ESR-REIT - CIMB Research 2018-04-23: 1Q18 Acquisition Boost; Scope For Capital Recycling

ESR-REIT - CIMB Research 2018-04-23: 1Q18 Acquisition Boost; Scope For Capital Recycling ESR-REIT J91U.SI

ESR-REIT - 1q18: Acquisition Boost; Scope For Capital Recycling

  • ESR-REIT's 1Q18 DPU of 0.847 Scts (-15.6% y-o-y) was below our and consensus expectations at 20% of our full-year forecast. The negative variance came from a lower-than-expected NPI margin.
  • Assuming the new units were only entitled to distributable income from 28 Mar to 31 Mar, adjusted 1Q18 DPU was stable (+0.4% y-o-y).
  • While 2H18 could remain soft due to MTB conversion of 16 Tai Seng, the acquisitions in 2017 and effective capital recycling could help to mitigate some of the weakness.
  • Valuations remain constructive, with the REIT trading at 7% FY18F yield and 0.9x current P/BV. A successful merger with VIT could catalyse the stock. Maintain ADD.


1Q18: Boosted by acquisitions

  • ESR-REIT's 1Q18 distributable income rose 2.4% y-o-y as full-quarter contributions from 7000 Ang Mo Kio (7000 AMK) and 8 Tuas South Lane (the acquisitions) more than offset MTB conversions at 21B Senoko Loop (1Q18) and 3 Pioneer Sector 3 (3Q17), four divestments since 1Q17 as well as lower underlying occupancies. 
  • However, 1Q18 DPU fell 15.6% y-o-y due mainly to new units issued in relation to the preferential offer. If we adjusted for the timing difference, 1Q18 DPU was stable (+0.4% y-o-y).


Negative rental reversions narrowing

  • ESR-REIT renewed/signed c.400k sq ft of leases in 1Q18, with an encouraging average rental reversion of -0.2% (FY17: -15.8%, 1Q17: -18.9%). We believe that this signals that the industry is bottoming. Tenant retention rate was 70.7%. 
  • During the quarter, ESR-REIT also successfully renewed 28 Woodlands Loop’s master lease. Portfolio occupancy climbed 1.2% pts q-o-q to 94.2%. Occupancy for 7000 AMK grew 2.3% pts q-o-q to 94.2%.


2H18 to remain soft

  • Looking ahead, 18.1% of GRI (gross rental income) is up for renewal for the remainder of 2018. With 28 Woodlands Loop renewed, the proportion of STBs (single-tenanted buildings) was reduced from 7.2% to 6% as at end-1Q18. 
  • We note that the Noble master lease (16 Tai Seng), which contributes to 4.7% of GRI, will be converted to MTB (multi- tenanted building) when it expires in 2H18. Also, there could be a temporary income vacuum for 21B Senoko Loop, which contributed to 2.4% GRI in FY17.


30 Marsling Industrial to undergo AEI (asset enhancement initiative) 

  • ESR-REIT has initiated an AEI for 30 Marsling Industrial (a general industrial building) so as to facilitate the addition of two quality tenants (Aptiv, a global tech company, and FormFactor, a Nasdaq-listed company). 
  • ESR-REIT has secured long leases with these tenants; the addition will boost the occupancy of the property to 100% for a 5-year period (end-17: 82%). The AEI is expected to cost c.S$10m-12m and is scheduled for completion in 1Q19. Post AEI, the asset is expected to generate c.6% NPI yield.


Gearing pared down to 30%; scope for capital redeployment

  • With the completion of the preferential offering in 28 Mar (262.8m new units were issued, raising gross proceeds of S$141.9m), gearing was pared down from 39.6% to 30%. Assuming a 40% cap, we estimate ESR-REIT has debt headroom of c.S$270m for further capital redeployment. 
  • We note that cost of debt rose 20bp q-o-q to 3.75% as 4Q17 had a higher proportion of revolving credit facility. ESR-REIT’s stabilised cost of debt is c.3.7%.


Maintain ADD

  • We cut our FY18F-20F DPU by 8-9.7% as we were over-optimistic on the REIT’s NPI margin. 
  • Our DDM-based Target Price accordingly drops to S$0.60. Nonetheless, the two acquisitions made in 2017 and effective capital recycling could help to mitigate some of the softness. 
  • Valuations remain constructive with ESR-REIT trading at 7% FY18F yield and 0.9x current P/BV. A successful merger with VIT (not rated) could also re-rate the stock. 
  • Downside risks are weaker-than-expected organic growth and higher rate hikes.





YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2018-04-23
SGX Stock Analyst Report ADD Maintain ADD 0.6 Down 0.640



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