JV with CIC to buy assets in Japan. GLP announced that it has entered into a 50:50 JV with China Investment Corporation (CIC) to acquire 15 Japanese assets from Lasalle Investment Management (LIM) for US$1.6bn (US$2,075psm), which is 7.5% below valuation. The assets have total GFA of 770,989sm; 90% are located in Greater Tokyo and Osaka areas. The WALE is 5.6 years and current occupancy rate is 98.3%. About 67% of the tenants are 3PLs and another 13% are e-commerce companies. Under the structure, GLP will provide asset management, property management and leasing services. The purchase is expected to conclude by end FYMar12.
Accretive to bottomline. The deal further demonstrates GLP’s ability to establish its first JV with another high quality partner in CIC, in addition to extending its leading presence in Japan as well as build its fee income source. Post acquisition, its attributable portfolio GFA is estimated to expand to 9.7msm valued at US$10.8bn (based on Sep 11 valuation), of which 70% is in Japan. Longer term, GLP’s strategy is to lower its exposure to Japan, either through establishing a J-reit or wholesale fund and recycle the capital into China. Property acquisition yield is estimated to be in excess of 5.5%. Based on 40% equity funding and 60% debt financing at 1.5% p.a. for 5 years, the purchase is expected to boost FY13F earnings by 13%, inclusive of fee income. In addition, the portfolio is currently slightly under-rented and holds potential for organic growth with some redevelopment opportunities in the medium term. The acquisition will raise the group’s see through gearing to 25% from 23% as at Sep 11.
Maintain Buy. GLP remains a major player in the Asian modern logistics space with leadership positions in China and Japan. Maintain BUY with TP revised slightly to S$2.31 based on parity to RNAV
Acquires more Japan assets
GLP has set up a 50/50 JV with China Investment Corporation (CIC) to acquire 15 properties in Japan from Lasalle Investment Management (LIM) for JPY122.6bn (US$1.6bn). This is 7.5% below valuation of JPY134.84bn (US$1.73bn) done in Aug and Oct 2011.
The 15 properties were part of a portfolio of over 20 properties that were put up for sale by LIM earlier this year. The 15 assets comprise 770,989sm of GFA, of which 90% are located in the greater Tokyo and Osaka areas. The properties are 98.3% occupied. The WALE of 5.6 years is similar to GLP’s current lease expiry profile of 5.5 years. GLP will provide asset management, property management and leasing services.
The purchase is expected to complete by end FY12 and further demonstrates GLP’s ability to establish its relationship with another high quality partner in CIC after the recent tie up with CPPIB.
The deal will increase GLP’s market share in Japan in the near term and further cement its leadership position in the country. Longer-term, GLP’s strategy is to lower its exposure to Japan, either through a J-reit or wholesale fund structure and reinvest the capital into China in the longer run. Post acquisition, GLP’s total attributable GFA is estimated to expand to 9.7msm valued at US$10.8bn, of which 70% is in Japan.
In terms of impact, the new properties will provide further tenant diversification in its tenant mix. An estimated 67% of the tenants in the new assets are 3PLs with another 13% in e-commerce.
The purchase will be funded by a combination of initial upfront equity and debt. Both partners will contribute US$272.9m of equity each. It has also secured debt financing for US$1bn at an attractive interest rate of 1.5% p.a. for 5 years. Based on an estimated property yield in excess of 5.5%, the acquisition could boost FY13F earnings by 13% to US$367m. In addition, the portfolio is currently slightly under-rented and holds potential for organic growth with some redevelopment opportunities in the longer run.
In terms of gearing, the latest deal will increase the group’s net debt to asset ratio to 25% from 23% as at Sep 2011. Based on a targeted gearing of 40%, its balance sheet still has significant capacity for development of its landbank in China as well as other inorganic growth opportunities.
Maintain BUY on GLP with TP revised slightly to S$2.31, based on parity to RNAV. GLP remains a major player in the Asian modern logistics space.
TP - S$2.72
- Value accretive acquisition with an implied 5.9% NOI yield: GLP announced it was teaming up with China Investment Corporation (CIC) to acquire 15 modern logistics facilities in Japan on a 50:50 basis. Total consideration is US$1.6bn, or 9% discount to US$1.73bn valuation. GLP is not allowed to disclose the NOI yield of the acquired assets, while we have derived the yield of the portfolio amounts to 5.9%. We consider a 5.9% NOI yield as attractive when market prices of similar assets have transacted at a c5.5% NOI yield. We believe these reasonable prices should provide an immediate NAV accretion to GLP.
- Solidifying Champion role in Japan: The total GFA of the acquisition portfolio reaches 771k sqm, with over 90% GFA located within the Greater Tokyo and Osaka areas. The portfolio is 6.9 years old on average, with current occupancy remaining high at 98.3%. Following the acquisition, GLP will enlarge its portfolio in Japan to 3.6m sqm GFA from a previous 2.8m sqm GFA. This should further widen its lead to Prologis (2.8m sqm GFA), the runner-up in Japan’s market.
- 11% earning lift in FY13; 3ppt increase in gearing: The transaction is to be completed in Feb 2012 and the major earnings impact will come in FY13. We forecast FY13 earnings will lift by US$39m or 10.9% while the impact on gearing should remain intact. Out of US$1.6bn consideration, a US$273mn equity contribution from GLP will be funded by internal resources. With over US$1.2bn cash on hand, we expect GLP net gearing by end-FY12 will be marginally increased to 38% from a previous 35%.
- First promising collaboration with CIC: Specifically for this transaction, it is strategically meaningful given it is the first partnership with the well-known CIC. This should lead to further expansion by riding on the strong financial capability of CIC. Reiterate Buy with revised TP S$2.72/sh after taking up the acquisition impact. GLP is now trading at 40% NAV disc and 0.82x PB - compelling for its balanced growth and defensiveness.
GLP – Locations of its 15 properties acquired (Above).
Company description
GLP has its origins in the China and Japan businesses of ProLogis, an NYSE-listed developer and provider of distribution facilities. Now it has the own portfolio which consists of an extensive network of 380 completed properties within 133 integrated parks with a total GFA of 11.5m sqm. GLP is a well recognized in the real estate market was ranked by Euromoney as the “Best Developer in Asia” and the “Best Global Industrial/Warehouse Developer” in 2010.
Investment strategy
We believe Global Logistics Properties' unique and policy-friendly business focus as well as its China-Japan dual exposure should help it strengthen its leading position in Asia's modern logistics facility industry. In particular, we believe our Buy rating is well justified by the several advantages GLP enjoys, including:
1) Right geographical exposure to attractive Asian markets (China, Japan);
2) Right segment of China logistics facilities property, which offers higher income yields than retail/office segments and is policy supportive; c80% of GLP's China logistics facilities cater to consumption-related demand;
3) Right business model with superior returns on higher capital velocity. The development takes only 1.3 years before stable rental revenue is generated (5-6 years for office/retail);
4) Right management team with a strong record.
Valuation
We set our target price at par with GLP's FY12E NAV of S$2.67, factoring in the company's strong execution ability, rapid development velocity, limited policy risk, and strengthened balance sheet. In particular, the existing NAV does not factor in two potential upside factors:
1) re-zoning of GLP's logistics properties; and
2) further yield compression in China. Our target price represents a P/B of 1.41x by end FY12E, undemanding in our view. A strong development pipeline, coupled with robust earnings, should continue to raise GLP's book value. Furthermore, we see more re-rating ahead on the company's stronger balance sheet.
Risks
With its unique business focus on logistics properties, an area which the government supports and is likely to be spared from any tightening measures, and a strong balance sheet after its equity-funding via an IPO, both increase the stock's defensive appeal. Downside risks that could impede the stock from achieving our target price include:
1) Adverse economic conditions;
2) An inability to acquire logistics facilities and land at commercially attractive terms or achieve performance as anticipated;
3) Increasing competition in the industry;
4) Generating a significant portion of revenue from a few customers; and
5) Heavy reliance on key personnel.
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