Following ESR-LOGOS REIT J91U ’s (E-LOG) stable 9MFY2023 ended Sept 30 results, the analysts at CGS-CIMB Research, DBS Group Research and Maybank Securities have all kept their “add” and “buy” calls.
CGS-CIMB analyst Lock Mun Yee has kept her target price unchanged at 39 cents, while Maybank analyst Li Jialin and DBS’s Derek Tan and Dale Lai have lowered their target prices to 31 cents and 34 cents respectively, both down from 38 cents previously.
The REIT’s 9MFY2023 net property income (NPI) margin remained stable y-o-y at around 70.8%, posting a 19.4% y-o-y increase in its NPI to $206.1 million while its 9MFY2023 gross revenue saw a 19.2% y-o-y increase to $290.7 million.
The y-o-y growth in 9MFY2023 NPI and gross revenue were largely due to the impact of E-LOG’s merger with ARA Logos Logistics Trust (ALOG) in April 2022, as well as positive rental reversions and new contributions from the REIT’s Japan acquisition. The growth was partly offset by the income vacuum from divested properties.
The REIT’s portfolio occupancy stood at 90.3% as at the end of 3QFY2023, although this excludes its assets at 2 Tuas Avenue, the redevelopment of 2 Fishery Port Rd, and the newly completed 7002 Ang Mo Kio Ave 5 this number would be at 92.3%.
On Oct 27, E-LOG also announced that it achieved full occupancy for its ESR Sakura Distribution Centre in Tokyo, and increased take-up at 7002 Ang Mo Kio Ave 5, bringing occupancy of the building to around 62%, up from 50% at the end of 3QFY2023.
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“Additional contributions from these properties should bolster the group’s bottomline going forward, in our view,” adds Lock.
E-LOG recorded a positive rental reversion of 13.5% in 3QFY2023, mainly from lease renewals of its logistics and business parks properties, while it has another 6.4% and 16.5% of leases due to be re-contracted in 4QFY2023 and FY2024 respectively.
As at end-3QFY2023, the REIT’s gearing stood at 37.7%, with an expectation for the ratio to dip to 35.5% post-completion of its announced divestments. The average funding cost also inched up to 3.93% at end-3QFY2023, and adjusted interest coverage ratio dipped to 2.4x.
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Lock notes: “While gearing could likely be impacted by negative revaluations at end-FY2023, ELOG indicated that continued strong growth in market rents could partly mitigate the impact of cap rate expansion on asset valuations; furthermore, as around 7.6% of its portfolio have land leases that are 10 years or less, the effects of land lease decay on its net asset value (NAV) is limited.”
The REIT looks to continue to execute its strategy to upscale portfolio quality and rejuvenation for its next growth phase, with planned divestments of up to $450 million of non-core assets in FY2023 which are around 96% completed to date and asset enhancement initiatives (AEI) at 16 Tai Seng St and 21B Senoko Loop scheduled to complete within 1QFY2024 to 2QFY2024.
Lock adds that in her view, E-LOG’s AEIs should “contribute accretively” to both the REIT’s earnings and NAV.
Following the REIT’s updates, Lock leaves her FY2023 to FY2025 distribution per unit (DPU) estimates unchanged, and the analyst thinks ELOG’s recapitalised balance sheet would position it to tap on inorganic growth opportunities.
Potential re-rating catalysts by Lock include accretive acquisitions, and speedier completions of its AEIs, while downside risks include slower-than-anticipated acquisitions and higher-than-projected interest rate hikes, which could hamper acquisition activities.
Meanwhile, Maybank’s Li has trimmed her FY2024 revenue and NPI forecasts by around 3% and around 6% respectively, to which she attributes to a slower-than-expected leasing market, income vacuum from divestments, softer margins and higher borrowing costs.
“We cut both our FY2023 and FY2024 DPU by around 6% and our dividend discount model (DDM) based target price to 31 cents due to a higher risk-free rate of 3.3% and market risk premium of 7.5%,” writes Li.
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The analyst understands that the recent stock price pull-back has likely priced in near-term risks such as potential asset devaluation from a shortening land lease, unfavourable foreign exchange (forex) and macro headwinds. Meanwhile, upside risks to Li’s rating include a sooner-than-expected rate cuts and capital recycling, as well as a rebound in the manufacturing sector.
Lastly, the DBS team share a similar sentiment, having lowered their target price due to the near-term challenges facing ELOG as interest rates continue to rise, as well as the recent $300 million equity fund raising (EFR) exercise leading to a dilution in the REIT’s DPU.
Despite this, the team at DBS point to the REIT’s sponsor’s pipeline that is valued at around US$2.0 billion ($2.7 billion) as a positive factor in making accretive acquisitions, and its ongoing AEIs and redevelopment projects as key drivers to earnings in the future.
Key risks noted by the DBS analysts include the slower-than-anticipated deployment of debt headroom.
“As E-LOG continues to divest non-core assets and utilise the proceeds to recapitalise its balance sheet, there will be a void of earnings from these divestments. We understand that ELOG continues to actively look at redeploying the proceeds into better quality assets in the long term, but if this happens slower than anticipated, earnings will remain depressed,” they write.
Units in ESR-LOGOS REIT closed one cent higher or 3.77% up at 28 cents on Oct 31.
