Growth On A New Lease
A newer new-economy play; Re-initiate SGD0.55 TP
ESR-LOGOS REIT (ELOG) has emerged from its merger with ARA Logos as one of the top 10 SREITs by free float, with higher contributions from new economy AUM. We see visible growth drivers from: (1) quality AUM growth from new-economy assets; (2) stronger fundamentals and growth in Australia; (3) visible sponsor pipeline, supported by added debt headroom; (4) dividend yield readjustment to match up to industrial peers. Valuations are undemanding at 7.4% FY23E yield, and 0.6% DPU growth. We reinitiate coverage with a SGD0.55 TP (COE: 6.5%, LTG: 2%), suggesting 42% upside. BUY. Risks are: higher interest rates, high inflation, and macro uncertainties.
New-economy assets underpin growth outlook
ELOG has SGD5.5b AUM post-merger (vs. SGD3.3b), boosted by newly added new-economy assets. We see stronger rental income from new economy assets (c.63% vs. 47% of effective gross rent pre-merger) due to pent-up demand caused by supply chain disruptions and relocation postCovid recovery, and rising e-commerce. The addition of mature assets further increases occupancy (to 94.1% in 1H22 from 92% in 4Q21). We expect more functional upgrades from asset enhancement initiatives (AEI) to ride on the rental growth momentum.
Diversified footprint in developed markets
The SGD2.2b additional assets are in good locations in Singapore and Australia, which would help ELOG gain a stronger foothold in key Australian markets. We expect robust contributions from the Australia portfolio due to the strong fundamentals, underpinned by historical low occupancy. We see room for revaluation gains on the back of cap rates compression.
Robust balance sheet, growth backed by sponsor
Post-merger all-in cost of debt fell to 2.97% as of 1H22, and management targets a solid credit rating in 2H22 to further reduce the cost, given its larger AUM. A further 50 bps increase in cost of borrowings will negatively impact DPU by 0.7%. We see SGD958.5m debt headroom supporting acquisitions from its sponsor’s visible pipeline in Japan and Australia, which would provide tailwinds for further AUM growth.
