ESR KendallSquare REIT leads Korean logistics sector

ESR KendallSquare REIT, overseeing 18 advanced logistics centers across South Korea, adeptly handled challenges in the real estate sector this year. The challenges include finalizing pre-purchase agreements, rising vacancy rates and navigating the higher-interest-rate environment.

Earlier this month, ESR KS REIT completed the refinancing of 362 billion won ($277.8 million) in debt at a 4.7% interest rate. The rate aligns with prime office buildings like Park One in Yeouido business district in Seoul, showcasing the REIT's ability to secure favorable terms.

Based on the company’s robust fundamentals, the market value of its assets surged by around 26% compared to the acquisition cost or its 2020 initial public offering valuation, lowering the loan-to-value ratio to about 52% and reducing refinancing interest rates.

“This competitive interest rate choice maximizes shareholder value, differing from scenarios involving dilution through new share issuance or convertible bonds, and notably surpasses prevailing corporate bond interest rates in the current market,” said Lee Dongjin, director, head of investors relations & capital markets at the REIT.

“Strategically equipped with in-house teams managing all facets of logistics asset operations – from location selection and design to leasing and asset liquidation – we provide highly competitive spaces,” Lee added.

100% OCCUPANCY RATE

The company also logged a renewal of about 20% of the leased logistics space set to expire by the end of 2023.

New rental rates rose around 18% compared to prior terms. The REIT has maintained a 100% occupancy rate since going public in 2020, housing major tenants like e-commerce giant Coupang Inc., apparel firm Fila Korea Ltd. and logistics major CJ Logistics Corp.

It compares with the estimated vacancy rate of 20%, which Seoul metropolitan area-located logistics centers including cold storage posted this year, according to real estate investment firm Colliers’ report issued earlier this month.

The competition to secure logistics centers in Korea will continue in line with the growth of third-party logistics players like CJ, Hyundai Glovis Co. and LX Pantos Co., Colliers said.

BEST-IN-CLASS LOCATIONS

The REIT acquired two assets in Icheon in Gyeonggi Province, which benefit from outstanding logistics transportation infrastructure and a central logistics hub near Seoul.

it purchased contemporary logistics facility Icheon LP 6 in November. Established in January, the property spans 62,195 square meters of floor area and was obtained at 114 billion won with a cap rate exceeding 5%. 

To ensure a stable income stream, the company implemented a lease structure of three plus two years, allowing for rental rate adjustments after the first three years to align with potential market rate upside risks. The tenant secured for the acquisition is a leading domestic logistics and distribution specialist, the REIT said.

Additionally, ESR KS REIT bought Icheon LP 7 at 127.1 billion won in May. Established in April 2023, the property posts a 100% occupancy rate and a five-year lease structure with a 5.1% cap rate. 

“The acquisitions of two assets have bolstered the company's image as a steadfast and dependable business partner. This commitment not only distinguishes ESR KS REIT from market trends but also enhances its brand value and credibility,” said Lee.

“We have fulfilled pre-purchase agreements, showcasing our trustworthiness in the industry. In Korea, there have been cases where unmet prerequisites led to the non-progression of pre-purchase agreements,” he explained.

In June, the REIT achieved a substantial profit by strategically divesting Icheon LP 1. Acquired at 66 billion won and sold at 81 billion won, the REIT realized about a 23% gain with an internal rate of return (IRR) of 19% over its two-and-a-half-year investment period.

ESG, SHAREHOLDERS’ VALUE

The company plans to strengthen shareholders’ value and its environmental, social and governance performance.

The REIT maintained its “A- stable” rating from Moody's in October. It anticipates an annualized dividend payout of 272 won per share, with intentions to increase it to 274 won in the fiscal year 2024. 

As the first Korean logistics-focused REIT, it published its inaugural sustainability report this year.

With a consistent five-star rating from the global ESG assessment organization GRESB for two consecutive years, the company has established itself as a leader in sustainable management within the Korean REIT sector.

ACCELERATING A SUSTAINABLE FUTURE 

ESR KS REIT has initiated its inaugural solar project. This venture involves leasing the rooftop space for solar power generation at its seven logistics assets.

With an estimated total capacity of 13 megawatt hours (MWh), these solar panels are anticipated to be fully operational by mid-2024.

Once operational, they are expected to generate around 15,000 MWh of solar energy annually, equivalent to powering over 4,000 average South Korean households each year.

Write to Jihyun Kim at snowy@hankyung.com

Jennifer Nicholson-Breen edited this article.