ESR-REIT - OCBC Investment 2021-01-22: Rejuvenation Continues

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

ESR-REIT - Rejuvenation Continues

  • In-line set of results.
  • ESR-REIT's 4Q20/FY20 DPU fell 16%/30% y-o-y.
  • Expecting additional 2-3 AEIs in FY21/22.

Remaining S$3.5m of distributable income retained was released in 4Q20

  • ESR-REIT (SGX:J91U)’s 4Q20 results came in within our expectations. See ESR-REIT's announcements. 4Q20 revenue and net property income decreased by 5% y-o-y and 6% y-o-y to S$59.3m and S$43.6m respectively, on the back of
    1. lease conversion from single to multi-tenancy for certain properties;
    2. provisions for rental rebates in view of COVID-19; and
    3. non-renewals and downsizing by certain tenants.
  • ESR-REIT released the remaining S$3.5m of distributable income or S$0.00099/unit retained in 1Q20 given stabilisation in the operating environment. As such, 4Q20 distribution and core distribution fell 16.0% and 25.9% y-o-y to S$0.0084/unit and S$0.00741/unit respectively, bringing full year distribution to S$0.028/unit (-30.2% y-o-y).
  • ESR-REIT's 4Q20 core DPU and FY20 DPU accounted for 26% and 100% of our full-year forecasts respectively, in-line with our expectations.

Rental reversions were marginally down by 0.6%

  • ESR-REIT's portfolio occupancy remained stable at 91.0%, which was above JTC’s average of 89.6%. Rental reversions were marginally down by 0.6% in FY20 as compared to 0.0% in FY19 and -2.9% in FY18.
  • We expect rental reversions to remain flat in FY21, given softer demand and large pipeline supply across the various industrial space in 2021 and 2022 due to delay in completions of projects in 2020 caused by COVID-19.
  • As at 31 Dec 2020, S$8m of rental rebates have been recognised out of the initial estimate of S$10.1m. Management shared that they are likely to utilise another S$1m, but not expected to provide much rental relief in 2021, barring unforeseen circumstances.

AEIs and overseas acquisitions remain the key growth strategy

  • The rejuvenation works at UE BizHub East and 19 Tai Seng Avenue are expected to complete in 1Q21 and 3Q21 respectively. Management plans to divest up to S$50m of non-core assets with the proceeds to be used to pare down debt and fund AEIs. Looking ahead, ESR-REIT is likely to carry out another 2-3 AEIs at estimated capex of S$60-70m over the next 12 to 18 months.
  • ESR-REIT has S$59.1m of capital gains available for distribution which could be utilised to support the income loss from AEIs. Meanwhile, management will continue to look for acquisition opportunities and likely to tap on its Sponsor’s pipeline to expand its footprint in overseas market e.g. Australia.
  • See ESR-REIT Share Price; ESR-REIT Target Price; ESR-REIT Analyst Reports; ESR-REIT Dividend History; ESR-REIT Announcements; ESR-REIT Latest News.
  • We reduce our FY21/22 DPU estimates by 5%/7% as we adjust our rental reversions and occupancy rate forecasts while decreasing our cost of equity assumption to 7.6%. After adjustments, our fair value estimate increases from S$0.45 to S$0.47.

Chu Peng OCBC Investment Research | https://www.iocbc.com/ 2021-01-22
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