We attended a non-deal roadshow hosted by ESR Cayman, held on 9 January 2020. Below are some key highlights:
Company Background
ESR Cayman Limited (“ESR”) is one of the largest Asia Pacific-focused logistics real estate company. They have a network of logistics focused properties spanning the PRC, Japan, South Korea, Singapore, Australia and India.
As at 30 June 2019, the group had total assets under management (“AUM”) of US$20.2 billion with a portfolio consisting of 213 properties covering total gross floor area (“GFA”) of 10.9 million sqm. The group’s largest AUM concentration is in Japan (37.3%), followed by China (21.7%) and South Korea (17.9%).
Principle activities of ESR Cayman:
- Development: Land sourcing, design, construction and leasing of logistics properties. The development cycle of the group’s development properties is about 12-24 months.
- Fund management: ESR manages funds and investment vehicles managing properties to earn recurring fee income. The group’s development properties can be divested into these funds.
- Investment: They also manage REITs, earning rental income as well as capital appreciation on its properties. ESR’s development properties can also be divested into these REITs.
The Positives
Strong stakeholders, with JD.com (7.65% stake) as a tenant as well
ESR Cayman has strong stakeholders, with the largest one being Warburg Pincus (18.66% stake). Warburg Pincus is an established private equity fund that has over $79 billion invested in over 880 companies in 40 countries. Redwood group (13.34%), ESR’s second largest stakeholder, was founded by two current executives of ESR in 2006. Redwood specializes in logistics real estate with substantial experience in developing modern warehouses in Asia.
The management team at ESR Cayman boasts substantial experience in the logistics space, many of whom have worked for Prologis, a current competitor of ESR.
Strong tenants
Large and established tenants, including Softbank, Amazon, Cainiao (a member of Alibaba group) and JD.com, build resilience in earnings as they are unlikely to default on rental contracts and are in for the longer term.
Leveraging on the growth of e-commerce in Asia
Logistics properties that ESR Cayman own are mainly used by e-commerce companies, third-party logistics providers, retailers, manufacturers and cold-chain logistics providers. With online sales volume seeing strong growth year on year, this drives demand for logistics properties. This is reflected in ESR Cayman enjoying 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. GIC is a Singapore government investment company.
ESR Management considering getting a rating in the next few years
Management at ESR Cayman are hoping for an investment-grade rating. Achieving it will help to reduce the cost of funds, as well as help existing bonds experience further yield compression. However, due to increases in the group’s gearing and debt to EBITDA ratios in the financial year of 2019, we think an investment-grade rating will be difficult to achieve if debt levels continue to rise.
ESR’s closest peer, GLP, has an investment grade rating of Baa3 by Moody’s and BBB by S&P Global. However, these ratings are 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$86 billion in AUM.
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, we think it may be difficult for ESR Cayman to obtain an investment grade rating given GLP’s already low tier investment grade rating.
Potential unlocking of USD500mn for capital recycling and deleveraging
Management at ESR have plans to divest assets in Propertylink, a recently acquired company in Australia, that could unlock an additional US$500 million.
The Negatives
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.
Overall Comments
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.
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