ESR REIT (EREIT SP) - DBS Research 2017-10-19: Waiting For Sponsor To Shed Light On Growth

ESR REIT (EREIT SP) - DBS Vickers 2017-10-19: Waiting For Sponsor To Shed Light On Growth ESR-REIT J91U.SI

ESR REIT (EREIT SP) - Waiting For Sponsor To Shed Light On Growth

  • ESR REIT's DPU was 0.964 Scts in 3Q17, down 2.2% y-o-y.
  • Impact of conversion from single- to multi-tenancy is expected to moderate.
  • Divestment proceeds were used to reduce leverage.
  • Maintain HOLD pending more growth pointers.

What’s New 

Single- to multi-tenancy conversion continued to pull down performance. 

  • 3Q17 gross revenue was S$27.1m and net property income was S$19.6m, down 1.9% and 1.6% y-o-y respectively. This was mainly due to the loss of efficiency from several lease conversions from single- to multi-tenancy as well as divestment of properties. 
  • Single- vs multi-tenanted properties by rental income is 43.3% vs 56.7% now. 3Q17 DPU was 0.964 Scts, down 2.3% y-o-y. 9M17 DPU represents 74.4% of our full-year FY17 forecast, in line.

Glaringly low rental reversion is expected to slow down.

  • Over 9M17, lease expiry in the year was reduced from 21.5% to 4.9%. Rental reversion rate was a glaring -18.8% and tenant retention rate was low around 60%, mainly due to the conversion of two assets from single- to multitenancy.
  • The downward trend, however, is expected to slow down. Only 12% of the portfolio represents single-tenant leases expiring up to end-FY19.

Divestment reduced leverage. 

  • Most of the sales consideration of S$22.1m from the divestment of 55 Ubi Avenue 3 in 3Q17 was deployed to pare down debt, reducing gearing ratio from 37.5% to 36.7%. The other two proposed divestments, namely 23 Woodlands Terrace (S$17.7m) and 87 Defu Lane 10 (S$17.5m), are in the process of closure on schedule with their target completion date in 4Q17. Assuming all divestment proceeds will be used to pare down debt, ESR-REIT’s gearing ratio could fall further to 35.0-35.5%. 
  • We had already removed future contributions from the two divestments from last quarter.

DRP switched on. 

  • Since the switch-on of the distribution reinvestment plan (DRP) from 1 April 2017, DRP continued to apply this quarter, with a 2% discount to the market price. The pricing of the DRP units will be announced on 27 October 2017. 
  • We believe the DRP will have an insignificant impact on either the stock price and distribution. However, this may be a signal of the REIT’s ability to accumulate cash on its balance sheet which might be used opportunistically.


Maintain HOLD. 

  • We upgraded the stock from HOLD to BUY in January 2017 and downgraded it back to HOLD last quarter. Over this period, ESR REIT stock price returned more than 10%. 
  • While we are still optimistic about the REIT’s prospects renewed by its Sponsor, we maintain our HOLD call for now as our target price (S$0.60) has been reached and the forward yield is expected to be close to 7%. We await its Sponsor to shed light on the roadmap of growth.

Recap of new sponsor ESR. 

  • ESR is the second-largest developer in North Asia focusing on warehouses, with 6.5m sqm of projects or more than US$5bn of assets under management. Click here for more details about the Sponsor.

Derek TAN DBS Vickers | Singapore Research Team DBS Vickers | Mervin SONG CFA DBS Vickers | http://www.dbsvickers.com/ 2017-10-19
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.600 Same 0.600