ESR-REIT: Well-diversified and backed by a committed sponsor

We will reduce uncertainties in the REIT’s capital structure via early refinancing of all expiring debt due in FY2021 and achieve an optimal balance of hedging ratio and debt tenor to maintain financial flexibility.

We will continue to focus on organic growth such as asset enhancement initiatives (AEI) to remain relevant in the industrial sector, which includes $60 million to $70 million of AEIs to be carried out over 12 to 18 months and the development of a multi-tenanted, high-specs building at 7000 Ang Mo Kio Avenue 5, which is suitable for advanced manufacturing, info-communication and data centre tenants.

In line with our portfolio reconstitution strategy, we intend to divest up to $50 million of non-core assets to pare down debt and/or fund AEIs and developments.

Acquisitions are an integral part of our growth strategy and we intend to execute single-asset and portfolio income-producing acquisitions and/or developments, locally and overseas, in markets where our Sponsor ESR Group has an established operation platform.

2. Does ESR-REIT plan to use inorganic means like asset acquisitions to grow its portfolio?

We continue to explore and pursue suitable acquisition targets and development opportunities locally and overseas, leveraging on the support of ESR Group, an established platform with a network across six countries in Asia Pacific and US$26.5 billion ($35.2 billion) pipeline of assets.

Apart from improving returns for our unitholders, we are also cognisant of the structural challenges posed by short land leases inherent in Singapore industrial properties. We have been evaluating acquisitions of freehold and/or longer land lease properties overseas to increase our portfolio’s weighted average land lease.

3. How has Covid-19 affected your operating conditions? What measures have you put in place to mitigate the impact?

Over half of our tenants are essential service providers and were operational during the “circuit breaker”. Since Singapore entered Phase Two of reopening, over 75% of our tenants have also restarted operations.

Despite the challenges, we have collected around 97% of billings for 4Q2020. We have taken measures to ensure that ESR-REIT has adequate cash flow to meet liabilities and pay out distributions, as well as close monitoring of the Covid-19 situation and conduct regular dialogues with our tenants.

We do not expect to provide much rental relief in 2021, barring unforeseen circumstances. The 0.197 cents distribution per unit (DPU) which was retained in 1Q2020 for cash flow purposes was paid out in 3Q2020 (0.098 cents) and the remaining will be fully distributed in 4Q2020 (0.099 cents).

Our diversification across industrial sub-asset classes and a high proportion of multi-tenant building versus single-tenant building, has mitigated our portfolio concentration risk.

We also reiterate the importance of having a well spread debt maturity profile. ESR-REIT has adequate operating cash flows and committed undrawn credit facilities to enable us to meet our financial obligations as and when they fall due.

4. How have occupancy rates, rental reversions and DPU changed as a result of Covid-19?

Occupancy rates are at 91% (at Dec 31, 2020), above JTC’s industrial average. Total lease renewals and new leases secured in FY2020 is 3.87 million sq ft (40.9% higher y-o-y).

Despite Covid-19, we have secured 1.65 million sq ft in new leases. Rental reversions have remained relatively flat at –0.6% as at Dec 31, 2020.

With continued business uncertainties and projected industrial space supply in 2021 and 2022, we expect industrial market rents and prices to remain soft in the coming quarters.

Core DPU for 4Q2020 increased 5.9% q-o-q to 0.741 cents, bringing the FY2020 core DPU to 2.8 cents, 20.7% lower from FY2019 due to provision of rental rebates, lower rentals and downsizing arising from the pandemic.

We intend to maintain a 100% distribution payout going forward, subject to further developments.

5. ESR-REIT is a pure-play S-REIT. Are there any plans to diversify into other markets?

We will evaluate and pursue value-adding acquisition opportunities to enhance our portfolio — in Singapore and overseas. Singapore’s small market size and shorter lease tenor of industrial properties necessitate the acquisition of overseas properties (with longer land leases and/or freehold basis) to grow our portfolio.

ESR-REIT has “first look” on over US$26.5 billion of ESR Group’s portfolio of assets in an increasingly scarce environment for quality logistics assets.

We will continue to evaluate opportunities that are in line with the REIT’s strategies and in the best interests of our unitholders. Any expansion overseas will be done in a scalable and disciplined manner.

6. What role does ESR Group play in boosting your growth strategy?

We are ESR Group’s flagship REIT in Singapore and bear its name. Our Sponsor has provided strong capital support and financial commitment in equity fundraisings and the acquisition of REIT managers to facilitate the merger of ESR-REIT with Viva Industrial Trust (VIT).

Since its entry as our Sponsor in 2017, ESR Group has transformed ESR-REIT by doubling our GFA and rejuvenating our properties to focus on higher value-added segments of the industrial value chain, such as highspecs industrial properties. ESR Group’s AUM of US$26.5 million and footprint across Asia Pacific also provides a pipeline of quality income-producing assets and development opportunities for ESR-REIT.

7. What is ESR-REIT’s outlook for the industry?

Industrial rents are expected to remain muted given the pandemic, weak trade conditions and potential oversupply due to construction delays as a result of Covid-19.

Despite signs of gradual stabilisation, we believe the outlook to remain uncertain with pressures from the staggered openings of international borders and resurgence of cases in some countries having impeded global trade and production volumes.

However, we have seen an uptick in demand and prospects coming from pharmaceutical, advanced manufacturing, precision engineering and third-party logistics providers, e-commerce companies and from businesses looking to right-size their current operations.

8. ESR-REIT’s debt-to-asset ratio was 41.6% as of Dec 31 last year, higher than the average of 36% across S-REITs. Do you have any plans to lower this ratio?

We are comfortable with our gearing of 41.6% which is lower than the regulatory gearing limit of 50%. As such, we have a debt headroom of $507.7 million.

Our portfolio remains 100% unencumbered which provides financial flexibility to lever up with various debt sources.

Should we undertake any equity fund raising exercise, there will be a clear use of proceeds in line with our strategies and we may consider reducing our gearing if market conditions permit. We have established a track record of reducing our cost of debt while extending debt tenors on an unsecured basis.

Even during Covid-19, we have managed to refinance our loans at lower margins and broadened our network of lending banks from two lending banks to 11 presently — a strong validation of our capital management strategy. Going forward, we expect our loan costs to reduce.

9. Sustainability and Environmental, Social and Governance (ESG) have increasingly been a key focus recently. How committed is ESR-REIT to sustainability?

We have in 2019 reviewed our material factors and set new targets which are more relevant to our enlarged size post the completion of merger with VIT in 4Q2018.

We have also stepped-up efforts in the collection and monitoring of ESG data so as to identify and implement initiatives for improvements where possible.

The REIT will be making its first GRESB submission in 2021. ESR-REIT aims to reduce its environmental footprint by efficiently managing resources such as energy and water. One such initiative is our solar harvesting programme.

We have nine assets with solar panels installed on their rooftops. Solar energy harvested is used by tenants and supplied to other buildings.

We also have a focus on children. One example is the setting up of a tuition centre in one of our assets, ESR Bizpark @ Chai Chee, (working) with the Kembangan Chai Chee Youth Executive Committee to create a space for underprivileged youths to study after school.

10. What is ESR-REIT’s value proposition to shareholders and potential investors?

We are a sizable and well-diversified REIT with strong banking support, low cost of debt, a balanced debt expiry profile and a committed developer-sponsor.

We believe these factors will position us for entry into key indices which could result in positive re-rating in the long-term. ESR-REIT also currently has the size and position to venture overseas especially with our Sponsor’s asset pipeline and Pan-Asian operational footprint.

This access is important given the increasingly scarce environment for such quality assets.