GLP Goes on Acquisition Spree in China and Japan with Distinct Strategies
By Goola WardenSince its IPO last year, Global Logistic Properties (GLP) has been on an acquisition drive in China and Japan, and that appears to have accelerated this year. However, the company is adopting different strategies in each country. In China where the growth is, GLP is taking up partly owned stakes in entities to create a network of strategic assets while it is investing in Japan because the yields are attractive versus financing costs.
On Aug 11, the company acquired a 90% stake in the holding company of Vailog Jiading Distribution Center and Vailog Songjiang Logistics Park for US$60.2 million ($71.4 million). Vailog is the No 9 logistics-park owner/operator in China by net lettable area (NLA). Earlier on Aug 9, GLP had acquired a 49% stake in Shanghai Yupei Group for US$53.6 million, with the option of acquiring a further 1% from some Chinese shareholders to give it control of the company. In January, GLP acquired 53% of Airport City Development Ltd (ACL), the sole provider of logistics for Beijing Capital Airport, for RMB1.4 billion ($264.5 million). And in December last year, the company announced the acquisition of a 19.9% stake in the parent of BLOGIS, the second-largest modern logistics facility provider in China, for HK$539 million ($83.16 million). GLP is now China’s top logistics-property owner, followed by BLOGIS, Mapletree Investments, and ProLogis.
Jeff Schwartz, vice-chairman, shareholder and founder of GLP, says the acquisitions in China are part of GLP’s two-pronged strategy of building new facilities as well as acquiring them from third parties. “The acquisition of Yupei, the No 5 provider, is part of the growth platform. There is so much growth in China that we need multiple platforms.”
GLP operates in 23 cities in China and while Schwartz declines to talk about specific competitors, all he will say is that GLP has the advantage. “The real barrier to competition in China for companies like Nike, and our customers Adidas and Alibaba, is the logistics network. There is only one company with that and no one has our coverage,” Schwartz claims.As he sees it, size really does matter in the logistics business. “It’s no different when you choose a bank. It’s usually the one with the largest ATM network,” he explains.
Japanese advantageMeanwhile, in developed Japan where growth is slower, Schwartz says it still makes sense to invest as the yields are just so good compared with the financing costs.
“Our portfolio yields 5.6% in Japan,” he says. Meanwhile, bank lending is below 1.6%, which makes cash flows very attractive. “Cash yields in Japan are the highest of any in the developed world,” he adds. GLP’s Japanese portfolio is almost fully occupied, compared with 89% occupancy in China. “There is just no vacancy in Japan,”
Schwartz says.Schwartz reveals GLP is bidding for the 20 properties in the logistics assets belonging to LaSalle Investment Management logistics for $2.1 billion. LaSalle is the No 3 owner of logistics assets in Japan. GLP is No 1 with a total NLA of 2.8 million sq m and the No 2 player is ProLogis with a total NLA of 2.1 million sq m.
“Should we acquire the portfolio in Japan, we would close on it in a fund situation with a joint-venture structure,” he says, adding that GLP would only have a stake in the fund along with other institutional investors. “It’s an attractive portfolio.”
On Aug 31, GLP and the Canada Pension Plan Investment Board (CPPIB) announced the formation of a joint-venture Japan Development Fun to develop and hold institutional quality, modern logistics facilities. Each partner will invest US$250 million of equity over a projected three-year investment horizon. The targeted leverage is 50% loan-to-value after stabilization and the fund is open-ended with long-term investment horizon. The Japan Development Fund will focus on building multi-tenant and build-to-suit facilities mainly in the greater Tokyo and Osaka area. An attractive site in Tokyo has been identified as the first potential development for the fund.
GLP was created form the assets which the property investment unit of GIC, Singapore’s sovereign wealth fund, bought from ProLogis. In 2009, GLP signed a Master Implementation Agreement, outline in its 2010 prospectus, which included a non-compete agreement where ProLogis would desist from developing logistics assets in China, and GLP in Japan, till February 2011. In fact, Schwartz was the former chairman and CEO of ProLogis.Still stable, solid
On Aug 31, Fitch Ratings said China faces a “better than even chance” of another downgrade to its local currency debt rating owing to rising defaults and high inflation following a credit binge. Fitch also warned that Chinese policymakers would also face a dilemma over how to respond to another global downturn, with rising consumer prices and bad debts preventing a repeat of the massive stimulus launched nearly three years ago.
Despite these headwinds, Schwartz is confident that the logistics space will remain resilient and that GLP will keep its No 1 position in China.
“We’ve got a competitive position in the modern-logistics space that is better than our competitors. We have personal relationships with customers. We have actually been able to hold costs constant although steel and other building-material costs have gone up and that’s an advantage,” says Schwartz“While the Chinese economy has slowed its growth to the 7% to 8% range, we continue to see earnings growth of more than 15%. Around 95% of our business is driven by domestic consumption as opposed to pure GDP growth and the move towards more efficient space has led to a growth in our customers who are e-commerce providers such as Alibaba and Amazon demanding more space,”
Schwartz says.“Typically, it takes six months to build a facility, much faster than any other asset type, and that’s a massive risk-mitigating factor,” Schwartz says. “Significantly, we can shut down our pipeline very quickly. For example in June 2008, we shut down development in China when we saw turbulence in the financial markets, and by March 2009, we could ramp up equally fast.”Leasing takes another six month. Hence, logistic properties have a short “cash conversion” cycle of just 18 months from investment to achieving stabilized cash flows. This is quite unlike an office building, Schwartz says, which required three years to develop and “you have very little visibility”, he adds.
Based on China’s 12th five-year economic plan, domestic consumption will be a key driver of China’s growth. China retail sales have grown by a compounded annual growth rate of 18.1% between 2005 and 2010, based on figures from the National Bureau of Statistics of China. Additionally, balancing growth between the coastal regions and inland provinces will be another driver of logistics activities, Schwartz points out. At the same time, the 12th five-year plan has identified the logistics industry as one to be supported by the government via tax cuts, supportive land policies and reduction in toll fees. In addition, both foreign and domestic companies are increasingly focusing on lower costs by outsourcing logistics services to third-party providers.
Indeed, GLP is gearing up for that growth. For FY2012 ending March 31, the company plans to develop a further 1.66 million sq ft of logistics space, with the majority to start construction in 2HFY2012. Meanwhile, the acquisition of the two Vailog parks located in western Shanghai adds NLA of 150,228 sq m, including 37,478 sq m of space under construction. Some of the anchor tenants are ABB, DB Schenker, Toll and Li Ning.
The acquisition of Yupei’s four completed logistics parks will add NLA of 252,943 sq m, all located within the Yangtze River Delta region and Shanghai. At ACL, Schwartz says it is developing a further 128,000 sq m this year. All together in the pipeline are 26 properties with 513,000 sq m of NLA to be developed.
For 1Q2012, GLP posted a 6.7% y-o-y increase in earnings of US$95.6 million, excluding revaluations. Net profit excluding revaluations was US$73.3 million during the quarter versus US$71.7 million a year ago. Revenues rose 15% y-o-y for 1QFY2012 to US$129 million, with turnover from China registering a 69% rise to RMB209 million. In Japan, revenue growth was attributed to the strengthening of the yen against the US dollar. GLP’s top line growth was due primarily to the completion and stabilization of development projects in China and acquisition of ACL.
In a results update, Citi Research says reported profit after tax and minority interests accounts for 23% of its full-year estimate of US$320 million. “The slow increase in net profit was primarily due to a one-off loss incurred for the Japan earthquake booking in the quarter. If we strip out this exceptional loss, core net profit should be around US$80 million, in line with our expectations,” the report states. “GLP’s 1QFY2012 results demonstrate the company’s ability to deliver a continuous growth with a relatively low-risk profile, which is driven by its unique and policy-friendly business model as well as its China-Japan dual exposure,” Citi says. It has a price target of $2.62, set at par to its estimated revised net asset value (NAV).GLP is currently trading at $1.74, a 12% discount to its book NAV of $1.97 and below its IPO price of $1.96.
