ESR-REIT - OCBC Investment 2020-11-03: Encouraging Signs

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

ESR-REIT - Encouraging Signs

  • S$3.5m of retained distributable income was released.
  • ESR REIT's 3QFY20 DPU fell 20% y-o-y.
  • Stable rental collection and portfolio occupancy.

3Q results came in within expectations

  • ESR REIT (SGX:J91U)’s 3QFY20 gross revenue and net property income fell 8.2% y-o-y and 10.8% y-o-y to S$56.9m and S$40.4m respectively. The decline was mainly attributable to
    1. lease conversion from single to multi-tenancy for five properties;
    2. provisions for rental rebates in view of COVID-19;
    3. non-renewals and downsizing by certain tenants.
  • ESR REIT released S$3.5m or 50% of the S$7m of distributable income retained in 1QFY20 due to improving 3Q performance and outlook.
  • Management added that it may pay out the remaining distributable income retained depending on how the COVID-19 situation pans out. As such, 3QFY20 DPU and core DPU (excluding the release of S$3.5m distributable income) fell 20.2% and 19.0% y-o-y to 0.798 and 0.700 cents respectively, which came in at 29%/25% of our initial full-year forecast, within our expectations.

S$7.0m of rental rebates has been given/recognised

  • ESR REIT's portfolio occupancy remained healthy at 90.8%, which was above JTC’s average of 89.6%. year-to-date rental reversions improved from -4.3% to -0.2%. We expect rental reversions to range from slightly negative to flat for FY20 and largely flat for FY21, with help from high-specs, but weighed by general industrials.
  • As at 30 Jun 2020, tenant retention rate was 85.0% with 5.3%/20.1% of leases by rental income due to expire in 4Q20 and 2021 respectively. Rental collection remained stable at 94%, which was consistent with pre-COVID-19 levels and management expects the trend to continue and sees no major stress on tenants.
  • Management had previously estimated that S$10.1m of rental rebates may be required for tenant support. As at 30 Sep 2020, S$7.0m of rental rebates have been given/recognised. Management highlighted that they do not expect major changes to the reliefs and rebates to its tenants in 4Q.

Looking ahead…

  • See ESR REIT Share Price; ESR REIT Target Price; ESR REIT Analyst Reports; ESR REIT Dividend History; ESR REIT Announcements; ESR REIT Latest News.
  • The rejuvenation works for UE BizHub East resumed and is on track to complete in 1Q21. AEI to convert 19 Tai Seng Avenue property from general industrial building to high specs industrial have also commenced and is expected to complete in 2H2021. The properties will remain operational during the AEI works.
  • Looking ahead, ESR REIT likely to carry out another 2-3 AEIs in FY21, e.g. to convert the property into high-specs or to increase GFA.
  • Management shared that they see the terms for the proposed merger with Sabana REIT (SGX:M1GU) as fair. Should the approval not be granted, management will continue to look for alternative M&A opportunities and probably to tap on its Sponsor’s pipeline to expand its footprint in overseas market.
  • We retain our ESR REIT's fair value estimate at S$0.45.

Chu Peng OCBC Investment Research | https://www.iocbc.com/ 2020-11-03
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