ESR-REIT - DBS Research 2018-08-14: 2Q18 DPU Rose 4.7% Y-o-y, Mainly On Acquisitions & Divestment Gains

ESR-REIT - DBS Group Research 2018-08-14: 2q18 Dpu Rose 4.7% Y-o-y, Mainly On Acquisitions And Divestment Gains ESR-REIT SGX:J91U

ESR-REIT - 2Q18 DPU Rose 4.7% Y-o-y, Mainly On Acquisitions & Divestment Gains

  • ESR-REIT’s 2Q18 DPU of 1.001 Scts broadly in line.
  • Rent outlook to improve in FY19F as supply tapers.
  • Capacity for future dividends remains supported amid AEI initiative given cash hoard of c.S$75m from past divestments.
  • Maintain BUY with Target Price of S$0.63; we have yet to factor in the M&A with Viva Industrial Trust.

What’s New

2Q18 DPU rose 4.7% y-o-y to 1.001 Scts, mainly on acquisitions and divestment gain.

  • ESR-REIT registered a strong 17.6% y-o-y growth in gross revenue to S$32.5m in 2Q18, mainly due to the acquisition of 8 Tuas South Lane and 7000 AMK in December 2017 and rent escalations from several properties, but partly offset by lower contributions from 16 Tai Seng, 21B Senoko Loop and 3 Pioneer Sector 3 post lease conversion to a multi-tenanted structure, expiries, non-renewal of leases at three properties and four property divestments of non-core assets since 2Q17.
  • Property expenses grew by a lesser quantum, resulting in an NPI boost of c.22% y-o-y to S$23.4m. EBIT interest coverage improved from 3.45x (2Q17) and 3.41x (1Q18) to 3.51x (2Q18). Given similar working capital profiles, OCF also maintained relatively stable y-o-y at S$19.7m (2Q18) vs S$20.3m (2Q17).
  • Including the partial realisation (S$1.8m of S$6.3m) of gains from sale of two plots to the Singapore Land Authority in 2012-2013, 2Q18 distributable income rose 26.4% y-o-y to S$15.8m – resulting in a higher DPU of 1.001 Scts (+4.7% y-o-y). Given the enlarged share unit base, ESR-REIT’s 1H18 DPU fell 5.7% y-o-y to 1.848 Scts but on an adjusted basis (taking into account the weighted average units in 1Q18), DPU have would have been closer to 2.009 Scts (+2.5% vs 1.96 Scts in 1H17).
  • Overall, ESR-REIT’s 1H18 DPU formed 46.4% of our FY18F forecasts, which was broadly in line. For 2H18, we believe that contributions from newly acquired assets 8TSL and 7000AMK (added in 3Q17) and addition of Tampines LogisPark (poised for completion at end-3Q18/early 4Q18) should provide adequate buffer from negative rental reversions and/or dips in occupancy and drive earnings growth.

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Portfolio occupancy improved sequentially from 90.7% (1Q18) to 91.4% (2Q18).

  • Portfolio WALE also increased to 4.5 years.

Downward pressure on rental reversions to ease.

  • During the quarter, ESR-REIT renewed and leased c.1.1m sqft of space during the quarter – including the conversion of 16 Tai Seng Street from a single-tenanted to multi-tenanted facility in April. Following the non-renewal of Beyonics International at 30 Marsiling Industrial Estate Road 8, tenant retention rate fell to 40.6% in 2Q18 (vs 70.7% in 1Q18).
  • Rental reversions also turned more negative sequentially from -0.2% (1Q18) to -4.2% (2Q18), reflecting the higher proportion of single-tenanted lease expiries during the quarter. 
  • Given tapering industrial supply and the lower proportion of single-tenanted vs multi-tenanted lease expiries in upcoming quarters, downward pressures on rental reversions should continue to ease ahead, particularly in FY19F.

Organic growth opportunities abound.

  • Notwithstanding its recently proposed acquisition of Tampines LogisPark and merger with Viva Industrial Trust, organic growth remains a key focus for ESR-REIT. The conversion of 30 Marsiling from a general industrial to high-specs building is currently underway. 
  • With an estimated cost of S$12m and estimated ROI of c.12%, the AEI is backed by a 5-yr lease commitment to Aptiv and FormFactor and poised for completion in 1Q19.
  • Looking ahead, untapped potential from over 1m sqft of unutilised plot ratio remains.

Unutilised divestment gains of c.S$75m; capacity for future distributions amidst AEI initiative.

  • ESR-REIT received confirmation from IRAS that the disposal gain from the sale of 63 Hillview amounting to c.S$70m will not be subject to income tax. Combined with c.S$4.5m in residual ex-gratia payments from the SLA, this translates into nearly S$75m worth of divestment proceeds and gains which can be used to offset temporary income loss from ongoing AEI initiatives or negative reversionary effects, underpinning the REIT’s capacity for future distributions.

Higher leverage (A/L) on a sequential basis, but substantial debt headroom remains.

  • ESR-REIT’s debt profile comprises only unsecured borrowings - all its assets are unencumbered. 
  • Aggregate leverage increased moderately from c.30% (1Q18) to c.30.4% (2Q18) but remains low, which provides ESR-REIT with the financial flexibility and headroom (of c.S$443m) to gear up for yield-accretive acquisitions and/or further AEI.

Derek TAN DBS Group Research | Carmen Tay DBS Research | https://www.dbsvickers.com/ 2018-08-14
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