ESR-REIT - OCBC Investment 2019-06-19: Now, Now, Now!

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

ESR-REIT - Now, Now, Now!

  • Strike while the iron is hot.
  • Down 6.2% post announcement.
  • Risks baked into our forecasts.

EFR for ESR: private placement & preferential offering to raise S$150m

  • ESR-REIT (SGX:J91U) has announced a proposed S$150m equity fund raising (EFR) consisting of a S$100m private placement, as well as a preferential offering.
  • The issue price per new unit under the private placement has been fixed at S$0.515 per new unit, representing a discount of 8.3% to the VWAP.

Use of proceeds: 48 Pandan Road acquisition, two AEIs, repaying debt

  • In terms of usage of proceeds,
    1. ~30% or ~S$44.4m will be used to fully finance ESR-REIT's share of acquisition costs for 48 Pandan Road,
    2. ~31% or S$45.7m will be used to finance two proposed asset enhancement initiatives (AEIs), and
    3. ~38% or S$56.8m will be used to repay debt.
    The remaining ~2% will be used to pay the transaction related expenses.
  • With regard to the 48 Pandan Road acquisition, ESR-REIT has entered a joint venture (JV) with Poh Tiong Choon Logistics Limited (PTC). The JV has then entered into an option agreement with PTC to acquire the leasehold interest over 48 Pandan Road for S$225.0m; total acquisition costs attributable to ESR-REIT are S$44.4m. On completion, the asset will be leased to PTC for a ten-year term fixed annual rental escalation.
  • With regard to the two AEIs, these consist of
    1. utilising untapped plot ratio to develop a new high-specification industrial facility at 7000 Ang Mo Kio Avenue 5 (7000 AMK) and
    2. rejuvenation works at UE BizHub EAST to enhance its ‘work-live-play’ factor.
    Both development works are expected to provide an estimated yield on cost of up to 9.0%.

Upside to fair value as at 18 Jun’s close

  • In terms of the impact of the EFR, acquisition, and AEIs, the 1Q19 pro forma DPU (annualized) is expected to drop 1.1% to 3.984 S cents, while NAV per unit is expected to increase 0.4% to S$0.47. Pro forma gearing is expected to improve from 42.0% to 40.3%.
  • Importantly, these pro forma figures include additional rental income projected to result from the AEIs.
  • Note that both AEIs will likely start in 4Q19 and take time to complete: 12 months for UE BizHub and 18-24 months for 7000 AMK. Due to the time gap between the EFR and the additional income expected from the AEIs, our FY19F and FY20F DPU forecasts are revised downwards by 2% and 4% respectively. That said, we note that ESR-REIT currently has > S$60m to distribute in capital distributions, which can be used to further smoothen out DPU growth.
  • According to our forecasts, ESR-REIT is currently trading at 7.1% FY19F yield. After adjustments, our fair value decreases from S$0.565 to S$0.560.
  • ESR-REIT share price fell 6.2% yesterday on the back of its announcements. After taking into account the impact of the transactions, we currently see upside to our fair value as at 18 Jun’s close.
  • Re-iterate BUY.

Deborah Ong OCBC Investment Research | https://www.iocbc.com/ 2019-06-19
SGX Stock Analyst Report BUY MAINTAIN BUY 0.560 DOWN 0.565