ESR-REIT - OCBC Investment 2019-01-21: Good First Steps

ESR-REIT (SGX:J91U) | SGinvestors.io ESR-REIT (SGX:J91U)

ESR-REIT - Good First Steps

  • ESR-REIT's first set of quarterly results post-merger.
  • Still at discount to large portfolio peers.
  • S$0.575 fair value.

4Q18 results within expectations

  • ESR-REIT (SGX:J91U)'s 4Q18 results were within expectations. 4Q18 revenue increased 114.9% y-o-y to S$58.4m while NPI increased 112.1% y-o-y to S$42.3m. The increase in revenue and NPI were mainly due to
    1. full quarter contributions from 8 Tuas South Lane and 7000 Ang Mo Kio Avenue 5 (“7000 AMK”) which were acquired in Dec 2017,
    2. the inclusion of Viva Industrial Trust's portfolio from 16 Oct 2018, and
    3. additional contributions from 15 Greenwich Drive which was acquired on 25 Oct 2018.
  • Borrowing costs increased 106.7% y-o-y to S$10.9m. 4Q18 distributable income increased 140.2% y-o-y to S$29.3m while DPU increased 8.2% y-o-y to 1.005 S cents on the back of an enlarged unit base.
  • All in all, ESR-REIT's FY18 DPU came up to 3.857 S cents or 101% of our initial full-year forecast.

In a stronger position post-merger

  • As at end-FY18, ESR-REIT’s portfolio consists of 57 properties in Singapore, with a total GFA of 14.1m sq ft. Portfolio occupancy stands at 93.0% as at end-FY18 and rental reversions have improved on a y-o-y basis (-2.9% for FY18 vs. - 15.8% for FY17).
  • In terms of exposure to asset types that command higher rental rates, business parks and high-specs assets contribute 45% of ESR-REIT’s portfolio’s valuation.
  • We do note that ESR-REIT’s 41.9% gearing ratio falls on the higher end of the spectrum (vs. ~35% average for all industrial S-REITs), but that said, we see it as a positive that the portfolio remains 100% unencumbered and the weighted debt expiry has improved from 2.2 years as at end-3Q18 to 2.7 years as at end-FY18. In addition, over 83% of interest rate exposure is fixed for the next 3.0 years.

Discount to large portfolio peers

  • Since our initiation (see report: ESR-REIT - New Kid On The Block dated 14-Dec-2018), ESR-REIT’s share price has increased 6.0% from S$0.50 to S$0.53 as at 18 Jan’s close. However, ESR-REIT is still trading at a discount to industrial REITs that also have large industrial portfolio.
  • As at 18 Jan’s close, ESR-REIT is currently trading at 1.13x P/B (versus the 1.23x average of its large portfolio peers), and a dividend yield of 7.2% FY19F yield (vs. the 6.1% current yield of its large portfolio peers).
  • After adjustments, our fair value dips from S$0.59 to S$0.575. We re-iterate BUY on ESR-REIT.

Deborah Ong OCBC Investment Research | https://www.iocbc.com/ 2019-01-21
SGX Stock Analyst Report BUY MAINTAIN BUY 0.575 DOWN 0.590