Saturday, January 4, 2020

ESR Game Plan: AIMS Apac or Sabana REIT or both?

Dear SFFians,

As I have promised my fans and thanks for all your unwavering support to read my blog, I shall pen down my thoughts based on my decade worth of experience dealing with PE funds like ESR and Warburg Pincus, and certainly my last trophy win on banging big on Viva Industrial Trust (which was eventually swallowed by Cambridge REIT and then rebranded as ESR-Reit today). I hope to strike another gold pot this round with ESR's similar move.

For those who want to understand more on ESR, you can refer to their website to read up. In short, ESR is formed through a series of M&A of different founders in different countries to amalgamate to a super logistic fund manager in Asia. Knowing this little history will allow you to understand the co-founders (1 PRC, 2 Angmos) who came from different background, but all their interests are aligned, i.e. to maximize shareholders' returns to them. 

Their game plan shall be to grow their property AUM and earn tons of fees from pools of AUM in Asia Pacific region. In essence, do lots of M&A to extract fees from property management, acquisition & disposals. They have done it for Cambridge and Viva, which are 2nd-tier industrial REITs here. What's left for them in SG are Sabana and AIMS Apac. How about Soilbuild? Maybe later as Soilbuild Group may not be willing to let go of their controlling hands.

Sabana REIT
ESR initially accumulated a small stake in this troubled REIT and wished to take advantage of its poor share price to do their 1st round of M&A in Singapore. However, they faced a major roadblock of not gaining favor from Sabana's shareholders and put this plan on hold while continue to quietly buy more.

However, on 22 May 2019, ESR managed to convince Vibrant Group and successfully acquire approximately 93.8% equity interest in Sabana's manager and approximately 21.4% of the total issued units in Sabana REIT. Vibrant Group should have let this go much earlier and admit their incompetence. ESR’s further acquisition of Sabana REIT units has been done to enhance its income diversification.

During that one year of slow accumulation between the trading price range of $0.38-$0.43, one can roughly estimate ESR's average cost should lie around $0.40-$0.42. Current market price stands at $0.465, which is merely 3% higher, with a trading yield of 6.8% and P/B of 0.82x.

Quartz Capital has called for a merger of these 2 REITs, but why ESR has yet to take action since they have already controlled the manager and being the largest shareholder in the REIT itself?

The probable answer to this would be Sabana has to stay Shari'ah compliant, merging with ESR Reit will lose this status unless the entire property portfolio of ESR is also Shari'ah compliant. Being Shari'ah compliant means complying with Shari'ah investment principles and procedures which are consistent with principles of Islamic law. It also requires general considerations of ethical investing in terms of social responsibility in asset selection and structuring. Business activities relating to conventional financial and insurance services, gaming, non-halal production, tobacco-related products, non-permitted entertainment activities and stock-broking in non-compliant securities are considered to be non-permissible. 

Given this strict compliance, I doubt very much the hypothesis of merging ESR and Sabana will pan out smoothly. I don't see this happening any time soon. If you wish to buy for takeover, it's a low probability game. Buying for 6.8% yield below NAV may just be your best bet to enjoy a not-too-shabby return.

On 4th Nov 2019, ESR acquired 26,827,400 units in AIMS APAC Reit at S$1.39 per unit. The married deal increased ESR Cayman Ltd's deemed interest in AA Reit from 5.24% to 9.09%. From SGX website, it stated ESR Cayman holding 10.021%, which ranks them as the 2nd largest shareholder behind Dragon Pacific Assets. I am curious to find out who is this big shareholder and the best I can CSI is Megaworld Corporation founded by Andrew Tan in Philippines. Given that their focus is in Philippines, this investment would likely be an overseas diversification for income play. In other words, they are likely to sell their shares to ESR if the price is right.

ESR's direct interest in Aims Apac Reit is 1.285% with deemed interests of 7.803% from units held by e-Shang Infinity Cayman Ltd and ESR HK Management Ltd.

This is the same trick they deploy when they acquire Cambridge Reit and then Viva Industrial Reit. ESR just have to attain a substantial shareholder status in the Reit itself and then convince other key shareholders to buy over their shares at a premium.

If ESR fails to convince Andrew Tan, they can easily convince George Wang and Chan Wai Kheong to sell. Warburg Pincus folks know these 2 guys, especially Chan Wai Kheong (aka Charlie) who happens to be the former 2nd largest shareholder in Cambridge Reit.

I see this as a high probability game that a M&A shall happen anytime soon to consolidate into a larger industrial REIT for ESR. My game plan is to keep buying near the $1.40 - $1.43 mark as I can see some good premiums should there be a M&A. If you can catch at $1.40, you are sitting on a 7.3% yield with a P/B of 1.06x while waiting for some premiums. With Iran stirring some volatility, I believe there is a good entry opportunity. 

How much will the premium be? I won't know...but based on Viva takeover, it is offered at P/B of 1.26x. Translating that to AIMS Apac Reit, the takeover offer price should be (1.26 x $1.32) = $1.66, representing a potential capital gain of 16% on last closing price of $1.43. Not too shabby though...

Disclaimer: Vested with some groupers (100,000 shares) in Aims. Target final hold to 200,000 shares if price dip with Iran shaking US.


  1. I have the same thoughts about APAC. :)

  2. I have just become a SFFian...going to retirement mode soon. Hope can learn from you and generate some passive income comfortably when retirement comes knocking in the near future. 1st stock to watch will be AIMS Apac. Thanks for your kind sharing and thoughts.

  3. Congrats to becoming my fan...I hope you have a fruitful retirement and continuously learn the art of investing.