ESR-REIT - DBS Research 2017-12-11: Returning To The Growth Path

ESR-REIT J91U.SI

ESR-REIT - Returning To The Growth Path

After its recent announced portfolio reconstitution exercise and an infusion of new capital through perpetual securities, we believe that ESR-REIT is back on the growth path.
Planned acquisitions will drive earnings higher, complemented by a stable operational outlook as the industrial supply risk dissipates. Estimated DPU CAGR of 5% over FY18-19 will be the first reversal in a number of years.
Upgrade to BUY on the back of rising yields of 7.1%-7.5%.

Post the issuance of S$150m in perpetual securities and S$35m in divestment proceeds, the manager has quickly redeployed the funds into Tuas South Lane, which comes with a long-term master lease; this boosts income visibility by lengthening the weighted average lease expiry (WALE) from 3.4 years to 4.2 years.
ESR-REIT still has an additional S$70m in proceeds that is yet to be deployed, which we have priced into our estimates.

We believe that the market will start to price in premiums to NAVs once we have clarity on the roadmap put forth by Sponsor and the REIT, which might mean diversifying overseas.
One of the immediate benefits is the ability to be more active in acquisitions, given a potentially more significant pipeline of deal opportunities.

Maintain TP at S$0.62. Estimates are reduced to account for a delay in timing of acquisitions and more conservative estimates.

Lease conversion from single- to multi-tenant. The unfavourable rental reversion resulting from the ongoing conversion of tenancy may bring downside surprises.

ESR-REIT proposed yesterday its inaugural acquisition since the appointment of its new Sponsor at a total estimated cost of S$111.0m and GFA of 780,842 sqft, or S$142/sqft. NPI generated by the property will contribute more than 9% of the existing NPI in FY18F.
The property is near Singapore’s future global port and international maritime hub, the Tuas Megaport, which will be the world’s largest container terminal once it opens progressively from 2021.
We estimate the property to have an NPI yield of 6.5%, and the acquisition to be accretive to DPUs.

The property will be leased back to its current vendor Hyflux Membrane Manufacturing (S) Pte Ltd and Hydrochem (S) Pte Ltd (collectively ‘Hyflux’) under a 15-year master lease, effectively extending the portfolio’s weighted average lease expiry from 3.4 years to 4.2 years.

ESR-REIT issued S$150m in 4.6% perpetual securities to fund the proposed acquisition of Tuas South Lane. Together with c.S$35.2m in proceeds from the divestment of Woodlands Terrace and 87 Defu Lane 10, the REIT has excess capacity to fund more acquisitions. We estimate that the REIT has close to an additional S$74m of capital yet to be deployed.
We have further priced in a S$70m acquisition in our estimates for FY18F @ yield of 6.5%, to be completed by June 2018. This is expected to drive DPUs by 2% in FY18F and FY19F.
Our overall estimates are tweaked down slightly to account for more conservative assumptions for portfolio rent renewals, reversions.

This port is expected to be the largest container terminal globally, housing Singapore’s port-related activities with the Maritime Port Authority (MPA) and beefing up the area with more warehouses and distribution centres to make the overall port operations more efficient and seamless.
Logistics and warehouse operators as well as manufacturers located near the mega-port are expected to benefit from faster turnaround time. The transformation of the Tuas area for port development is also expected to increase the attractiveness of the property to enjoy upside potential.
The Tuas Terminal will be developed in four phases over 30 years, with Phase 1 scheduled to be completed by the early 2020s. (Source: Ministry of Foreign Affairs)

Singapore Research Team DBS Vickers | Derek TAN DBS Vickers | Mervin SONG CFA DBS Vickers | http://www.dbsvickers.com/ 2017-12-11

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