ESR Cayman is a leading logistics real estate player in APAC benefitting from powerful growth trends in ecommerce and years of underinvestment into APAC logistics real estate. Despite being in growth phase, the company generates steady cash flows from its recurrent fee income, as well as derive income throughout the whole value chain; from development to divestment. We believe there is further upside for logistic asset values in APAC, allowing ESR to unlock higher value in its stabilised portfolio.
One of the few players with a global reach and full breath of service offering
ESR is one of the only few logistics real estate players with capability to provide the entire value chain of services, from investment management, sourcing land and undertaking development and asset management for the world’s leading global real estate investors. This has helped drive market share gains despite having a relatively small AUM.
ESR’s AUM, as of 30 December 2020, was US$30bn, relatively small to competitors Prologis (US$148bn in AUM), Global Logistic Properties (>US$100bn), LOGOS Property (US$80bn), and Goodman Group (US$53bn). Still, ESR managed to garner the largest development pipeline in the likes of China, South Korea and Japan, with a strong network of capital partners and tenants including JD.com, Carrefour, Cainiao, and Amazon.
In addition, being able to derive income throughout the whole value chain helps prevent cash flow bumpiness, even during development phases.
Investment portfolio and fund management are steady cash flow generators
ESR’s fund management segment generated recurring fee income that contributed US$148mn or 26% of FY20 core EBITDA. Together with stabilised assets in its balance sheet and fund vehicles, contributing a further US$189mn or 33% of FY20 core EBITDA, recurrent income made up 59% of ESR’s total FY20 EBITDA. We expect ESR’s ongoing and pipeline development projects of US$15bn to drive AUM and recurrent fee income growth.
In addition, ESR’s modern logistic assets provide higher cash flow visibility. The customised nature of modern built-to-suit logistics assets that ESR develops helped keep vacancy rates resiliently low over the past few years. ESR’s portfolio occupancy has not dipped below 90% the past 3 years. Built-to-suit leases are sticky and incur large penalties for early cancellation, essentially the remainder of the lease payments due.
Key markets still not near expected penetration rates
The pandemic accelerated already powerful ecommerce adoption trends. Despite this, ecommerce penetration still has legroom. Ecommerce penetration represents the percentage of total households in a specific region that have bought goods online at least once within the last 12 months.
In China, ecommerce penetration is still expected to increase more than 50% from current levels. ESR’s largest region by revenue (32% of FY20 revenue), China ecommerce penetration is expected to rise from 27.3% in 2020 to 40.4% by 2024. Penetration is also expected to modestly rise by up to 3.6% in the next 3 years for mature markets like South Korea, Japan, Australia, and Singapore. This helped drive ESR to record leasing, new development starts and AUM achieved in 2020.
Still, despite the hot market, valuation of APAC logistics real estate still offers attractive spreads to developed markets such as the US and UK. This is due to years of underinvestment in the sector. Cap rates in APAC still offer over 200bps above developed market cap rates. We see this driving APAC logistics asset values higher, allowing ESR to unlock stabilised assets at higher values into funds or REITs for liquidity.
Summary
Further legroom in ecommerce penetration is spurring logistics real estate demand in APAC. ESR Cayman is able to capture the growth through the entire value chain, while generating healthy recurrent income. The company maintains a low net debt to assets of 23.2% and adequate cash to short term debt of 2.0x, while maintaining an EBIT interest coverage ratio of 1.2x.
We prefer the ESRCAY 5.1% 26Feb2025 (SGD) senior unsecured bond with an ask price of 104.55 and yield to maturity of 3.7%, and the ESRCAY 5.65% Perpetual (SGD) bond with an ask price of 101.05 and yield to call of 5.4% callable on 2 March 2026.
