ESR REIT is a real estate investment trust which specializes in income-producing industrial assets in Singapore. Although this REIT was affected by the COVID-19 pandemic, it’s recovering as the company embarks on new projects. However, the company was not adversely affected like others due to its high number of industrial properties.
Over the past five years, the REIT has seen a growth in earnings and become profitable. They have a reasonable dividend payout ratio with the dividend payments covered by earnings. The acquisitions and AEIs have the potential to drive revenue growth and earnings in the next quarter of FY2021.
Profile
Previously known as Cambridge Industrial REIT, ESR-REIT was listed on the Singapore Exchange Securities Trading Limited on 25th July 2006. ESR-REIT’s portfolio includes quality income-producing industrial properties in business sectors such as business parks, industrial parks, logistics, warehouses, and high-specs industrial.
As of 31st December 2020, the company held a diversified portfolio of 57 properties in Singapore. With a property value of S$3.1 billion and a total gross floor area of about 15.1 million square feet, these properties are primarily in locations close to major transportation hubs and key industrial zones. The company just acquired 46A Tanjong Penjuru in June 2021 and is in the process of renovating 16 Tai Seng Street and 7000 AMK.
Performance
| Dec S$ m | 2020 | 2021f | 2022f |
| Revenue | 230 | 243 | 249 |
| Distribution Income | 99 | 125 | 130 |
| Distribution Growth(%) | (25) | 26 | 4 |
| PE (X) | 26.3 | 15.1 | 15.0 |
| Dist Yield (%) | 6.4 | 7.2 | 7.2 |
| P/NAV (x) | 1.1 | 1.1 | 1.2 |
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Gross Revenue and Distribution Per Unit (DPU)
Since the company was listed on the Singapore Exchange Securities Trading Limited in 2006, the DPU has mildly fluctuated. In the data, the third quarter of 2007 had the highest DPU at 1.700, with the lowest being 0.145. Despite the effects of the pandemic, the DPU was relatively stable between 0.500 and 0.900.
As the effects of the pandemic reduce, ESR has begun AEI works and started working on more projects that will drive organic growth. The operations are also stabilizing from FY2020, contributing to the gradual recovery of the company’s core revenues. Based on the analysis, the distribution growth and income for FY21 will increase by more than 12% y-o-y due to the recent acquisitions.
Gearing Ratio
ESR REIT has a relatively high gearing ratio of 42.9%. Although the leverage limits have recently increased to 50%, this high ratio puts the REIT at risk. This is because the company might require fundraising to cover major capex expenses.
Share Price
As of July 2021, the ESR-REIT was trading at 44 cents. With a +8.5% change, the company had priced its preferential offering at 40 Singapore cents per unit. This share price is enough to raise gross proceeds of up to S$50 million.
The company is looking to raise S$150 million through this preferential offering of its shares and private placement. The gross proceeds from the shares preferential offering will be channeled to partially finance asset enhancement initiatives at 16 Tai Seng Street and 7000 Ang Mo Kio Avenue 5 properties and for debt repayment.
Strategies
Here are some strategies that the company has adopted to grow its earnings.
1. Rental Reversions
ESR REITs rental reversions have fluctuated greatly since the onset of the pandemic during the second quarter of 2020. During the Phase two (heightened alert) period, the rental reversions for the second quarter of 2021 were -1.6% because of the pandemic. This was contributed by lower renewal by larger tenants in the business park.
However, the high-specs, general industrial, and logistics business sectors had positive reversions.
2. Portfolio Optimization
In April, ESR-REIT divested two non-core properties, 11 North Serangoon Ave 5 & 3C Toh Guan Road East, at 5% above valuation. The company also divested at a 7.1% premium of their total acquisition price. In addition, they also acquired the 46A Tanjong Penjuru in June 2021. This latest logistics and warehouse property will strengthen ESR REIT’s portfolio in the logistics sector, which has been more stable during the pandemic period.
On top of this, the company is engaged in portfolio rejuvenation of 3 AEI properties in Singapore. Rejuvenation works on 19 Tai Seng Avenue are already ongoing, and they have secured more than 63% commitment occupancy.
This project is on track to be completed by 3Q 2021. In addition, there are also two other upcoming AEIs for 16 Tai Seng Street and 7000 AMK. When all these projects are done, the company will have a higher value.
3. Lease Profile
Of all the 58 properties owned by ESR REIT, the weighted average lease (WALE) is 2.8 years. The assets under management, including joint ventures, are $3.36 billion. The weighted average land lease is 27.62 years.
The occupancy rate on all the properties is still low at 97.1%. In addition, the highest lease expiry within five years is at 25.4% and falls in 2022.
4. Debt Balance
The operating cash flow does not cover the debt in ESR REIT. While all debts are unsecured, the cost of debt is high at 3.24%.
The fixed-rate debt is at 75%, while the highest debt maturity over a period of 5 years is at 29.8% and falls in 2023. The company’s interest coverage ratio is pretty low at 2.8 times, whereas the weighted average debt maturity is 2.6 years.
What are the Risks?
The rental reversions and lower occupancy in some of the properties could affect the performance of the ESR REIT. In addition, the company has a relatively high gearing ratio at 42.9% and a debt to equity ratio of 78%.
This puts the company at risk because they need more funds to cater to their expenses. As an investor, this might be risky for you.
However, as the COVID-19 pandemic continues, the ESR earnings are also exposed to some risks. This might affect the gross revenue and earnings.
Diversification Profile
Of all its properties, Singapore makes up 97.8%, while Australia comprises 2.2%. Looking further into the profile, the top tenant contribution is at 5.2%, whereas the top 10 contribute 30.6% to the total occupancy.
The company’s diversification into industrial properties has helped them withstand the adverse effects of the pandemic. The occupancy rate is above 97%, which is good for company returns.
Asset Upgrade and Acquisition
In the second quarter of FY21, ESR was reported to raise $150M via a private placement and preferential offering to fund its $119M acquisition of a logistics facility in Tanjong Penjuru. The Fund will also be used to enhance two main assets in Ang Mo Kio and Tai Seng.
The REIT also obtained a A$68.5M unsecured loan to finance the acquisition of 10% interest in GIC majority-owned Australian logistics investment for A$60.5M. The trust currently holds properties in 5 Australian states, with a favorable occupancy rate of 95.5% and a weighted average lease expiry of 4.87 years. The Australian acquisition with a total cost of A$64.9M will be fully funded through debt.
Market Valuation
ESR-REIT is undervalued compared to its fair value by 30.5%. It is trading below the estimated fair value of 0.73, which is based on the cash flow the company is expected to generate in the future.
Ownership
When looking at the ownership of ESR REIT, the top shareholder, Jinquan Tong, owns 20.19% of the company, followed by ESR Cayman Limited at 7.73%, Mondrian Investment Partners Limited at 4.77%, The Vanguard Group, Inc. at 2.24%, and United Engineers Developments Pte Ltd at 1.29%. The top 25 shareholders own 44.63% of the company.
The general public own 54.6% shares of the company, while the rest is split between individual insiders, institutions, public companies, and private firms. With the high ownership, the general public investors can make decisions that affect shareholder returns, including appointments and dividend policies. In addition, because the company is continually expanding, the shareholders can vote on acquisitions or mergers that affect revenue.
Management
The average management tenure is at 3.6 years. The current CEO is Mr. Wai Yin Chui, also serves as CEO & Executive Director of ESR Funds Management (S) Limited at ESR Cayman Ltd. He has held this role since joining the company on March 24, 2017.
Our Verdict
The performance of FY21 and FY22 is expected to be much better than FY20 since the company has focused its efforts on acquiring assets overseas to strengthen its portfolio. In addition, the AEI plans in FY21 are expected to generate a higher return. Overall, the company is estimated to perform better in the next 1-2 years.
The company just acquired new properties in logistics and is in the process of renovating others. Once these are occupied in the next 2-3 years, the gross revenue will increase, contributing to the share price and dividend payout. ESR REIT also needs to find ways to cover the high debt to ensure they don’t use all the earnings.
Like other industrial landlords, ESR REIT was less impacted by the pandemic and outperformed other players in the property sector. EREIT retained part of its income for cash flow purposes which is being utilized to grow its portfolio.
Our Takeaways
- ESR REIT earnings are forecast to grow in the next 1-2 financial years.
- The acquisition of new properties is promising if able to secure a favorable occupancy rate and steady revenue.
- The company needs to strategize on how to manage the debt to equity ratio to manage its performance.
- The focus on industrial properties protected the company’s investments against the adverse effects of the COVID-19 pandemic.
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