Restarting inorganic growth
- 2H/FY23 DPU of 1.186/2.564 Scts was slightly below, at 44.9%/97% of our FY23F forecast.
- Positive reversions for existing portfolio, second acquisition in Japan via stake in JIF for US$70m.
- Reiterate an Add rating with a TP of S$0.39.
2H23 results highlights
ESR-Logos REIT (ELOG) reported a 3.1%/6.5% yoy decline in 2H23 gross revenue/NPI to S$189.5m/S$132.3m, due largely to income vacuum from divested assets, weaker A$ vs. S$, and partly offset by contributions from ESR Sakura Distribution Centre, acquired in Oct 2022. 2H23 DPU of 1.186 Scts was 23% lower yoy due to an expansion in units base from the equity fund raising exercise in May 2023. ELOG’s portfolio value declined by 9.2% yoy to c.S$4.7bn on the back of divestments and asset devaluations from cap rate expansion. Gearing declined from 37.7% in 3Q23 to 35.7% at end-FY23.
ELOG achieved positive reversions of 11.1% in FY23
Portfolio occupancy stood at 92.8% as at end-FY23. ELOG leased/renewed 645.8k sqm of space in FY23 and achieved positive rental reversion of 11.1%. The strongest reversions came from the hi-spec industrial and logistics segment, with rental uplift averaging 12.4- 19.6%. ELOG has another 18.3%/25.9% of leases due to be re-contracted in FY24-25F. Management believes that its portfolio remains under-rented and anticipates the positive rental reversion trend to continue into FY24F. Meanwhile, it has secured take-up of 62% at 7002 Ang Mo Kio Ave 5 and has completed the redevelopment of 21B Senoko Loop, which is fully leased on a 15-year master lease. Plans are being finalised for the redevelopment of 2 Fishery Port Rd into a ramp-up cold storage facility.
Second acquisition in Japan via stake in JIF
ELOG announced that it has entered into a subscription agreement to invest US$70m into Japan Income Fund (JIF), representing an 8.4% stake in the fund. As at Dec 2023, JIF has five properties under management, valued at S$1744.7m. The properties are located in Tokyo, Osaka and Nagoya and are 100% leased. According to management, based on an unlevered yield of 5%, the investment is expected to be 1.8% DPU accretive. This acquisition is in line with ELOG’s strategy to build a future-ready portfolio, with an earnings accretive transaction. Going forward, we anticipate ELOG to continue deploying its balance sheet capacity, particularly in Japan, due to positive yield spreads. Post-acquisition, management estimates ELOG’s gearing to rise to c.37%.
Reiterate an Add rating
We tweak down our FY24-25F DPU estimates by 0.186-0.253%, post results, but retain our DDM-based TP of S$0.39 as we roll forward our assumptions. We reiterate our Add rating as we think ELOG’s recapitalised balance sheet would position it to tap into inorganic growth opportunities. Potential re-rating catalysts are accretive acquisitions, and speedier completions of its asset enhancement initiatives (AEIs). Downside risks: slower-than anticipated acquisitions, and higher-than-projected interest rate hikes, which could hamper acquisition activities.
