SINGAPORE (Mar 19): ESR REIT has been a victim of the global REIT sell-off, with its share price plunging some 56% since the beginning of the Covid-19 outbreak on Jan 24.
Although S-REITs have only shed some 30% in comparison, analysts are optimistic that ESR REIT is in a strong position to overcome the turbulent phase.
In a Thursday report, RHB Group Research notes that Singapore’s industrial sector has garnered a reputation of being the most resilient among all REIT asset classes.
Analyst Vijay Natarajan says reasons for this include the sector’s inability to carry out operations remotely, lower rental base, as well as substitution choices for industrial tenants and longer lease tenures.
“The manufacturing sector still forms the backbone of Singapore’s economy, accounting for 21% of the country’s GDP in 2019,” says Natarajan.
“We believe the government has various policy measures and tools at its disposal to support the industrial sector should the economy enter into a recession,” he adds.
In addition, the brokerage notes that the REIT’s sponsor, ESR Cayman, has a strong pan-Asian industrial sector experience and has more than US$20 billion worth of assets under management to its name.
“The sponsor has also been showing its commitment to the REIT by backstopping recent equity fund raisings,” says Natarajan.
The way he sees it, ESR REIT also boasts a diversified tenant base, or some 328 tenants across more than 15 sectors, which could in turn mitigate potential tenant defaults.
“Based on our discussions with management, there has been no tenant default or an increase in late payments so far,” shares Natarajan.
The REIT’s management has been constantly engaging with its top 10 tenants, who constitute 30% of its rental income, and is also monitoring the ongoing developments across various industrial sectors.
Although ESR REIT’s gearing of 41.5% might be a cause for concern to some investors, Natarajan shares that asset values need to fall by more than $200 million, or 7%, from the current level before a potential breach of its gearing threshold of 45% occurs.
“Even in the worst case where such an event occurs, we believe the REIT’s sponsor will potentially step in and underwrite any potential equity fund raising,” says Natarajan.
“In terms of debt maturity, the REIT has already secured commitments for the $160 million loan expiring this year at a lower interest cost, which should bring down the overall borrowing costs by 20 basis points,” he says, adding that the REIT’s next debt maturity is only in 2HFY2021.
However, the brokerage has lowered its DPU forecasts for FY2020F to FY2022F by 7-9% on the assumptions of lower rents and occupancies.
“We also raise our COE assumptions by 100 basis points, factoring in higher market risk premiums,” says Natarajan, adding that key risks for the REIT include a prolonged recession and a sharp spike in tenant defaults.
Despite this, RHB is reiterating its “buy” call on ESR REIT with a target price of 50 cents, representing a 61% upside for the stock.
As at 12.09pm, shares in ESR REIT are trading six cents lower, or 20% down, at 24 cents. According to RHB valuations, this translates to a price-to-book (P/B) ratio of 0.57 times and a dividend yield of 9.7% for FY2020F.
