ESR-REIT - DBS Research 2021-01-21: Next Leg Of Growth Lies Overseas

ESR-REIT (SGX:J91U)

ESR-REIT - Next Leg Of Growth Lies Overseas

Stabilisation of ESR-REIT's earnings in 4Q20 led to a 1.9% q-o-q growth in core revenues.
Identified 3-4 properties with AEI opportunities that will generate a ~7% return to drive organic growth.
Targeting to acquire ~S$1bn of properties from the sponsor’s overseas pipeline in the next 3-4 years.

ESR-REIT (SGX:J91U)'s core revenue of S$59.3m and NPI of S$43.6m were a 4.2% and 7.9% q-o-q improvement respectively. See ESR-REIT's announcements. 4Q20 DPU of 0.84 cents comprises core DPU of 0.741 cents, and 0.099 cents from retained income.
ESR-REIT's portfolio occupancy inched up slightly to 91.0% with ~1.1m sqft of leases signed and renewed in 4Q20.
Rental reversions posted a slight 0.6% decline in 4Q20.
Gearing was maintained at 41.6% and all-in cost of debt was reduced to 3.54%.

Given the stability in operations and cashflow in 4Q20, ESR-REIT has distributed the remaining income (0.099 cents) that was retained earlier in the year.
Core earnings of S$59.3m was a 4.2% q-o-q improvement; ESR-REIT does not expect to provide any significant rental relief or restructuring in FY21.
ESR-REIT's core DPU of 0.741 cents was up 5.9% q-o-q.

Rental rebates provided for SMEs and retail tenants; ~S$8.0m of rebates had been utilised in FY20.
Negative rental reversions and lease restructuring.
Non-renewal at several single-tenanted properties and the subsequent conversion of five single-tenanted buildings to multi-tenanted buildings.

Despite the slowdown in leasing activities, ESR-REIT's occupancy rate remained healthy at 91.0%.
3.8m sqft of leases signed and renewed in FY20; signed 1.6m sqft of new leases in FY20.
High tenant retention rate of ~85%.

ESR-REIT plans to proceed with the development of a multi-tenanted high-spec addition at 7000 Ang Mo Kio Avenue 5.
Identified another two or three properties for AEI in FY21; estimated cost of S$60-70m.
Ongoing AEI at UE BizHub EAST and 19 Tai Seng Avenue on track for completion in 1Q21 and 3Q21 respectively.

ESR-REIT will be focusing on overseas acquisitions in FY21 by tapping on Sponsor’s pipeline.
Will consider both income-producing assets as well as development projects (JV with Sponsor).
Acquisitions will include both direct purchase and investments in private funds.
ESR-REIT’s current WACC is estimated to be ~5.5%.
Targeting to acquire ~S$1.0bn over the next 3-4 years.

~20.1% of ESR-REIT's leases due to expire in FY21; 18.0% from multi-tenanted buildings and 2.1% from single-tenanted buildings. Spike in new supply in FY21 will likely put pressure on rents at general/light industrial properties.
Expect rental reversions to remain flat or slightly negative.

ESR-REIT's all-in borrowing costs improved slightly to 3.54%. It is in negotiations to early refinance the S$191m of loans expiring in August and October 2021.
Further savings in finance costs expected, but will only gradually see the savings towards second half of FY21; all-in costs could go down to ~3.1% by year-end.

Despite a y-o-y decline in core revenues, we believe that ESR-REIT’s 4Q20 earnings have stabilised and will continue to recover gradually going forward. The completion of the two ongoing AEIs during the year may provide further upside, and the ~S$59m remaining in capital gains will be utilised to any void in income from further AEIs.
See ESR-REIT Share Price; ESR-REIT Target Price; ESR-REIT Analyst Reports; ESR-REIT Dividend History; ESR-REIT Announcements; ESR-REIT Latest News.
Given the current tightening in cap rates globally, ESR-REIT’s first overseas foray is likely to be in Australia. For accretive acquisitions, we believe ESR-REIT will rely on a combination of income-producing assets as well as development projects (via JV or investment in private funds). Its Sponsor’s sizeable pipeline, valued at more than US$26bn, provides ESR-REIT with ample opportunities to foray overseas.

Dale LAI DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2021-01-21

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