ESR-REIT - DBS Research 2020-03-25: Enough Selling al-Ready!

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

ESR-REIT - Enough Selling al-Ready!

  • Interest expense savings from early refinancing; no refinancing in 2020.
  • Earnings relatively sheltered for now; retail tenants facing more challenges.
  • Long-term goals still intact despite a pause in near-term inorganic growth plans.

ESR-REIT Investors' Call

  • We just hosted an investors’ call earlier this afternoon with ESR-REIT (SGX:J91U) to get an update on how the current COVID-19 situation has affected its operations. There was quite a healthy turnout with almost 40 participants dialing in and many questions revolved around how tenants are being affected by COVID-19 and updates on the recent sell-off in ESR-REIT’s shares.
  • The call was timely given that ESR REIT share price has fallen 55% since the start of the year, before staging a 17% daily rebound today!

Mitigating impact of COVID-19 on operations. Nil refinancing in 2020.

  • Having already done an early refinancing of borrowings due in FY20, ESR-REIT will not have any refinancing risk for the rest of this year.
  • 100% of the portfolio is unencumbered currently; ESR-REIT will have the flexibility to negotiate secured financing if necessary.
  • It may be difficult to take on new financing given current market conditions, but refinancing should not be an issue.

No major arrears; earnings relatively sheltered.

  • Approximately 2% of tenants are late on their rental payments on average and remains in this range currently.
    • Will put some planned AEIs on hold for now but works at UE BizHub and 7000 Ang Mo Kio Ave 5 will continue (albeit at a possibly slower rate at Ang Mo Kio).
    • Based on worst-case scenario sensitivity analysis, earnings will drop c.S$40m if all expiring leases this year are not renewed and there are no new leases signed (still represents an implied c.12% dividend yield).
    • In fact, leasing activities in the first two months of FY20 have been very encouraging; approximately 2% of the portfolio has been renewed so far and rental reversions remain flat.
    • Do not expect portfolio to be too adversely affected; only experienced a c.3% decline in portfolio valuation during GFC in 2008-2009.
  • 4.1% of leases that are expiring in FY20 are from four single-tenanted assets on master leases.
    • One has renewed its master lease.
    • Two have already been converted into multi-tenancies; average occupancy of 94% currently.
    • One has been identified as a non-core asset and has been put up for sale.

Retail tenants are most affected

  • Retail (and F&B) clients make up approximately 7.5% of Gross Rental Income. So far only some of these retail tenants have come forward to ask for rental rebates; ESR REIT will pass on government property tax rebates to these retail tenants.
  • Industrial tenants have not asked for any rental rebates at this point.
  • The convention hall and hotel component at UE Bizhub is on a master lease with UE, and ESR REIT will receive a fixed contribution from the master lease and thus will not be impacted in terms of cash flows.

Long-term goals still intact

  • Stronger financing position. Expect further savings in borrowings once the bonds due in April/May FY20 are redeemed.
    • Will be refinanced with a loan facility that has been committed.
    • Projected interest savings of c.S$1.7m in FY20 once the bonds are redeemed.
  • Will put on hold M&A activities for now, but long-term goal to expand overseas and extend portfolio land lease expiry remains.
  • Recent sharp sell-offs possibility due to margin-calls on investors.
    • Most of its major shareholders remain the same; one major shareholder has only decreased his holdings by 1% (not too significant and should be strategic in nature as this shareholder has an ownership stake in the Manager as well).

Maintain BUY

  • We continue to like ESR-REIT for its proactive management of its portfolio and operations. Despite the relatively high gearing of 41.5% currently, there is no refinancing risk in FY20, and there would be interest expense savings from 2Q20 onwards.
  • About 2% of the 13.5% of leases expiring this year have already been renewed and we take comfort in the flat rental reversions especially in the current turbulent economic landscape. For single-tenanted assets (4.1% of expiries in FY20), three out of four assets have been repositioned, and the remaining asset will be divested.
  • Lastly, it is the financial might and support of a strong Sponsor that will help names like ESR-REIT stand out in times of uncertainty. See ESR REIT Share Price; ESR REIT Target Price; ESR REIT Analyst Reports; ESR REIT Dividend History; ESR REIT Announcements; ESR REIT Latest News.
  • In fact, ESR Cayman (the Sponsor), just increased its stake in AIMS APAC REIT (SGX:O5RU) by c.S$13m last week.
  • At current prices, the implied FY20 dividend yield is approximately 14%. We maintain our BUY call with a Target Price of S$0.59.

Derek TAN DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-03-25
SGX Stock Analyst Report BUY MAINTAIN BUY 0.590 SAME 0.590