Execution on divestments; trim TP, maintain BUY
ESR-LOGOS divested 7 non-core assets at a valuation of SGD337m, representing a 4.5% discount to book value. We see the divestment as the first concrete step in its capital recycling plan, following its SGD300m EFR completed in April. While EREIT has another SGD113m worth of assets on its book identified for sale, the divestment lifts its headroom to SGD996m. We expect EREIT to shift its focus from divestment to execution on potential acquisition/redevelopment as rates stabilise. We cut our FY23E DPU by c.2.5% and DDM-based TP by 5% to SGD0.37 to factor in lower earnings due to divestment. Dividend yield is attractive at 8%. Retain BUY.
Deal at a discount and NPI support
The portfolio of 4 logistics and 1 industrial asset (see Fig 1) was acquired by Intertrust Group, an Amsterdam-based trust management company. According to the manager, EREIT will provide NPI support of SGD4.8m to Intertrust across 36 months. Without NPI support, the portfolio was valued lower at SGD325.4m. The 5 assets contributed aggregate rental income of SGD28.2m in FY22, implying a yield of c.9.0%. We expect the transaction to fully complete by 4Q23. The other two smaller assets were sold at a premium to two separate parties. 22 Chin Bee Drive was acquired by its tenant (Sanli M&E) at a 6.2% premium-to-book, while the freehold warehouse, 51 Musgrave Road, was sold to an unidentified party at a 2.4% premium.
Execution awaiting
The combined portfolio represents 8% of FY22 income and c.7% of our previous FY23E revenue estimate. Given the income vacuum, we lower our FY23/24E earnings by c.1.4%/7.6% (see fig.2). Management has guided for dilutive impacts on pro forma NAV (-1.1%) and DPU (-4.6%) from the
portfolio sale alone. Nonetheless, the divestment is timely amid slowing rate hikes. In our view, EREIT needs to execute on its acquisition/redevelopment pipeline. Potential acquisitions will likely come from redevelopment projects (a cold storage facility) or sponsor pipelines, which include a few modern logistics facilities.
Balance sheet further de-geared
Assuming all proceeds are used for debt repayment, EREIT’s pro-forma gearing will fall to 33.6%, from post-EFR gearing of 38%. With debt headroom of SGD996m (assuming 45% gearing limit), EREIT is better positioned to take on accretive acquisitions and redevelopment projects. In addition, management reiterated during EFR that it has identified up to SGD450m of non-core assets for divestments. If the remaining divestments (SGD113m) are successfully executed, its balance sheet will be further strengthened.
