happening across the broader U.S. market, where leasing volume is up and tenants are signing longer leases. Base rents and net effective rents (which take away the effect of tenant improvement allowances and free rent) are recovering, and subleasing declined for the first time since COVID-19.

*Subleasing is the re-renting of property space by an existing tenant to a third party for a portion of the tenant’s existing lease contract. A large volume of sublease space was put on the market when COVID-19 first struck, due to tenants’ uncertainty about their space needs while some also faced financial difficulty. The fact that this is now declining shows that either existing tenants are expanding, or they are more certain about their financial stability and space needs.

Kenny Loh is a Senior Financial Advisory Manager and REITs Specialist of Singapore’s top Independent Financial Advisor. He helps clients construct diversified portfolios consisting of different asset classes from REITs, Equities, Bonds, ETFs, Unit Trusts, Private Equity, Alternative Investments, Digital Assets and Fixed Maturity Funds to achieve an optimal risk adjusted return. Kenny is also a CERTIFIED FINANCIAL PLANNER, SGX Academy REIT Trainer, Certified IBF Trainer of Associate REIT Investment Advisor (ARIA) and also invited speaker of REITs Symposium and Invest Fair.  You can join my Telegram channel #REITirement – SREIT Singapore REIT Market Update and Retirement related news. https://t.me/REITirement

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Exclusive Insights: Interview with ESR REIT CEO, Mr Adrian Chui

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On the 26th October 2021, I had the opportunity to speak to Mr Adrian Chui, CEO and Executive Director of ESR REIT. As you may have known, the recent announcement of ESR REIT’s proposed Merger with ARA LOGOS Logistics Trust has sparked many questions amongst investors. 

Proposed merger of ESR REIT with ARA LOGOS Logistics Trust: Resources

During my visit to ESR Bizpark @ Changi, on behalf of investors, in an interview with Mr Adrian Chui and Ms Charlane-Jayne Chang (Head of Capital Markets and Investor Relations), I asked several questions regarding the proposed merger with ARA LOGOS Logistics Trust, ESR-LOGOS REIT’s future strategy, and what to expect moving forward.

 

 

Kenny: Is the ESR REIT – ARA LOGOS Logistics Trust merger dependent on ESR’s successful acquisition of ARA Asset Management?

Adrian: Yes the merger is conditional on that. If ESR’s acquisition of ARA Asset Management (including LOGOS) does not go through, the REIT merger will not go through. Before the announcement of ESR’s acquisition of ARA Asset Management, both parties (ESR Cayman and LOGOS) have their own property pipelines from our respective Sponsors. The REIT merger will also remove conflicts of interest when ESR acquires ARA Asset Management as the enlarged ESR-LOGOS REIT will trade as 1 enlarged REIT with access to enlarged ESR Cayman’s pipeline of assets and tenant base.

 

Kenny: The new banking facilities have a lower weighted average “all-in” finance cost of 2.25% per annum. Have you considered ‘green bonds’, that have an even lower finance cost?

Adrian: Yes – we are keen to look at green bonds and/or sustainable loans as we embark on our ESG offerings as an enlarged ESR-LOGOS REIT. Post-merger we will review our ESG offerings, plan and then roll out our ESG offerings. It is necessary to align both REIT’s ESG plans, before embarking on further green initiatives. Green loans and/or bonds will be part of our capital structure going forward.

 

Kenny: After the ARA LOGOS Logistics Trust merger, what will be ESR-LOGOS REIT’s strategy moving forward, in terms of property pipeline? The current portfolio of properties is Singapore and Australia centric.

Adrian: We will look to follow the footprint of our Sponsor, ESR Cayman. They have properties in Singapore, China, Japan, Australia, India and Korea. Freehold and/or longer land lease assets will be the focus of our growth strategy in order to address the short underlying land lease of Singapore industrial properties. As such, overseas expansion will pick up with Australia, Japan and possibly China as the key overseas markets. These are countries where ESR Cayman has a long established footprint and full real estate value chain with Australia & Japan being developed countries. As REITs should primarily consist of stabilised assets, the properties have to be in countries where there is rule of law, and money can flow in and out easily. Our Sponsor’s assets in Japan are also relatively new and freehold.

Kenny: Also Japan’s cost of debt is very low. For example ParkwayLife REIT at ~0.6% average cost of debt.

 

“Overall, we are quite excited for the future. Wherever we invest is going to be in the jurisdiction in which ESR Group has a presence in.”

 

Kenny: I also see that ESR Group have a share in Cromwell. Does this mean anything?

Adrian: Nope. Different jurisdictions. Our focus will be on APAC.

 

Kenny: Judging by your responses, despite ESR being a major shareholder in Sabana REIT and also AIMS APAC REIT, I don’t think you’ll be interested in acquiring these two REITS already.

Adrian: In terms of acquiring properties, we would be focusing on our Sponsor’s pipeline of assets. For example, Sponsor has some assets in Japan which we can easily acquire.

Also, as a REIT CEO, when we look at every investment, we look at how it will benefit the REIT. A fundamental issue for ESR-REIT now is that most of our assets are in Singapore, where land leases are short, which means that our yield is relatively higher at about 6% as an equity risk premium is required for short land leasehold assets compared to freehold. As our Sponsor’s asset pipeline consists of freehold and longer land lease assets, this is more valuable to us. Post-merger, with a larger asset base, lower cost and wider access to funding, we can do more and faster.

Kenny: Because your NAV will drop over the years.

Adrian: Exactly. If Singapore industrial assets are also freehold, our yield will be lower than 6%. Now that the REIT will be bigger (S$5.4b total assets), we are in NAREIT Global Index, and we have visible and executable pipeline of assets from our Sponsor with longer land leases, that should be the direction moving forward, acquiring properties with longer land leases, so that the NAV won’t constantly keep dropping. Previously, when our total asset size was smaller, buying a portfolio of properties (such as Sabana REIT acquisition) to help us get into NAREIT would be quite sensible. Now we are already a NAREIT-indexed REIT.

In terms of growing, every year since we became ESR REIT, we generally acquire assets, at about 15-20% of our then portfolio size. This excludes merger years which are one-off.

 

“Our philoshophy is that whenever you want to perform an acquisition, you must be able to digest (and manage it).”

 

Kenny: Last question: Do you personally have a target on how big your market cap should be, or Sponsor tells you to meet this target? For strategic reasons.

Adrian: The answer from the Sponsor is always ‘as big as sensibly possible’. For me, I look at a practical point of view on what I believe the market can accept in terms of size and risk. We also take into account other factors such as resources (you need people to do the work and due diligence properly). Post-merger, with a larger asset base, lower costs of funding, wider access to capital and looking at my Sponsor’s asset pipeline, $800m to $1 billion per annum of acquisitions in the next 3 years is plausible.

Charlene: I think importantly, with our track record we have been very disciplined with the way acquisitions are done, it has been done in a properly staged and “digestible” size which are value-accretive to unitholders.

Adrian: We are quite aware that once you make one wrong move, that’s it. Our philoshophy is that when you want to acquire, you must be able to digest (and manage it). One recent example would be the recent acquisitions of 46 Tanjong Penjuru and 10% investment in ESR Logistics Partnership (“EALP”) which is accompanied by a manageable c.S$149.6mil Equity Fund Raising exercise (consisting of a c.$100mil Placement Tranche and c.$50m Pref Offer tranche for our existing unitholders) which was 3.6 times subscribed (Editors note: Read more about it here). We cannot just ‘gobble’ up on assets for growth sake without considering execution and funding risk. We want to make sure our team is able to manage the assets that we acquire also, making sure it is within our comfort zone and risk appetite.

Kenny Loh is a Senior Financial Advisory Manager and REITs Specialist of Singapore’s top Independent Financial Advisor. He helps clients construct diversified portfolios consisting of different asset classes from REITs, Equities, Bonds, ETFs, Unit Trusts, Private Equity, Alternative Investments, Digital Assets and Fixed Maturity Funds to achieve an optimal risk adjusted return. Kenny is also a CERTIFIED FINANCIAL PLANNER, SGX Academy REIT Trainer, Certified IBF Trainer of Associate REIT Investment Advisor (ARIA) and also invited speaker of REITs Symposium and Invest Fair.  You can join my Telegram channel #REITirement – SREIT Singapore REIT Market Update and Retirement related news. https://t.me/REITirement

 


Continue Reading Exclusive Insights: Interview with ESR REIT CEO, Mr Adrian Chui