ESR-REIT - CIMB Research 2017-07-13: Existing Portfolio Grinding Along

ESR-REIT J91U.SI

ESR-REIT - Existing Portfolio Grinding Along

ESR-REIT's 1H17 DPU of 1.96 Scts (-10.5% yoy) was below consensus and our expectations, at 45% of our FY17 forecast. 2Q17 DPU of 0.956 Scts (-11.3% yoy) was at 22%.
Portfolio WALE decreased to 3.4 years (1Q17: 3.7 years). Occupancy was flat qoq at 95.4%. Rental reversion for 1H17 was -18.3% (1Q17: -18.9%).
We cut our FY17F-18F DPU by 8.4-8.5% on 1H17 results and lower NPI margins. We also introduce our FY19F estimates. There could be slight upside to our FY17 forecast should EREIT be reimbursed by insurance for the fire at 30 Toh Guan Road that occurred in 2Q17.

2Q17 DPU of 0.956 Scts (-11.3% yoy, -4.8% qoq) was below our expectations, at 22% of our full-year forecast. The yoy decrease was due to effects of MTB (multi-tenanted building) conversions, two property divestments since 2H16 and a one-off accrual of cost related to the fire at 30 Toh Guan Road.
We understand that the one-off accounted for around half of the yoy DPU decline.
Also, the manager has switched on the distribution reinvestment plan (DRP); DRP units are priced at a 2% discount to market price.

Portfolio weighted average lease expiry (WALE) decreased to 3.4 years (1Q17: 3.7 years), partially due to pre-termination of the Tellus Marine master-lease at 21B Senoko Loop.
The manager has proactively found a replacement tenant from the construction sector to take over the entire site for a three-year lease term at the beginning of 2018. Meanwhile, Tellus Marine’s security deposit will cover EREIT until Oct, and there would be an income void in Nov-Dec 17.

As for other operating metrics, portfolio occupancy was maintained at 95.4%, flat qoq. 692.5k sq ft of space was renewed in 1H17, with a tenant retention rate of 66.6%.
Rental reversion for 1H17 was -18.3% (1Q17:-18.9%). About 50% of the negative reversion was due to an MTB conversion in 1Q17. 30% was attributed to the replacement lease at 21B Senoko Loop and 20% due to reversions at existing MTBs.

Leases due for renewal in FY17 were brought down to 14.8% of gross rental income (GRI), from 21.5% at the start of 2017. EREIT is at the tail-end of the MTB conversions.
In 2012, 55% of the portfolio represented STB (single-tenanted buildings) expiring in the next three years. Today, only 13% of the portfolio represents STB expiring in the next three years.

Gearing as at end-Jun 17 stood at 37.9%. There is no refinancing till 2H18 and 89.5% of EREIT's interest rate is fixed for the next 2.4 years.
All-in borrowing costs decreased 1bp qoq to 3.67%. Assuming proceeds of the three planned divestments would be used to pare down debt, we calculate aggregate leverage to be c.35% at end-FY17.

Assuming status quo, we maintain our Hold call on EREIT with slightly higher DDM-based Target Price (S$0.56) as we lower our Singapore risk-free rate. With MTB conversions coming to an end, we view EREIT’s organic performance as bottoming, though a recovery is long drawn.
That said, with support from sponsor-developer ESR, this could be exciting times for EREIT as it looks at M&As, asset acquisitions and re-development opportunities to fuel growth.
Inversely, downside risk would be the failure to materialise corporate actions.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2017-07-13

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 0.56 Up 0.55