We attended ESR Cayman’s non-deal roadshow held on 9 January 2020. Below are some key highlights:
ESR Cayman Limited (ESR) is one of the largest Asia Pacific-focused logistics real estate company, with a network spanning PRC, Japan, South Korea, Singapore, Australia and India. As at 30 Jun 19, the group had total AUM of US$20.2bn, with a portfolio of 213 properties of a total gross floor area (GFA) of 10.9mn sqm. The group’s largest AUM concentration is Japan (37.3%), followed by China (21.7%) and South Korea (17.9%).
+ Strong stakeholders, with JD.com (7.65% stake) as a tenant as well. Warburg Pincus (18.66% stake) is an established private equity fund investing $79bn in over 880 companies in 40 countries. Redwood group (13.34%), founded by 2 current executives of ESR in 2006, is a specialized logistics real estate firm with substantial experience in developing modern warehouses in Asia. The team at ESR have substantial experience in the logistics space, many who worked for Prologis, a current competitor of ESR.
+ Strong tenants, including Softbank, Amazon, Cainiao (a member of Alibaba group) and JD.com.
+ Leveraging on the growth of e-commerce in Asia. ESR’s portfolio mainly used by e-commerce companies, third-party logistics providers, retailers, manufacturers and cold-chain logistics providers. Online sales volume seeing strong growth YoY, driving demand for logistics. ESR enjoys 92% occupancy for stabilized properties (completed for more than 1 year). As a testament to the growing e-commerce space, ESR recently established a US$500 million joint venture with GIC to develop institutional-grade logistics facilities in key cities across China
+ Management considering getting a rating in the next few years. An investment-grade rating will help to reduce the cost of funds and existing bonds could see further
yield compression. However, due to increases in ESR’s gearing and debt to EBITDA ratios in FY2019, an investment-grade rating could be difficult. ESR’s closest peer, GLP, has a rating of Baa3 by Moody’s and BBB by S&P Global, which are ratings at the lowest tiers of investment grade. GLP is a leading global investment manager and business builder in logistics, real estate, infrastructure operating across Brazil, China, Europe, India, Japan, and the U.S. with US$86bnin assets under management.
According to GLP’s website, its net debt to EBITDA stands at 3.2x and EBITDA to interest expense at 7.0x, while ESR’s net debt to EBITDA stands at 5.95x and EBITDA to interest expense at 4.76x. As we see that ESR’s credit profile is weaker than GLP’s, obtaining an investment grade rating is unlikely given GLP’s already low tier investment grade rating.
+ Potential unlocking of USD500mn for capital recycling and deleveraging as management plans to divest recently acquired Propertylink assets.
– Heavy expansion requires high capex. Projected capex for 2019 is USD1.23bn. ESR has a substantial pipeline of development properties comprising more than half the GFA of ESR’s completed properties. We expect gearing to increase. However, after a successful IPO in Hong Kong in November 2019 that raised US$600mn, 70% was used to retire debt. Current gearing ratios are manageable in our view. We also take comfort in ESR’s strong stakeholders to support future funding requirements.
We take a neutral view on ESR. We view ESR’s strong stakeholders as a credit positive. Also, management’s plans to get rated in the future is a potential positive catalyst. However, while we note ESR’s current gearing levels are manageable, we expect gearing levels to increase due to heavy investments in development projects.
We like the USD denominated ESRCAY 7.875% 04/2022 bond as it offers relative value from the ESRCAY curve standpoint. It offers an attractive implied yield of 6.15% based on the SGD swap with about 2 years to maturity.