ESR-REIT - CIMB Research 2018-01-17: 4Q17 Fruits To Be Borne From A Year Of Many “firsts”

ESR-REIT - CIMB Research 2018-01-17: 4Q17 Fruits To Be Borne From A Year Of Many “firsts” ESR-REIT J91U.SI

ESR-REIT - 4Q17 Fruits To Be Borne From A Year Of Many “firsts”

  • ESR-REIT's FY17 DPU of 3.853 (-7.7% y-o-y) was in line with consensus and our expectations, at 98% of our full-year forecast. 4Q17 DPU of 0.929 Scts (-6.7% y-o-y) was at 24%.
  • 4Q17 DPU decreased 6.7% y-o-y, wider than the y-o-y decline in 3Q17 due mainly to negative carry from perps issued in early-Nov 2017.
  • The decline in DPU was expected; we believe its organic weakness is dissipating and ESR-REIT is at the tail-end of MTB conversions.
  • Gearing as at 4Q17 stood at 39.6%. With successful equity fund raising, the manager expects gearing to decrease to 32.4%, with debt heard room of c.S$388m.
  • Reiterate ADD with a higher target price.

4Q17 distribution impacted by negative carry from perps 

  • ESR-REIT's 4Q17 DPU of 0.929 Scts decreased 6.7% y-o-y, wider than the y-o-y decline in 3Q17 due mainly to the negative carry from the S$150m 4.6% perpetual securities (perps) issued in early-Nov 2017. 
  • Meanwhile, the newly-acquired properties (8 Tuas South Lane and 7000 Ang Mo Kio) only contributed from mid-Dec 2017. The quarter was also impacted by divestment of two properties (87 Defu Lane 10 and 23 Woodlands Terrace), non-renewal of the CWT lease at 3 Pioneer Sector 3 and vacancy at 21B Senoko Loop.

2017: A year of many firsts 

  • Nonetheless, we remain upbeat on ESR-REIT as we believe that its organic weakness is dissipating and the REIT is at the tail-end of multi-tenanted building (MTB) conversions. 
  • ESR-REIT’s 4Q17 financial statements included some new line items which reflected the new management team’s various initiatives. Some examples are the inclusion of non-controlling interest to reflect third-party’s 20% interest in 7000 AMK and the inaugural inclusion of perps. 
  • Other key developments included the name change to “ESR-REIT”.

Portfolio metrics and lease expiry profile 

  • Portfolio occupancy improved 1.9% pts q-o-q to 93% in 4Q17. Weighted average lease expiry (WALE) extended to 4.3 years from 3.4 years in 3Q17. 
  • ESR-REIT renewed and leased 0.11m sq ft of leases with single-digit positive rental reversion in 4Q17 (renewed 1.19m sq ft of leases in FY17 with -15.8% rental reversion). 
  • 22.4% of portfolio rental income is due for renewal in 2018. 15.2% of portfolio rental income stems from MTBs; we expect single-digit negative reversion. 7.2% stems from five STBs. We note that one STB (16 Tai Seng) accounts for 4.6% of portfolio rental income.

Fair valuation loss of S$41.8m 

  • ESR-REIT suffered S$41.8m fair value loss on investment properties. The bulk of it was due to three properties – 3 Pioneer Sector 3, 21B Senoko Loop (valuers factored in lower rentals) and 16 Tai Seng which is currently leased to Nobel Design (valuers previously assumed the master lease would be extended but now assume that it could be converted into MTB). 
  • We note that 16 Tai Seng has potential AEI/redevelopment opportunity as its “white” space is not fully utilised. Otherwise, cap rates remained stable.

Reiterate ADD with slightly higher DDM-based Target Price 

  • We decrease our FY18F-19F DPU by 0.3-4.5% on lower revenue assumptions. However, we raise our DDM-Target Price to S$0.64 on lower COE of 8.1% (previously 8.5%). Reiterate ADD. 
  • We like the stock on
    1. relative valuations,
    2. organic weakness bottoming and
    3. clearer growth path ahead with the two recent acquisitions (resulted in c.30% increase in AUM). 
  • For 2018, we believe ESR-REIT would look at similar deals as 2017 and re-development opportunities within its portfolio. 
  • Downside risk could come from still-challenging industrials market.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2018-01-17
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.64 Up 0.630