ESR-REIT - CGS-CIMB Research 2019-04-24: Growing Into Its New Stature

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

ESR-REIT - Growing Into Its New Stature

  • ESR-REIT's 1Q19 DPU of 1.007 Scts was in line at c.23% of our FY19 estimate due to higher revenue and NPI from the VIT merger and some new acquisitions.
  • Gearing unlikely to change significantly as refinancing for FY19 has been completed; DRP has been switched on.
  • Maintain ADD, with a lower Target Price of S$0.60.

ESR REIT's 1Q19 results in line due to impact from merger

  • ESR-REIT (SGX:J91U)'s 1Q19 DPU of 1.007 Scts (+18.9% y-o-y, +0.2% q-o-q) was in line and formed c.23% of our FY19 forecast.
  • Revenue and NPI improved 92.9% and 104.4% y-o-y, respectively, due to the impact from its merger with Viva Industrial Trust (VIT), the completion of 30 Marsiling, and rental escalations from existing properties. However, the impact on DPU was offset by an increase in management fees (+73.7% y-o-y) and borrowing costs (+111.5% y-o-y).

Positive rental reversions as new leases kick in; occupancy dips

  • Rental reversions for the portfolio turned positive at +1.6% for 1Q19 (-2.9% in 4Q18); we understand this was mainly for its business park space as existing rents were contracted before asset enhancement was carried out.
  • Occupancy dipped slightly to 92.0% (vs. 93.0% in 4Q18), mainly due to the non-renewal of Cisco Systems's lease at UE Bizhub East. Part of this vacancy has been filled via a new lease with DBS.

Hyflux continues to pay its rents

  • HYFLUX LTD (SGX:600), a tenant at 8 Tuas South Lane taking 70% of the space, has made rental payments, representing 3.7% of the portfolio’s monthly rental income, up till Mar 2019. ESR-REIT has a 3-month deposit amounting to S$2.1m for this lease.
  • In a proforma analysis provided by ESR-REIT, a default would cause a 4.9% drop in pro forma annualised 1Q19 DPU. This analysis assumes the space would remain vacant for the rest of FY19. We currently have not factored in a default into our forecasts as the outcome of Hyflux’s restructuring is still uncertain.

Refinancing completed for FY19 while gearing inches up

  • ESR-REIT has completely refinanced its debts expiring in FY19, leading to a longer weighted average debt expiry of 3.3 years (2.7 years in 4Q18). As debt tenor has lengthened, its weighted average all-in cost of debt crept up to 3.99% from 3.81% in 4Q18.
  • Management indicated its comfort at the current gearing of 42.0% and has no plans to do an equity fund raising to lower gearing. To this end, ESR-REIT has switched on its distribution reinvestment plan (DRP) and also taken management fees in units.

Maintain ADD, with a lower DDM-based Target Price of S$0.60

  • We maintain our ADD call but lower our Target Price to S$0.60 due to the higher management fees and interest expense. Additionally, we also adjust our risk-free and terminal growth rates downward to reflect a more dovish interest rate outlook.
  • We continue to like ESR-REIT due to its re-rating potential as a result of the larger portfolio from its merger with VIVA INDUSTRIAL TRUST (SGX:T8B).
  • Downside risks to our call are a slower recovery in industrial rents and large tenant non-renewals.

LOCK Mun Yee CGS-CIMB Research | Ervin SEOW CGS-CIMB Research | https://research.itradecimb.com/ 2019-04-24
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