ESR-REIT - CGS-CIMB Research 2021-04-22: AEIs, Lower Debt Cost To Drive Growth

ESR-REIT (SGX:J91U)

ESR-REIT - AEIs, Lower Debt Cost To Drive Growth

ESR-REIT’s 1QFY21 core DPU of S$0.008 (+14.8% y-o-y) came in line at 27% of our FY21F DPU.
Occupancy remained high at 91%; rental reversion -5% as leases were negotiated last year when operating environment was weak.
Reiterate ADD on ESR-REIT with an unchanged target price for its attractive yield of over 7%.

ESR-REIT (SGX:J91U)’s 1QFY20 core DPU of S$0.008 (+14.8% y-o-y, +8% q-o-q) came in line at 27% of our FY21F DPU of S$0.0293. 1QFY21 revenue and NPI increased 4.4% and 7.6% to S$60.3m and S$44.1m, respectively.
The stronger y-o-y performance was mainly driven by the absence of provisions for COVID-19 rental rebates to tenants and lower property expenses in 1QFY21. No rental rebates were provided in 1Q2021. Distributable income increased by 17.1% y-o-y to S$28.7m mainly due to lower borrowing costs.

ESR-REIT's portfolio occupancy rate remained stable at 90.8% vs 91% the previous quarter while retention rate was at 87% vs 85%. 16.9% of the portfolio leases by rental income are expiring in FY21. Out of these 16.9% expiring leases, ~28.1% have been renewed ahead of time.
Rental collection for 1QFY21 was healthy at 97.5%, in line with pre-pandemic levels. 1QFY21 rental reversions declined 5%, mainly due to renewals of certain large tenants in the business park segment. We understand that these leases were negotiated last year when operating environment was relatively weak.

We expect negative to flat rental reversions for ESR-REIT in FY21. While business sentiment has improved, expansion plans are on hold with many businesses looking to consolidate the use of industrial space. Supply will also spike in 2021/22 due to construction delays.
ESR-REIT's FY21 DPU growth would be driven by higher occupancy and lower cost of debt as the REIT has successfully refinanced all expiring debt due in FY21 ahead of expiry.
All in cost-of-debt reduced from 3.54% in FY20 to 3.52% in 1QFY21.
Asset enhancement initiatives (AEI) at ESR BizPark @ Changi have been completed with TOP obtained on 31 March 2021. AEI at 19 Tai Seng is expected to be completed in 2H2021. The REIT has identified 2-3 more properties for AEIs which could be funded with the proceeds from the divestment of non-core assets of S$50m. Income disruptions due to AEI can be offset by distribution of capital gain of S$59m.
ESR-REIT is also actively looking for acquisitions and open to income producing and development projects in order to make an accretive deal.

We maintain our FY21-22F DPU forecast and DDM-based target price of S$0.49 for ESR-REIT. Reiterate ADD.
ESR-REIT is trading at book vs pre-COVID-19 peak of 1.25x (Jan 2020) and offers attractive dividend yields of more than 7%.
See ESR-REIT Share Price; ESR-REIT Target Price; ESR-REIT Analyst Reports; ESR-REIT Dividend History; ESR-REIT Announcements; ESR-REIT Latest News.
Re-rating catalysts/downside risks include accretive acquisition/weaker-than-expected rental reversions.

EING Kar Mei CFA CGS-CIMB Research | LOCK Mun Yee CGS-CIMB Research | https://www.cgs-cimb.com 2021-04-22

SGX Stock Analyst Report ADD MAINTAIN ADD 0.494 SAME 0.494