Recalibrating for long-term growth
What’s New
(+) Revenues and NPI driven by 2 months’ contribution from merger
- Merger with ARA LOGOS Logistics Trust was completed on 22 April 2022
- 1H22 revenues up 23.3% and NPI up 18.2% y-o-y mainly from two months’ contribution from its enlarged portfolio
- NPI margins declined to c.69.6%, likely due to the impact of higher utility costs and inflation on operating costs
- Bulk of the impact from higher utility costs have already been felt; c.90% of utility costs will be recoverable from tenants going forward
- EREIT is looking to gradually increase service charges by c.15% to pass on cost inflation to its tenants
(+) 1H22 DPU of 1.46 Scts in line with estimates
- 1H22 DPU of 1.46 Scts is in line with our estimates (c.49% of full-year estimates)
- 1H22 DPU was c.6.0% lower y-o-y, mainly due to an enlarged unit base from the merger
(+) Positive rental reversions of 14.3% in 2Q22
- Strong positive rental reversions of 14.3% in 2Q22, mainly driven by logistics and general industrial properties
- YTD 1H22 rental reversions were up 11.4%
- Continue to see strong demand for logistics and general industrial space
- Business park properties reported a c.3.0% positive rental reversion in 2Q22; a reversal of negative reversions have been seen over the past few quarters
- Positive rental reversions expected to continue for the rest of FY22; expect an average positive rental reversion of 6%-7% for the full year
- Passing rents at properties are still below market rents; there is room for expiring leases to be brought up closer to market rents
Only 18.0% of portfolio leases expiring in FY22
- Healthy portfolio occupancy rate of 94.1%
- Singapore portfolio has an occupancy rate of 92.6%, while Australia has an occupancy rate of 99.4%
- EREIT has already commenced negotiations with c.70% of its tenants whose leases will expire in FY22
(+) All-in financing costs of less than 3%
- Following the merger and refinancing of debts due in FY22, its next debt expiry will be in FY23
- S$390m of debt is due in late FY23
- Gearing is currently 40.6%, still within EREIT’s comfort range
- All-in financing costs improved by c.40bps to 2.97% currently
- 66.2% of borrowings are hedged to fixed rates with an average tenor of c.2 years
- Rising interest rates remain a challenge, but EREIT will be less impacted, as its credit margins have improved with its enlarged portfolio
- Credit margins could potentially improve further if EREIT obtains a credit rating
- It targets to obtain a credit rating by the end of this year
- Credit rating could potentially lead to a 30-50bps improvement in credit margins (for term loans, notes, and perpetuals)
(+) Ongoing portfolio recalibration to drive future organic growth
- Seven non-core assets divested since FY21 are generating proceeds of c.S$190m
- There is potential it may divest up to a further S$450m over the next two years
- Proceeds reinvested into higher yielding initiatives such as AEIs and redevelopments
- Six AEIs and redevelopments are ongoing, with estimated total costs of S$145m
- Targeted ROIs of between 6%-8%
- Commenced S$32.0m AEI at 16 Tai Seng Drive, which will lead to a c.14% increase in GFA (additional 2,793 sqm)
- Target ROI of c.6% and completion expected in 4Q23
- Exploring major AEIs or redevelopments at another three logistics properties
- Will tap into capital distributions to smoothen DPU, while these assets undergo AEIs or redevelopments
- EREIT currently has capital gains amounting to c.S$62m that they can tap into
(+) Sponsor’s growing commitment to EREIT
- ESR Group acquired an additional 24% stake in the Manager from Mr Tong Jinquan for c.S$65.1m
- ESR Group will now hold a more than 90% stake in the Manager
- ESR Group will also acquire EREIT units from Mr Tong Jinquan, making it the largest unitholder with a c.14.4% stake in the REIT
- Positive development as it demonstrates Sponsor’s growing commitment to the REIT
- Sponsor will now be more focused, dedicated, and aligned with the REIT to see to its growth ambitions
Our thoughts
In our view, EREIT’s merger and the ongoing recalibration is very timely. In an environment where cap rates remain tight while interest rates continue to creep up, accretive acquisitions are becoming increasingly challenging. With the merger now completed, EREIT has shifted its focus to recalibrating its portfolio and reallocating capital into higher yielding opportunities. Fortunately for EREIT, they have capital gains of up to S$62m that they can tap into to smoothen distributions over the next few years while it carries out its recalibration initiatives.
Operationally, we believe the brunt of higher utility costs has already been reflected in 1H22 and margins should stabilise and potentially improve going forward. Furthermore, the bulk of its utility costs are now recoverable from tenants, with no loans due for refinancing until late next year.
In addition to the recalibration efforts to drive organic growth, EREIT continues to be on the lookout for accretive acquisitions. An initial pipeline of US$2.0bn has been identified, and even as cap rate spreads continue to compress, we understand that acquisitions in Singapore and Japan remain conducive.
The Sponsor has also just announced the acquisition of Mr Tong Jinquan’s stake in both the Manager and the REIT. Following the acquisition of Mr Tong Jinquan’s stakes, ESR Group will now have a more than 90% stake in the Manager and become the single largest unitholder in the REIT with a c.14.4% stake. With the increased commitment, we believe that the Sponsor will now be even more focused and aligned with EREIT’s ambitions to grow into one of the largest industrial S-REITs.
We will be maintaining our BUY recommendation with a TP of S$0.50.
