ESR Cayman proposes further issue of SGD 5.65% perps

• ESR Cayman delivered higher profits and revenue in 2020 albeit at a slower pace. A growing e-commerce industry and larger fund size will continue to boost its earnings.
• ESR Cayman is also well-levered and has more than enough cash to meet its short-term debt.
• We think that the ESRCAY 5.650% Perpetual Corp (SGD) is attractively priced.

Despite all the inconvenience that COVID-19 has left in its path, the e-commerce industry is thriving quite well. ESR Cayman Limited (“ESR Cayman”) – a Group closely intertwined with logistics properties is one of the beneficiaries of the e-commerce boom.

After issuing the ESRCAY 5.650% Perpetual Corp (SGD) back in March 2021 (see ESR Cayman prices SGD NC5 perp at 5.875% IPG), ESR Cayman is now proposing a re-tap to increase its issue size. The re-tap has been priced this evening and the issue will be immediately fungible with the existing SGD 200m of outstanding notes.

About ESR Cayman

ESR Cayman has three main revenue segments – investment, fund management and development. The investment segment recognizes rental income and capital gains on properties directly held, and dividend income and share of earnings and value appreciation from REITs that it manages. ESR Cayman also earns recurring fee income from managing properties held by the funds and investment vehicles that are managed by the company. Lastly, the company earns development profits through the building and sale of logistics properties.

(Read more: Bond investors should pay more attention to ESR Cayman after its Hong Kong IPO)

Operating results

While ESR Cayman managed to grow its 2020 revenue (USD 388.3m) by 8.66% YoY, revenue growth slowed as revenue from the investment segment decreased by 11.5% YoY following the disposal of Propertylink assets to ESR Australia Logistics Partnership (“EALP”), a new core-plus fund joint venture.

Figure 1: Revenue and profit growth slowed in 2020

Approximately 64% of ESR Cayman’s tenants are in the e-commerce and third-party logistics (“3PL”) industries, both of which have been growing despite COVID-19. Euromonitor projects e-commerce penetration rates to increase throughout the Asia Pacific (“APAC”) region, especially in countries like India and Indonesia. COVID-19 was not an obstacle to growth as shopping frequency for e-commerce platforms increased in 2020. ESR Cayman’s portfolio lease expiry is also well-staggered with a weighted average lease expiry (“WALE”) of 4.2 years with 28% of leases expiring in 2026 and beyond.

For their fund management segment, total assets under management (“AUM”) grew by 35% YoY in 2020 resulting in a 13.5% YoY growth in fund income for 2020. ESR Cayman manages 34 private third-party investment vehicles across APAC and 3 publicly listed REITs in Singapore and Korea. Investors include GIC who increased its investment in EALP from 45% to 80% in September 2020. In December, the company also partnered with GIC to invest in industrial and logistics properties in India.

ESR Cayman’s development segment performed extremely well, with revenue growing by 31.9% to USD 92m in 2020. Demand for logistics properties increased in 2020 with work in progress developments increasing by USD 0.6b to USD 4.7b. It also has a land bank gross floor area (“GFA”) of 3.7m sqm and development pipeline GFA of 15.5m sqm. On the balance sheet, completed investment properties and investment properties under construction amounted to USD 1.45b and USD 1.21b respectively.

In April, ESR Cayman announced that together with a joint venture associated with GIC (Realty) Private Limited, they will be acquiring an Australian property portfolio comprising unit trusts holding 45 industrial and logistics real estate assets with a 20-80 split from the Blackstone Group Inc. (“Blackstone”). The Property Portfolio is the largest logistics portfolio ever put to market in Australia, which upon completion, will increase the Group’s AUM and scale of its Australian business to USD 6.0 billion. The Group will fund AUD 753m (an approximate 20%) of the consideration.

The Property Portfolio has an initial yield of 4.5% and a Weighted Average Lease Expiry of 6.9 years. The aggregate value of the Property Portfolio was AUD 3.43b based on valuations as of 31 May 2021 as determined by independent property valuers. Based on the unaudited financial information provided by Blackstone, for FY19 and FY20, both the unaudited net profits before and after taxation attributable to the Property Portfolio were AUD 281.5m and AUD 294.3m, respectively. They will be acquiring the properties on a 100% occupancy basis with two years of rental support being provided by the property vendors.

Credit profile

ESR Cayman’s balance sheet looks strong with more than enough cash (USD 1.52b) to cover its short-term debt of USD 733.66m. However, management indicated that they will be funding the acquisition of the Property Portfolio using cash. The table below shows its credit ratios at the end of 2020 and our estimates. The Group has also pledged USD 2.57b of its total assets (USD 7.69b) to secure its borrowings. ESR Cayman may also refinance some of these secured borrowings in future.

Table 1: Estimated credit ratios

	2020	1H21
Net debt/total assets excl. cash	29.05%	35.46%
Net debt/equity	47.13%	62.46%
Net debt/equity including perpetual bonds	47.13%	69.17%

Source: Company, iFAST estimates

With regard to its 2021 bank loans, USD 526.37m of the secured notes has an effective interest rate of between 0.20% and 6.18%. On 23 Feb 2021, ESR Cayman issued SGD 200m of perpetual securities at a coupon rate of 5.65%. It is probable, that the issuance of perps would offer a lower interest expense to the Group as compared to extending its bank loans with its creditors. Furthermore, by issuing perps, the Group is able to reduce its leverage ratios as the perps are categorised as debt under the balance sheet.

With the proposed further issue of the perps, net debt/total assets could decline to about 30% if the Group issues about SGD 150m of perps. Management also indicated that a net debt/total assets ratio of 30% is a comfortable level for them. Assuming a 150m size issuance, net debt/equity would drop to 60.6% but if the perps were to be included, it would rise to above 70%.

After the acquisition, cash balances will drop to USD 0.93b, which is still more than enough for its bank loans expiring this year. The amount of cash raised from the further issuance of perps should be used to cover some of the bank loans too. ESR Cayman also constantly recycles its assets, and with a strong refinancing ability, its redemption of bonds should not be a major issue for them.

Figure 2: Debt maturity profile

Relative valuation

Although ESR Cayman draws most of its revenue from fund management fees, its main operations is still in the logistics industry, hence we compare to peers such as ARA LOGOS Logistics Trust (“ALLTSP”), Mapletree Logistics Trust (“MLTSP”), and GLP Pte Ltd (“GLP”). ESR Cayman has similar credit ratios with the other companies and should be better post-issuance. However, its interest coverage ratio is much lower but should improve after the acquisition.

Table 2: Trailing twelve-month credit ratios of peer companies

	ESRCAY	ALLTSP	MLTSP^	GLP
Net debt/total assets excl. cash	35.46%	35.52%	37.12%	<45%
Net debt/equity	62.46%	63.12%	66.27%	N.A.
Adjusted EBITDA/interest expense incl. distributions to perpetual securities (x)	1.31	3.11	4.84	>2.5

Source: Bloomberg Finance L.P. estimates, iFAST compilations. As at 31 Dec 2020.
^Mapletree data as of 31 Mar 2021.

Looking at ESR Cayman’s fixed term notes, the ESRCAY 7.875% 04Apr2022 Corp (USD) offers the highest yield in SGD terms (3.38% in USD terms) despite having only 0.89 years to maturity left. If investors are able to hedge USDSGD, it is an attractive choice among the fixed term notes. On a side note, the USDSGD has to fall by about 0.9% in 0.9 years to match the SGD yield of the ESRCAY 6.750% 01Feb2022 Corp (SGD), as of 24 May 2021. However, at the current USDSGD levels, we would prefer the ESRCAY 7.875% 2022’s over the ESCAY 6.75% 2022’s despite the currency risk. A yield of about 4% would be attractive for the bond too.

Figure 3: Relative valuation among fixed rate notes

Comparing the perpetuals, the ESRCAY 5.650% Perpetual Corp (SGD) look the most attractive at a yield-to-call of 5.64%. Its next call date is the same as its reset date – 2 March 2026. It will reset to the sum of the prevailing 5Y SGD Swap Offer Rate (“SOR”), initial spread of 4.73% and a step-up margin of 200 bps. The step-up margin also gives a greater likelihood of the Group calling the perps.

Figure 4: Relative valuation among comparable perpetual notes

In our final point, we observed that the issuer’s net debt/equity has not exceeded 60% in the past three years and although its adjusted interest coverage ratio is the lowest, there should be a floor to its revenue due to recurring income from the fund management segment. Demand for logistics properties should continue to grow due to the rise of e-commerce industry which will be beneficial for its rental rates. Considering its adequate credit profile and attractive bond yields, we recommend investing in the ESRCAY 5.650% Perpetual Corp (SGD).

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in ESRCAY 5.65% Perp Corp (SGD), ESRCAY 6.750% 01Feb2022 Corp (SGD) and ESRCAY 7.875% 04Apr2022 Corp (USD), and the analyst who produced this report hold a NIL position in the abovementioned securities.

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