Analysts are bullish on ESR-LOGOS REIT (EREIT) following the REITs latest FY2022 ended December 2022 results, which saw distribution per unit (DPU) gain 0.4% y-o-y to 3 cents. The 2HFY2022 period saw a 7.5% y-o-y increase in DPU to 1.540 cents.
In FY2022, the REIT has also divested some $151.3 million worth of properties at an average 14.8% premium to valuation, and announced the acquisition of ESR Sakura DC, a five-storey modern logistics facility in Japan. This is a part of EREIT’s strategy to reposition and rejuvenate its portfolio.
Additionally, EREIT has earlier planned about $143 million worth of asset enhancement initiatives (AEIs), which are on track to progressively complete over 4Q2022 to 1Q2024. As part of its portfolio transformation strategy, management has also guided that it could look to divest up to $450 million worth of non-core assets over the next 12-24 months.
CGS-CIMB Research is hence keeping its “add” call on the REIT but has slightly lowered down its target price to 42 cents from 44 cents previously. Analysts Lock Mun Yee and Natalie Ong note that the uplift in the latest results were due to revenue contributions from its merger with ARA-LOGOS REIT in April 2022 and positive rental reversions.
However, portfolio occupancy slipped marginally to 92.7% at end-FY2022, dragged by a dip in Singapore portfolio. In FY2022, ELOG achieved positive rental reversion of 11.8%, mainly coming from strong performance within the logistics, hi-specs and general industrial properties. “EREIT has 27% of leases expiring in FY2023, mainly from the logistics properties and we anticipate the positive, albeit moderated, rental reversion to continue,” says the analysts.
In terms of capital management, the REIT;s all-in cost of debt stood at 3.66% at end-FY2022. An estimated 72% of borrowings are on fixed rates. In addition to having 11% of its total debt due to be refinanced in FY2023, EREIT has elected to redeem the $100 million of ARA-LOGOS REIT perps on the first call date on Feb 1. “While this may raise EREIT’s gearing in the near term, we believe the potential interest savings (vs. a reset coupon rate of 7.1%) outweighs the near-term risk of a hike in leverage ratio,” says the analysts.
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On its portfolio rejuvenation strategy, Lock and Ong say: “In the longer run, EREIT’s strategy to rejuvenate its portfolio and strengthen its balance sheet should result in improved stock valuations.”
RHB Group Research is also keeping its “buy” call with a target price of 45 cents, lower than its previous target price of 46 cents.
Analyst Vijay Natarajan notes that 2HFY2022 and FY2022 results were broadly in line and that operational performance should continue improving in FY2023, on resilient industry demand. But this may be offset by interest cost and inflation pressures.
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Natarajan is expecting positive mid-single digit reversions for the upcoming FY2023 following the a strong FY2022, in which the REIT’s portfolio saw a healthy around 12% rental reversion –driven mainly by logistics and high-specification buildings. Passing rental rates for its overseas assets are also 20-40% below spot rental rates, which the analysts believes indicates good room for rental growth. Overall portfolio occupancy improved 0.3 percentage points (ppt) q-o-q to 92.7%, and are expected by the analyst to stay around these levels for FY2023.
“We are positive on management’s strategy of rebalancing its portfolio towards modern and longer lease assets and divesting shorter-lease assets. While there is a visible pipeline of $2 billion worth of sponsor assets, it remains cautious on acquisitions ahead amid the rising cost of capital,” says Natarajan.
DBS Group Research too is keeping its “buy” call and 44 cents target price. Analysts Dale Lai and Derek Tan believe that the REIT is overdue for a re-rating as its post-merger synergies unravel. Following the merger, EREIT is now the fifth largest industry Singapore REIT (S-REIT) with a total asset base of about $5.5 billion but has yet to re-rate.
“With a yield of more than 7%, about 200 basis points (bps) higher than its large cap industrial S-REIT peers, it is attractive. The manager is executing an asset recalibration strategy post-merger, which should be value accretive and drive a re-rating of the share price, in our view,” say the analysts.
DBS too is upbeat on the REIT’s portfolio transformation and believes that it will help drive organic growth in earnings and net asset value (NAV). “Portfolio diversification has helped to mitigate negative impact to valuations, and offset the slightly weaker Australian valuations,” they add.
Similarly, OCBC Investment Research has maintained its "buy" rating and 42 cents fair value estimate, as analyst Chu Peng likes the REIT's portfolio rejuvenation efforts and believes that it can drive future growth.
"EREIT will continue to focus on portfolio rejuvenation through redevelopments and asset enhancement initiatives. We understand that EREIT is targeting further divestments of $300-450 million this year with proceeds from the divestments to be reinvested into new economy assets and potentially be used to lower its gearing level," says Chu, who also sees earlier-than-expected recovery in the industry demand-supply dynamics and DPU accretive acquisitions as potential catalysts.
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The risks identified are tenant defaults or asset conversions from master-leased to multi-tenanted, while a slowdown in macroeconomic conditions may dampen business sentiment.
As at 12.10pm, units in EREIT are trading at 38 cents.
Photo: ESR-LOGOS REIT
