Multiple growth levers
- 1H22 DPU of 1.46 Scts was in line, at 48.7% of our FY22F forecast.
- Strong portfolio operating metrics, with room for upside from AEIs.
- Reiterate Add rating with an unchanged TP of S$0.51.
1H22 results highlights
In its maiden post-merger results, ELOG posted 1H22 gross revenue of S$147.7m, +23.2% yoy, while net property income rose 18.2% yoy to S$102.8m. The uplift was due to revenue contributions from ALOG, following the completion of the merger on Apr 2022, and positive rental reversions, partly offset by higher utilities expenses. 1H22 NPI margin averaged 69.6% vs. 72.9% a year ago. Income available for distribution grew 29.65 yoy to S$73.6m. Together with 2Q22 DPU of 0.737 Scts (including clean-up distribution of 0.187 Scts), 1H DPU totalled 1.46 Scts. ELOG revalued its Australian properties resulting in BV/unit of S$0.365.
Robust rental reversions amid an uptick in portfolio occupancy
Portfolio occupancy ticked up 0.4% pt qoq to 94.1% as at 1H22, led by an improvement in take-up of the Singapore portfolio. In 1H22, ELOG leased/renewed 195k sqm of space and achieved positive rental reversion of 11.4% (2Q: +14.3%), mainly coming from strong performance within the logistics and general industrial properties. ELOG has 18% of leases expiring in FY22F, of which 70% are in the process of renewal. Given the robust demand outlook and upbeat rental market, we anticipate the positive reversion trend to continue, although the trajectory may moderate. In view of inflationary pressures on utilities cost, ELOG indicated that it is progressively rolling out higher service charges for selected assets across its portfolio as well as restructured its utilities agreements with tenants to reflect a pass-through cost recovery basis. With effect from 1 Jul, more than 90% of the portfolio utilities expense have been re-stated and this will likely shield ELOG from the impact of rising utilities cost going forward.
AEIs to improve portfolio returns
ELOG’s gearing as at 1H22 stands at 40.6%. Post refinancing loans due in FY22, its all-in cost of debt averaged 2.97%. An estimated 66.2% of borrowings are on fixed rates. Management indicated that every 25bp change in funding cost could impact DPU by 0.7%. As part of its strategy to rejuvenate its portfolio, six asset enhancement initiatives are currently under way, with potentially another three properties that can be upgraded. When completed, we believe these will likely be NAV and DPU accretive. With its sponsor ESR Group’s asset base of US$59bn and executable pipeline of US$2bn of assets in Asia Pacific, ELOG is also well-positioned to grow inorganically. On 27 July 2022, ESR Group (1821 HK, CP HK$19.98, NR) announced that it has completed the acquisition of 654,546 shares in ESR-LOGOS Funds Management (S) Ltd and is in the process of acquiring 189.97m ELOG units, from Mr Tong Jinquan. Post transaction, ESR will hold 90% of ELOG Manager and will also become the largest unitholder of ELOG with a 14.4% stake in the REIT. We believe this is positive and demonstrates ESR’s commitment to ELOG.
Reiterate an Add rating
We keep our FY22-24F DPU estimates unchanged and reiterate our Add rating with an unchanged DDM-based TP of S$0.51. ELOG is trading at an attractive 7.15% FY22F dividend yield. Downside risks: slower-than-anticipated acquisitions and higher-than projected interest rate hikes. Potential catalysts are accretive acquisitions.