ESR-REIT - CIMB Research 2017-10-17: 3Q17 DPU Decline Narrows

ESR-REIT - CIMB Research 2017-10-17: 3Q17: DPU Decline Narrows ESR-REIT J91U.SI

ESR-REIT - 3Q17: DPU Decline Narrows

  • ESR REIT's 9M17 DPU of 2.924 Scts (-8% yoy) was within consensus and our expectations, at 74% of our full-year forecast. 3Q17 DPU of 0.964 Scts (-2.3% yoy) was at 24%.
  • Quarterly DPU decline narrowed from double digits in the past quarters to low-single digit in 3Q, reflecting the REIT is reaching an inflection point. Otherwise, 3Q trends were in line with previous quarters, with the exception of a larger decrease in occupancy offset by an improvement in gearing.
  • Management continues to look for acquisitions to take ESR REIT to next growth stage.
  • We believe what it does next would have a significant bearing on the unit price. Until then, we expect ESR REIT’s unit price to trade sideways. Hold maintained.

3Q17: DPU decline narrows 

  • ESR-REIT's 3Q17 DPU of 0.964 Scts (-2.3% yoy) was within expectations. 
  • The gist of the quarter was the narrowing of quarterly DPU decline, from double digits in the past quarters to low single digit in 3Q, reflecting the REIT is reaching an inflection point. 
  • Income from new leases helped to partially offset multi-tenanted building (MTB) conversion effects and the absence of property divestment income, resulting in a -1.6% yoy decline in NPI to S$19.6m.

Portfolio occupancy dropped to 91.1% 

  • ESR-REIT's 3Q17 portfolio occupancy dropped to 91.1% (2Q17: 95.4%) due to the inclusion of 120 Pioneer Road (warehouse) following the completion of its asset enhancement initiative (AEI) as well as the impact of the non-renewal of the CWT lease at 3 Pioneer sector 3.
  • We understand the current occupancy of 120 Pioneer Road is in its 30s while that of 3 Pioneer 3 is in mid-70s.

9M17 rental reversion: -18.8% 

  • In 9M17, ESR REIT renewed and leased more than 1.08m sq ft of space (1H17: c.693k sq ft) with tenant retention of c.60%. It registered -18.8% rental reversion for 9M17 (1H17: -18.3%). 11 Woodlands Walk, a master lease, was successfully renewed during the quarter and contributed to the negative rental reversion. 
  • ESR REIT is at the tail-end of the MTB conversion, with only 12% of the portfolio representing single tenanted buildings (STB) expiring up to FY19F.

Aggregate leverage improved to 36.7% 

  • Aggregate leverage as at end-3Q17 improved to 36.7% (end-2Q17: 37.9%) as divestment proceeds from 55 Ubi Avenue 3 were used to repay debt. 
  • Divestments of 23 Woodlands Terrace and 87 Defu Lane 10 are expected to be completed in 4Q17F, and could help to further improve the REIT’s balance sheet.

Tweaking DPU estimates 

  • We expect a slightly weaker 4Q17F due to the divestments in 4Q17F, lower occupancy at 3 Pioneer Sector 3 as well as the income void at 21B Senoko Loop (following the pre-termination of Tellus Marine in 2Q17). We tweak our FY18F-19F DPU by -0.1% as the absence of income from divestments should be offset by lower borrowing costs.
  • Nevertheless, we reiterate our view that ESR-REIT’s financial performance is bottoming out, as evident by 3Q17 results.

Hold maintained with slightly higher target price 

  • We maintain Hold on ESR-REIT with a slightly higher DDM-based target price (S$0.57) as we roll forward our valuations. 
  • Management continues to scour for acquisition opportunities to take ESR-REIT to the next growth stage. We believe what it does next would have a significant bearing on unit price (from both upside and downside perspective). Until then, we believe that the unit price would trade sideways.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2017-10-17
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 0.57 Up 0.560