Near-term cost hiccup, growth plans intact
? 1Q22 DPU of 0.723 Scts was slightly below expectations at 23.3% of our
FY22F forecast.
? High portfolio occupancy of 91.5%, positive reversion of 3.1% in 1Q.
? Reiterate Add rating with a lower DDM-based TP of S$0.474.
1Q22 business update highlights
ESR-REIT’s (EREIT) 1Q22 DPU of 0.723 Scts (-9.6% yoy) was slightly below at 23.3% of
our FY22F forecast. 1Q22 DPU will be paid together with the clean-up distribution of 0.187
Scts for the period 1-22 Apr 2022, following the completion of the merger with ARA Logos
Logistics Trust (ALOG) on 28 Apr 2022. 1Q22 revenue fell 1.2% yoy to S$59.6m but NPI
declined a greater 10.4% yoy to S$39.5m due to higher property expenses as a result of
an increase in utilities cost. Amount available for distribution was higher by 2.1% yoy to
S$29.3m due to lower finance cost, contribution from 10% interest in ESR Australia
Logistics Partnership and a non-recurrent tax-exempt income distribution from Viva
Industrial Trust.
Stable portfolio occupancy, positive reversion of 3.1% in 1Q
Portfolio occupancy rate stood at 91.5% in 1Q22. EREIT leased a total of 305,613 sqft of
space in 1Q, with a retention rate of 75.6%. There was strong leasing interest received
from third-party logistics providers and end-users with new demand from chip
manufacturers and electronics companies looking to expand amidst the global supply chain
disruptions. Rental reversion during the quarter was +3.1%, primarily due to positive
reversions from the logistics/warehouse, general industrial and business parks sectors.
About 23.3% of leases are expiring in FY22, of which c.9.3% are in the process of renewal.
In terms of operations, EREIT guided that higher utilities costs are expected to be felt for
the rest of FY22E. As such, we have tweaked up our utilities expenses assumptions,
resulting in a 7.9% erosion in FY22 DPU.
Active AEIs to boost portfolio yield
In terms of asset enhancement activities and asset recycling activities, EREIT has
completed the divestments of 28 Senoko Drive and 45 Changi South Avenue 2 for
S$23.1m and has also announced a build-to-suit redevelopment at 21B Senoko Loop for
NTS Components Singapore Pte Ltd. The estimated development cost is c.S$38.5m. The
redevelopment will be executed in two phases to convert the property from a general
industrial building to a high-spec industrial asset. Phase 1 is scheduled to complete in 1H23
and Phase 2 10 months after. With the completion of the merger with ALOG on 28 Apr, we
believe EREIT’s near-term focus will be on integration and driving economies of scale while
continuing to look for growth opportunities.
Reiterate Add rating
We lower our FY22-24F DPU estimates by 4-7.9% to factor in higher operating expenses.
Accordingly, our DDM-based TP is lowered to S$0.474. At this level, EREIT continues to
offer attractive dividend yield of 7%. Reiterate Add rating. We believe in the longer run, the
merger with ALOG will help to accelerate inorganic growth. Upside/downside risks are
accretive acquisitions/weaker rental reversions.