ESR-ARA combination offers investors capital recycling opportunity, exposure to e-commerce boom

Photo: ESR

The proposed combination of Hong Kong-headquartered ESR and Singapore-based ARA Asset Management offers investors a “closed loop,” or a unique capital recycling strategy, says a key shareholder of the combined entity.

“If you’re a large pension fund, you have an ability to [free up capital owing to being underweight on new economy real estate] divest a Grade A commercial asset that you probably would never have sold in the last 10 years, and then reinvest it into ‘new economy’ real estate,” explained ESR chairman Jeffrey Perlman in an interview with DealStreetAsia.

“We can have one of our REITs acquire that commercial asset, have that capital released back in the system, and through LOGOS or ESR, help the same capital partner invest it back into new economy real estate.”

ESR’s proposal to acquire 100% of ARA for $5.2 billion will create the third-largest listed real estate manager globally after Brookfield and Blackstone with combined assets under management (AUM) of $131 billion. Of that, $53 billion will be ‘new economy’ assets, or e-commerce warehouses and data centres.

ESR’s announcement comes just months after news emerged that ARA, which was previously listed on the Singapore Exchange, was looking to return to the public markets with a dual listing in Hong Kong and Singapore. ARA was privatised in a S$1.75 billion deal by a consortium led by ARA founder John Lim with private equity firm Warburg Pincus and China’s AVIC Trust.

The proposed transaction also comes about a year after ARA acquired a majority stake in warehouse developer LOGOS, which gives commercial and office property-oriented ARA exposure to new economy assets.

The founders of ESR; ARA, which is already Asia Pacific’s largest real estate fund manager; and LOGOS saw strategic overlaps in their businesses, particularly in the key markets of China, India, Australia, and Southeast Asia, Perlman pointed out. 

The mega combination was also driven by a sense of urgency to ensure ESR remains ahead of the game and secures a footprint for e-commerce-related real estate assets, which need to be strategically located near consumers.  

“The key with ‘new economy’ real estate in Asia is unless you build it, it’s very tough to get your hands on it. Whether it’s ESR, GLP, LOGOS or Goodman, everything that they build through their development funds, they typically sell into their long-term managed vehicles,” Perlman said. 

“That’s why we think it’s especially important bringing LOGOS and ESR together now, versus five or six years from now, because of this strategic footprint that’s being built.”

For the half-year ended June 30, 2021, ESR reported a nearly 25% year-on-year jump in revenue to $178 million, while EBITDA increased by 38.6% to $373.5 million. The results were buoyed by a growing demand for modern logistics facilities, which is itself being driven by e-commerce growth across the region. Eight out of ESR’s top 10 tenants are e-commerce giants, including JD.com, Coupang and Amazon.

Profit after taxation and minority interests (PATMI) grew 60.9% to $213.9 million during the period on the back of the growth in the group’s co-investments in funds, associates, and joint ventures.

LOGOS: An important piece of the puzzle 

Hong Kong-headquartered ESR, formed by the merger of e-Shang, another Warburg Pincus portfolio company, and Redwood Group in 2016, develops, manages, and invests in logistics facilities across China, Japan, South Korea, India, Australia, Singapore and Vietnam. ESR was listed on the Hong Kong stock exchange in 2019, raising $1.6 billion. It has $36.3 billion in AUM as of June 30. 

ARA, meanwhile, is a real estate manager, with several private funds as well as real estate investment trusts (REITs) with assets in the Asia Pacific and the US.

In March 2020, ARA acquired a stake in LOGOS Group, which is one of the largest logistics warehouse developers in the Asia Pacific. With LOGOS, ARA’s gross AUM comes to some $95 billion.  

Indeed it is LOGOS, in which ARA has an 80% stake, that is understood to be the key to ESR’s interest in ARA. “LOGOS…is a leading new economy real estate platform,” noted Goldman Sachs in a report on the transaction. 

Analysts tracking ESR note that additionally, ARA brings 69 capital partner relationships, out of which 59 are new to ESR. Fourteen of these are new economy-focused funds. The transaction also secures nine of the top 20 global LPs as capital partners.

“There is huge strategic value with LOGOS,” Perlman said, noting that with the acquisition, ESR’s footprint expands to 10 markets, and its ‘new economy’ AUM goes up 50% to more than $50 billion. The pipeline of assets for the combined entity of nearly 8 million square metres will also be several times that of rivals, he said. 

“Anytime you put number one and number two together in a space that’s growing as fast as this, it’s going to be very transformational,” Perlman added. 

Source: ESR investor presentation

What lies ahead

The initial plan is to integrate ARA’s REITs and private funds under ESR, while LOGOS continues to operate “in parallel,” Perlman explained. 

“For LOGOS, because we still think this is the “land grab” phase of the logistics and data centre space, the goal is to largely have that run in parallel with ESR for the next several years before we then fully integrate the business.”

Perlman expects that the core markets of China, South Korea, Japan and Australia will represent over three-quarters of ESR’s AUM. At the same time, the combined entity is set to be the biggest logistics player in Southeast Asia and India in terms of both AUM and pipeline. “Both are emerging and very important markets over the long term,” Perlman said. 

Analysts have observed that compared to current ESR operations, the combined entity would have a more asset-light model, though the ‘new’ economy’ mix of assets would be lower; ESR currently gets 100% of its earnings from ‘new economy’ exposure, Goldman Sachs notes. The combined group is still expected to clock relatively high growth and would have exposure to non-Asian markets.

At the same time, as analysts at HSBC note in a report, the scale of projects in Australia, China, Japan, and South Korea is growing. For one, Australia, which typically has sprawling single-storey developments, is seeing vertical developments. “Tenant demand is significant, and a merged entity should be able to better cater to this demand,” analysts Joy Wang and Utkarsh Rastogi wrote. “The merged entity would have uncalled capital of $7.7 billion for future growth.”

Further, ARA manages several REITs, which would provide stable management fees for the group. “The higher fund management business mix and more stable funds within should increase earnings resiliency at ESR,” Goldman Sachs’s Gurpreet Singh Sahi and Zou Hanyu noted.

The transaction is still subject to regulatory and ESR shareholder approval and the company is in the process of preparing a circular for its shareholders.

Perlman is also the managing director, head of Southeast Asia and Asia-Pacific Real Estate at Warburg Pincus, a former ESR shareholder. After the ESR-ARA transaction is completed, Warburg Pincus returns as a shareholder in the enlarged entity with a 12% stake. The other largest shareholders would be ESR’s founders, with a 17% interest; and Canadian pension fund OMERS, with a 10% stake.

Expand Table

     
Timeline of key transactions at ESR, ARA
August 2021ESR Cayman announces proposal to acquire ARA Asset Management for $5.2 billion
July 2021DSA reports that Warburg Pincus sold all shares in ESR, although Perlman remains chairman
May 2021ARA increased stake in Japanese real estate fund manager Kenedix to 30%, post buy-out with Sumitomo Mitsui Finance & Leasing Co
2020ARA completed acquisition of majority stake in logistics play LOGOS Group
2019ESR Cayman listed in Hong Kong IPO, raising $1.6 billion
ARA US Hospitality Trust listed on SGX
ARA acquired majority stake in Dunedin Property to invest in and manage real estate in the UK
2018ARA acquired strategic stake in Cromwell Property Group
2016e-Shang merged with Redwood Group to form ESR
Privatisation of ARA by Warburg Pincus and China’s AVIC Trust announced
2014Closed ARA Summit Development Fund I at $80 million to invest in real estate projects in Australia and Southeast Asia
2012ARA Asia Dragon Fund II closed at $441 million
ARA China Investment Partners closed at $500 million
2011Warburg Pincus co-founded e-Shang to develop warehouses in China and South Korea
2010ARA listed Cache Logistics Trust on Singapore Exchange; the trust is a joint venture between ARA (60%) and logistics company CWT (40%), the trust is later renamed ARA Logos Logistics Trust
2008ARA Asia Dragon Fund closed at $1.133 billion private real estate fund to invest in China, HK, Singapore, Malaysia
2007ARA was listed on the Mainboard of the Singapore Exchange
2005ARA listed Prosperity REIT on the Hong Kong Exchanges and Clearing, as first private sector REIT owning office and industrial property in HK
2004ARA listed Suntec REIT on the Singapore Exchange as Singapore’s first REIT owning prime retail and office property
2003ARA listed Fortune REIT on the Singapore Exchange as Asia’s first cross-border REIT with mandate to invest in retail malls and property in Hong Kong
2002ARA was established by John Lim and Cheung Kong (Holdings) Limited. Lim is CEO and Justin Chiu is Founder Chairman

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.