ESR REIT - CGS-CIMB Research 2020-04-24: Reiterate ADD, With A Lower Target Price Of S$0.50

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ESR-REIT (SGX:J91U)

ESR REIT - Reiterate ADD, With A Lower Target Price Of S$0.50

• ESR REIT’s 1QFY20 DPU of 0.5 Scts (- 50.3% y-o-y) came in below expectations.
• Occupancy and retention rate remained high.
• No more refinancing requirement in FY20.

1QFY20 DPU came in below expectations.

• ESR REIT (SGX:J91U)’s 1QFY20 DPU of 0.5 Scts (- 50.3% y-o-y) came in below, at only 12% of our FY20 DPU forecast of 4.06 Scts. The lower-than-expected DPU was mainly due to lower NPI margins, as well as retention of income of S$7m in 1QFY20, translating into a dividend payout ratio of 72%.
• We cut ESR REIT’s FY20-22F DPU by 20-26%, factoring in weaker revenue and margins as a result of the conversion of single to multi-tenancies and the potential impact from the Covid-19 outbreak. We also removed capital gain distributions from our forecast.

Revenue and NPI declined.

• ESR REIT's 1QFY20 revenue and NPI declined by 10.9% y-o-y and 15.6% y-o-y, respectively, mainly due to:
  1. the lease conversion from single to multi tenancies for five properties, where ESR REIT now has to bear the costs of land rent, property tax and maintenance fees, which the tenants used to pay under a master lease arrangement;
  2. non-renewals;
  3. downsizing of certain tenants; as well as
  4. rental rebates set aside as part of measures to support tenants whose businesses were adversely affected by Covid-19.
• We understand that the non-renewals and downsizing of certain tenants were not due to the impact of Covid-19.

Occupancy and retention rate remained high.

• ESR REIT's 1QFY20 portfolio occupancy stood at 90.5% (flat q-o-q), above JTC Corp’s average occupancy of 89.2%, while YTD retention rate was 87.1% (vs. 70% in 1QFY19). Leasing activity for 1Q2020 was relatively stable, with 0.3m sf of space renewed and 0.6m sf of new leases secured, bringing the total leases signed to 0.9m sf. However, rental reversions remained stagnant at -0.1%, demonstrating active leasing strategies to drive value and lease future expiries.
• 12.5% of ESR REIT’s leases are up for renewal in FY20, with 9% indicating an intention to renew. Rental reversions were mixed for these leases.

No more refinancing requirement in FY20.

• ESR REIT has a S$160m medium-term note (MTN) maturing in 2Q2020, and this will be repaid by utilising its existing loan facilities. Hence, there is no further refinancing requirements for FY20.
• Although its gearing of 41.7% is relatively higher than its peers, ESR REIT’s portfolio remains 100% unencumbered, with 90% of its debt on a fixed rate. It has a 3-year committed undrawn revolving credit facility of S$250m. In addition, the government has also raise gearing limit to 50% recently.

Retention of income due to prudent management.

• ESR REIT’s dividend retention in 1QFY20 is more of a precautionary measure as it can tap into borrowings and internal cash. Management believes that the REIT is likely to retain some income in the next quarter as it anticipates slower rental collections.
• As of now, the rental collection rate is still healthy, with 75% of the 1Q rent collected via Giro. The remaining rent should be paid manually in the next 2-3 weeks, which is not uncommon.

Not many tenants asking for rental deferrals or rebate yet.

• There are minimal tenants who have asked for rental deferrals or rental rebate as of now, according to the REIT. ESR REIT estimates that eventually 10% of its portfolio may need some form of help. Based on its estimates, if more than 75% of its tenants opt for rental deferment for eight months, it would only have enough to pay its loan commitments and maintenance expenses.
• More than 50% of its tenants are considered as essential services and, hence, are still operating during the “circuit breaker” period.
• Retail tenants account for 7.5% of its revenue, while 25- 30% of its revenue is generated from SMEs. In the event of defaults, ESR REIT has an average security of 5.5 months, with multi-tenanted buildings at 4.1 months and single-tenanted buildings at 9.6 months.
• See ESR REIT Share Price; ESR REIT Target Price; ESR REIT Analyst Reports; ESR REIT Dividend History; ESR REIT Announcements; ESR REIT Latest News. 
• See also report: FCT, MCT, ESR REIT - CGS-CIMB Research 2020-04-24: Bracing For The Impact Of COVID-19 In 2Q. 

EING Kar Mei CFA CGS-CIMB Research | LOCK Mun Yee CGS-CIMB Research | https://www.cgs-cimb.com 2020-04-24

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