ESR-REIT - CGS-CIMB Research 2020-01-23: Results In Line; Yield Remains Attractive

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

ESR-REIT - Results In Line; Yield Remains Attractive

  • ESR-REIT's 4Q/FY19 DPU of 1.00/4.011 Scts were in line with our FY19 forecasts, on the back of higher distribution of other gains.
  • Occupancies and reversions were in line with previous guidance and market.
  • Maintain ADD call. See ESR REIT Target Price.

ESR-REIT 4Q/FY19 DPU in line, at 26%/103% of our FY19 forecasts

  • ESR-REIT (SGX:J91U)’s 4Q/FY19 DPU of 1.00/4.011 Scts (-0.5%/+4.0% y-o-y) were in line with our FY19 forecasts, although slightly below at 92% of consensus’ FY19 forecast of 4.34 Scts. This was attributed to growth in earnings from the full-year contributions of Viva Trust’s nine properties and new acquisitions, albeit offset by lease conversions from single-to multi-tenancies at certain properties.

Occupancy and reversions in line with market

  • ESR-REIT recorded an occupancy rate of 90.5% as at end-FY19, marginally higher than the industry average reported by JTC of 89.3%. Rental reversions for FY19 were 0.0%, in line with the earlier flattish guidance by management. ESR-REIT had a tenant retention rate of 69.6% and a portfolio WALE of 3.8 years.
  • Hyflux remains a top 10 tenant and contributed 3.0% of rental income, down from 3.5% in FY18; Hyflux continues to be current with rents.

Gearing remains above 40%, but debt maturity is well staggered

  • Gearing was 41.5% as at end-FY19, a level that management is comfortable with. Debt headroom to the 45% gearing limit is S$195.2m. Weighted average cost of debt was 3.92%.
  • ESR-REIT has refinanced all its expiring debts in FY20, which could result in a weighted average debt expiry of 3.1 years. The portfolio is 100% unencumbered, and 88.8% of its interest rate exposure is fixed for the next 2.6 years.

Maintain ADD, with an unchanged DDM-based Target Price.

  • We maintain our ADD call on ESR-REIT, as we account for FY19’s full-year figures and increased payouts from other gains, resulting in a 3.7-6.5% increase in FY20-21F DPU. See ESR REIT Target Price.
  • Distribution from other gains (relating to gains from disposal of investment properties and ex-gratia payments received from Singapore Land Authority in prior years) formed c.12% of FY19 distributions and could continue to be used to keep distributions stable going forward.
  • We continue to believe in ESR-REIT’s long-term re-rating potential post-merger and think that it is an attractive yield play, with a 7.4% FY20F yield and a 570bp spread above the MAS 10Y yield.
  • See ESR REIT Share Price; ; ESR REIT Analyst Reports; ESR REIT Dividend History; ESR REIT Announcements; ESR REIT Latest News.
  • Positive catalysts include a lower cost of debt post-refinancing and accretive acquisitions.
  • Key risks include dilutive fundraising exercises and a weaker rental environment.

LOCK Mun Yee CGS-CIMB Research | Ervin SEOW CGS-CIMB Research | https://www.cgs-cimb.com 2020-01-23
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