ESR-REIT (EREIT SP) – In-line set of results
• FY21 DPU rose 6.7% YoY
• Portfolio occupancy stable at 92.0%
• Revised scheme consideration for the proposed merger
4Q21 DPU came in-line with our expectations – ESRREIT’s 2H21 revenue and net property income increased by 4.5% YoY and 2.8% YoY to SGD121.4m and SGD86.3m respectively, on the back of 1) contribution from 46A Tanjong Penjuru which was acquired in Jun 2021; 2) absence of Covid-19 rental rebates; and 3) rental escalation from certain properties. As such, 4Q21 DPU came in at 0.721 S cents (-2.7% YoY from core DPU of 0.741 S cents in 4Q20 due to an enlarged share base), bringing full year DPU to 2.987 S cents (+6.7% YoY).
Negative rental reversions at 1.7%, weighed down by business parks – Portfolio occupancy improved marginally by 0.8ppt QoQ to 92.0% in 4Q21, which was above JTC’s average of 90.1%. A total of 2.15m sqft of leases were secured in FY21, with 47.4% of the leases coming from new leases, primarily from high-specs and general industrial segments while the remaining 52.6% were from renewal leases. Rental reversions for FY21 came in at -1.7%, weighed down by the business park segment which remained challenging due to the Work-from-Home arrangement. However, management noted some improvement in leasing momentum in 4Q21 which saw a positive rental reversion of 3%, with logistics, high-specs and general industrial sectors registering positive rental reversions.
Revision of terms for merger with ARA LOGOS Logistics Trust (ALOG) – The scheme consideration was increased from SGD0.950 per ALOG unit to SGD0.970 per ALOG unit (SGD0.097 in cash + 1.7729 new ESR-REIT units at the issue price of SGD0.4924). The revised scheme would reduce the pro-forma DPU accretion for ESR-REIT from 5.8% to 4.7% and increase the NAV dilution to 8.5% (from 6.4%), while pro-forma gearing is expected to remain at 42.1%. The pro-forma DPU accretion to ALOG unitholders would increase from 8.2% to 12.8%. Key considerations for the increase in scheme consideration include the non-favourable recommendation from proxy advisors Glass Lewis and Institutional Shareholder Services, and that the growth of EREIT and ALLT would be impacted negatively if their conflict of interest arising from a common sponsor are not resolved. The EGM scheduled on 27 January 2022 will be deferred to
March 2022. We recommend unitholders of ESR-REIT to vote in favour of the merger. Our fair value
estimate remains at SGD0.52.
ESG Updates
ESR REIT’s ESG rating was downgraded in Oct 2020, largely driven by weakening governance structure due to concerns with related party transactions. ESR REIT’s environment score trails its peers due to fewer green-certified buildings in its portfolio relative to peers. However, its human capital development ranks higher than industry average, with comprehensive employee development efforts including strong managerial and leadership development training initiatives. BUY. (Chu Peng)