ESR-REIT - OCBC Investment 2019-10-30: 3Q19 Results In-line 

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

ESR-REIT - 3Q19 Results In-line 

  • ESR-REIT’s 3Q19 DPU fell 0.4% y-o-y.
  • Positive 0.6% YTD rental reversion.
  • Two AEIs are expected to start in 4Q19 and 1Q20.

3QFY19 results were in-line

  • ESR-REIT (SGX:J91U)’s 3QFY19 revenue and net property income increased 91.5% y-o-y and 101.1% y-o-y to S$62.0m and S$45.3m respectively, largely due to contributions from
    1. the acquisition of 15 Greenwich Drive;
    2. the merger with Viva Industrial Trust;
    3. rental escalations from the existing property portfolio
    4. the leasing of 30 Marsiling Industrial Estate Road 8 following the completion of its AEI in Jan 2019.
  • The growth was partially offset by the lease conversion from single to multi-tenancy for certain properties. See ESR REIT Announcements.
  • 3QFY19 DPU fell 0.4% y-o-y to 1.00 S cents, mainly due to larger unit base following the placement of new units and longer-than expected approval process for the completion of the acquisition of 49% interest in PTC Logistics Hub. See ESR REIT Dividend History.
  • YTD 3QFY19 DPU, however, grew by 5.6% to 3.011 S cents. As such, 3QFY19 and YTD 3QFY19 DPU comes up to 25% and 76% of our initial full-year forecast respectively, which we consider to be in-line with our expectations.

Rental reversion to remain challenging in the near to mid-term

  • Portfolio occupancy remained stable at 91.0%. Despite the positive 0.6% YTD rental reversion, we expect rental reversion to remain challenging in 4Q19 and 2020, given softer demand and strong pipeline supply across the various industrial space.
  • After years of efforts to convert ESR-REIT’s buildings from single-tenanted (STB) to multi-tenanted (MTB), we notice that the tenant retention rate improved from 54.7% in 2Q to 71.2% 3QFY19. We expect the rate to stabilise moving forward as no major conversion is expected in the near term.
  • The current mix of STB to MTB by rental income as at the end of FY2018 stands at 30.5% and 69.5% respectively. This creates flexibility for ESR-REIT to capture potential rental upside and improve tenant mix and quality amid the challenging environment.

Two AEIs at 7000 AMK and UE BizHub East

  • Recall that the manager launched a non-renounceable Preferential Offering of new units (which was completed on 14 Oct 2019) to raise gross proceeds of up to S$50.0m to partially finance the two AEIs at 7000 Ang Mo Kio Avenue 5 and UE BizHub EAST, with the remaining balance for debt repayment.
  • The AEI for 7000 Ang Mo Kio Avenue 5, which includes building up a new block to utilise its untapped plot ratio, will start in 1Q 2020 and is likely to take up 12-18 months to complete. As for UE BizHub EAST, the rejuvenation works will begin in 4Q 2019 and take approximately 6-9 months to complete.
  • We note that ESR-REIT currently has ~S$67m to distribute in capital distributions, which can be used to further smoothen out its DPU growth.
  • We maintain our fair value of S$0.58 on ESR-REIT (see ESR REIT Share Price; ESR REIT Target Price).

Chu Peng OCBC Investment Research | https://www.iocbc.com/ 2019-10-30
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