ESR-REIT - CGS-CIMB Research 2020-10-30: Improving Prospects

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

ESR-REIT - Improving Prospects

  • ESR REIT declared 3Q/9M20 DPU of 0.798/1.960 Scts, in line with expectations.
  • While revenue and NPI declined y-o-y mainly due to rental rebates and lease conversion, q-o-q performance improved as new leases commenced in 3Q20.
  • We reiterate our ADD call on ESR REIT with an unchanged DDM-based Target Price.

ESR REIT's 3Q20/9M20 DPU in line, at 29%/72% of our FY20 forecasts

  • ESR REIT (SGX:J91U) reported its 3Q20 DPU of 0.798 Scts (+20.5 q-o-q, -20.2% y-o-y) came in line with our FY20 forecast (9M20 DPU formed 72% of FY20F) while core DPU was 0.7 Scts (+5.7% q-o-q, -19.0% y-o-y).
  • 3Q20’s DPU payment includes S$3.5m (or 0.098 Scts per unit) of distributable income that was previously retained during 1Q20 against a backdrop of COVID-19 uncertainties.
  • ESR REIT reported gross revenue of S$56.9m (+1.6% q-o-q, -8.2% y-o-y) and NPI of S$40.4m (+3.1% q-o-q, -10.8% y-o-y) in 3Q20, both representing c.24% of our full-year FY20F forecasts. This was attributable to rental rebates handed out to tenants during the COVID-19 outbreak and lease conversions from single to multi-tenancies for five properties according to the REIT manager.

Occupancy remains resilient and secured new leases

  • ESR REIT’s portfolio occupancy stood at 90.8% which was slightly ahead of the industry average of 89.6% reported by JTC. In 3Q20, tenant retention rate was 85% and rental reversions improved from -4.3% to -0.2% YTD.
  • ESR REIT also reported that it has secured 244,000 sq ft of new leases as well as renewed 585,000 sq ft of space to bring total leases signed this quarter to 829,000 sq ft.

Encouraging outlook for ESR REIT

  • ESR REIT has previously allocated S$10.1m of rental rebates and rental relief for tenant support and distributed S$7m ($3.2m pending IRAS’s confirmation) to date to tenants, which ESR REIT does not expect large rebates for the rest of FY20.
  • Overall portfolio occupancy is expected to be stable while rental reversion is expected to be largely flat for FY20 and FY21 with high-spec industrial and ramp-up warehouse to experience positive rental reversion.
  • ESR REIT expects asset enhancement initiatives (AEI) at UE BizHub EAST to be completed by 1Q21 and at 19 Tai Seng Avenue by 2H21. ESR REIT has also received strong enquiries for industrial leasing space from pharmaceutical and mechanical manufacturing sectors.
  • Going forward, the management expects a stable 4Q20 and will look to grow ESR REIT via organic and inorganic growth avenues in FY21.

Reiterate ADD on ESR REIT

EING Kar Mei CFA CGS-CIMB Research | LOCK Mun Yee CGS-CIMB Research | https://www.cgs-cimb.com 2020-10-30
SGX Stock Analyst Report ADD MAINTAIN ADD 0.492 SAME 0.492