The manager of ESR-REIT on Jan 20 announced that its FY2020 DPU has declined by some 30.2% y-o-y to 2.8 cents, while net property income was 12.6% y-o-y lower at $164.2 million. The lower results were mainly due to the impact of the Covid-19 pandemic.
Despite the lower y-o-y performance, analysts are remaining positive on the REIT as a recovery in underway.
DBS Group Research continues to rate ESR-REIT a “buy” with a higher target price of 45 cents from 43 cents previously.
Lead analyst Dale Lai says, “With operations stabilising, we expect core revenues to continue their gradual recovery and for FY2021 DPU to increase about 10% y-o-y.”
ESR-REIT has resumed its asset enhancement initiative (AEI) works and embarked on new projects to drive organic growth as the pandemic has somewhat stabilised. AEI plans in FY2021 are expected to generate a return of about 7% compared to ESR-REIT’s estimated weighted average cost of capital (WACC) of 5.5%.
“As ESR-REIT focuses its efforts to acquire accretive assets overseas and to strengthen portfolio lease expiry, its Sponsor’s US$26 billion portfolio provides the REIT with a pipeline,” adds Lai.
On the same page, RHB Group Research is maintaining its “buy” call on ESR-REIT, but with a lower target price of 48 cents from 50 cents previously.
“The stock is trading at an unjustified 1 time P/B, compared to the industrial peer average of 1.5 times. We think this is mainly due to concerns over shorter land leases for its industrial assets and aggressive expansion strategy,” says analyst Vijay Natarajan.
While business sentiment improved in 4QFY2020, management noted that tenants have been cautious with their expansion plans and have been focusing on consolidating their operations.
While industrial demand continues to be driven by the pharmaceutical, advance manufacturing and precision engineering sectors, the higher supply for 2021-2022 (partly driven by construction delays) is likely to keep the market rates competitive. The REIT will focus on maintaining high occupancy levels, and management expects flattish rental reversions for FY2021.
On the outlook, ESR-REIT will be focusing on rejuvenating its portfolio and expanding overseas.
ESR-REIT has identified two to three assets for carrying out AEIs with an estimated capital outlay of $60-70 million. The AEIs will mainly involve converting some assets into high-specification industrial buildings, for which it sees strong tenant demand.
“The second strategy will be to expand in overseas markets where there is sponsor presence, which we believe will likely be Australia in the near term. Potential acquisitions are likely to be a combination of development and income-producing assets that can be from the sponsor or third parties. The REIT is also in the midst of divesting about $50 million worth of assets – the proceeds of which will be used to fund AEIs and acquisition,” says Natarajan.
Similarly, OCBC Investment Research has kept its “buy” rating on ESR-REIT with a fair value of 47 cents.
Analyst Chu Peng notes that the REIT’s results came in within expectations and it released the remaining $3.5 million of distributable income of 0.099 cents retained in 1QFY2020 given stabilisation in the operating environment.
Portfolio occupancy remained stable at 91.0%, which was above JTC’s average of 89.6%. Rental reversions were marginally down by 0.6% while tenant retention improved from 69.6% to 84.6% in FY2020.
“We expect rental reversions to remain flat in FY2021, 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. Looking ahead, ESR-REIT is likely to carry out another two to three AEIs over the next 12 to 18 months. Meanwhile, management will continue to look for acquisition opportunities overseas,” adds Chu.
Units in ESR-REIT closed 1.22% higher on Jan 21 at 42 cents. The stock is trading at FY2021 P/B of 1.04% with a dividend yield of 7.4%, according to RHB’s estimates.
