CGS-CIMB Research is keeping its “add” call on ESR-REIT with an unchanged target price of 49.4 cents.
This came on the back of ESR-REIT’s manager announcing in its 1QFY2021 ended Mar 31 interim business update, which saw core DPU increase by 14.8% y-o-y to 0.8 cents. Gross revenue grew 4.4% y-o-y to $60.3 million, causing net property income (NPI) to also increase by 7.6% y-o-y to $44.1 million.
See: ESR-REIT reports 14.8% y-o-y growth in DPU to 0.8 cents for 1QFY21
According to lead analyst Eing Kar Mei, the results came in line with the research house’s expectations. 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 1QFY2021. No rental rebates were provided in 1Q2021.
Apart from positive results, ESR-REIT’s operating metrics also came in rather stable q-o-q, as portfolio occupancy rate remained stable at 91%, while retention rate came in at 87%, compared to 85% last quarter.
ESR-REIT will be seeing 16.9% of the portfolio leases by rental income expire in FY2021. Out of these expiring leases, about 28.1% have been renewed ahead of time.
Rental collection for the first quarter period also remained healthy at 97.5%, in line with pre-pandemic levels. But rental reversions dropped by 5% y-o-y, 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,” adds Eing.
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Looking ahead, she expects negative to flat rental reversions in FY2021. “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,” she adds.
Meanwhile, Eing expects FY2021 DPU growth to be driven by higher occupancy and lower cost of debt as the REIT has successfully refinanced all expiring debt due in FY2021 ahead of expiry.
So far, asset enhancement initiatives (AEI) at ESR BizPark @ Changi have been completed, while 19 Tai Seng is expected to be completed in 2H2021. The REIT has identified two to three more properties for AEIs which could be funded with the proceeds from the divestment of non-core assets of $50 million. Income disruptions due to AEI can be offset by distribution of capital gain of $59 million.
The REIT is also actively looking for acquisitions and open to income producing and development projects in order to make an accretive deal.
“The stock is trading at book vs. pre-Covid-19 peak of 1.25 times (Jan 2020) and offers attractive dividend yields of more than 7%,” says Eing.
As at 12.55pm, units in ESR-REIT are trading at 42 cents.
