ESR-LOGOS REIT - OCBC Investment 2022-07-28: Maiden Results Post-Merger

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ESR-LOGOS REIT (SGX:J91U)

ESR-LOGOS REIT - Maiden Results Post-Merger

• ESR-LOGOS REIT's 1H22 DPU fell 6% y-o-y on enlarged share base.
• 63% of portfolio exposure underpinned by New Economy assets.
• Rejuvenating portfolio to drive future growth.

ESR-LOGOS REIT's 1H22 DPU met our expectations

• ESR-LOGOS REIT (SGX:J91U)'s 1H22 revenue and net property income increased by 23.2% y-o-y and 18.2% y-o-y to S$147.7m and S$102.8m respectively, driven by contributions from ARA Logos Logistics Trust (ALOG) following the completion of the merger in Apr 2022, partly offset by higher electricity costs.
• 1H22 DPU came in-line with our expectations at 1.460 cents (-6.0% y-o-y) due to an enlarged share base and higher utilities cost, representing 50% of our initial forecasts.
• ESR-LOGOS REIT will change the frequency of its distributions to unitholders from quarterly to half-yearly basis with effect from 2H22.

Mitigating cost pressures

• To mitigate the impact of inflationary pressure on costs, ESR-LOGOS REIT has converted majority of its portfolio to Singapore Power (SP) tariff rates. With effect from 1 Jul 2022, more than 90% of the portfolio’s utilities expenses will be pass through to the tenants. In addition, ESR-LOGOS REIT will progressively roll out service charge increases at an average of 15% for selected assets.
• 66.2% of ESR-LOGOS REIT’s borrowings is hedged on fixed rate. For every 25 bps increase in interest rates, 2Q22 DPU will decrease by 0.7%. Management is comfortable with the current hedge ratio and has no intention to increase it in the near-term as it is more costly to do so.

Positive rental reversions at 11.4%

• ESR-LOGOS REIT's portfolio occupancy improved by 0.4 percentage points (ppt) q-o-q to 94.1% in 2Q22 (Singapore: 92.6% and Australia: 99.4%, both are above the industry averages of 89.8% and 99.0% respectively).
• Rental reversions for 1H22 came in at 11.4% driven by positive reversions across its segments (logistics: +15.4%, general industrial: +13.1%, business park: 3% and high-specs industrial: +2.4%). Management expects full-year rental reversion of 6- 7%, supported by strong demand for logistics and general industrial segments on the back of secular trends.
• A total of 196k square meters (sqm) of space was leased in 1H22 driven by the logistics, manufacturing and electronics sectors.

AEIs and acquisitions remain the key growth strategy

• ESR-LOGOS REIT currently has 6 assets under asset footprint in markets such as Australia, Japan and Singapore.
• See
  • ESR-LOGOS REIT's Share Price,
  • ESR-LOGOS REIT's Target Price,
  • ESR-LOGOS REIT's Analyst Reports,
  • ESR-LOGOS REIT's Dividend History,
  • ESR-LOGOS REIT's Announcements,
  • ESR-LOGOS REIT's Latest News.
• Factoring a higher risk-free rate of 3.25% (previously 2.5%) and divestments, our fair value estimate for ESR-LOGOS REIT slips from S$0.50 to S$0.48.

Chu Peng OCBC Investment Research | https://www.iocbc.com/ 2022-07-28

SGX Stock Analyst Report BUY MAINTAIN BUY 0.48 DOWN 0.500