Stable income, attractive yield
? EREIT’s FY21 DPU of 2.987 (+6.7% yoy) was in line at 101% of our forecast.
? Positive rental reversion from high-specs, logistics and general industrial partially offset the negative reversion from business park.
? Reiterate Add; EREIT is trading at an attractive 6-7% DPU yield.
Absence of rental rebates and acquisition boost FY21 performance
ESR-REIT’s (EREIT) FY21 DPU of 2.987 Scts (+6.7% yoy) was in line, at 101% of our FY21F DPU of 2.96 Scts. FY21 revenue/NPI rose 4.9%/5.5% yoy on (i) the absence of provision for Covid-19 rental rebates to tenants in FY21 (S$7.4m in FY20), (ii) contribution from 46A Tanjong Penjuru which was acquired on 29 Jun 2021, as well as (iii) the leasing out of certain properties in FY21. Amount available for distribution was higher by 15.4% yoy due to higher NPI, lower finance cost and contribution from 10% interest in ESR Australia Logistics Partnership. However, the stronger growth was partially offset by the larger share base due to equity fund raising, leading to a slower yoy DPU growth.
Healthy reversion from high-specs, logistics and general industrial
Portfolio occupancy rate improved from 91.2% in 3Q21 to 92% in 4Q21 and stayed above industry average of 91.4%. Rental reversion in FY21 was -1.7% vs -0.6% in FY20, primarily due to renewals of certain large tenants in the business park segment. Rental reversion for 4QFY21 was encouraging at +3% with high specs, logistics and general industrial sectors registering positive rental reversions. General industrial saw strong demand recently with the pick-up in the economy. The business park segment remained relatively weak with rental reversion at -4.9% in FY21. 26.5% of leases are expiring in FY22 of which c.11.5% are in advanced negotiations to secure early renewal commitments. The majority of the leasing interest were from media production, semiconductor manufacturing, e-commerce, food storage, furniture showroom, e-gaming and general warehousing sectors.
Active capital recycling and AEIs to boost portfolio yield
In FY21, EREIT acquired 2 assets at 6-7% yield, divested 3 assets at c.5% exit yield and completed 2 AEIs with yield on cost of c.7%. 19 Tai Seng’s AEI was completed in 4Q21 and has started generating income. It is now 76% committed and continues to see good demand. AEI at 7000 AMK will be completing in 3Q23 with good yield on cost of 9%. The asset is seeing strong demand from data centre operators. The REIT will be calling for tender for the AEI at 16 Tai Seng to create an additional 29k sf of floor space.
Reiterate Add
Our FY22-23F DPU is adjusted by -1.3% to +0.7% after updating for the full year numbers. We reduce our DDM-based TP to S$0.501 as we raise our COE assumption to reflect the rising interest rate environment. Its diversified portfolio would provide stable income. A successful merger with ALOG will help to accelerate inorganic growth. Upside/downside risks are accretive acquisitions/weaker rental reversions.