Analysts are positive on ESR-LOGOS REIT J91U (E-LOG), following the REIT's 1HFY2024 results ended June 30. RHB Bank Singapore analyst Vijay Natarajan has tweaked his target price moving it from 34 cents to 35 cents, while Maybank Securities' Li Jialin keeps his target price unchanged at 32 cents. Both keep their “buy” calls.
Although the 1HFY2024 results “missed expectations” on lower-than-expected income top ups, Natarajan says that the REIT’s proposal to acquire two sponsor assets checks all the right boxes in its long-term portfolio rebalancing strategy.
The REIT declared an amount available for distribution of $86.3 million in 1HFY2024, down 15.0% y-o-y, translating into distribution per unit (DPU) of 1.122 cents, down 18.6% y-o-y.
This is due to divestments, decommissioning of assets for redevelopment and pending contributions from redevelopments along with lower income top-ups.
Net property income (NPI) on a same-store basis rose marginally by 0.5%, and E-LOG has also raised utility charges across the majority of Singapore assets, which will add $250,000 per month to income, Natarajan notes.
Meanwhile, the analyst is optimistic about the news that E-LOG is proposing an acquisition of two modern warehouse and high-specification assets in Japan and Singapore from its sponsor.
The first is ESR Yatomi Kisosaki Distribution Centre, Nagoya, a freehold warehouse asset completed in Apr 2022 and will be acquired for JPY38 billion ($322 million), at 2.3% discount to valuation.
It has a committed occupancy rate of 89.4% with advanced negotiations for another 4%, and will be acquired at an initial NPI yield of 4% (including rent guarantee for vacant spaces).
The analyst says that while its weighted average lease expiry (WALE) is relatively short at 2.7 years from five tenants, management attributed this to the first cycle of lease signings and expects the majority of tenants to stay. Average passing rent of the property is slightly below current market rates, he adds.
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E-LOG will also acquire a 51% stake in 20 Tuas South Avenue 14, a high-specification manufacturing facility (60%) and ramped-up warehouse (40%) for an agreed upon value of $840 million, based on a 100% stake, at 2.3% discount to valuation.
The asset is 99.7%-occupied, with a blended long WALE of 11.2 years, and comes with lease extension options and built-in rent step-up of about 1%. As both assets are acquired from its sponsor, the transaction will be subject to EGM approvals, with a likely completion by end-November, Natarajan notes.
The analyst says that about 73% of the acquisitions are expected to be funded by debt and the remaining $194 million via preferential equity offering at a premium of 30.5 cents per unit. This will be fully underwritten by its sponsor ESR for up to $140 million and Ivanhoe Cambridge for the remaining $54 million.
“Post-acquisition gearing, though, is expected to climb to 41% (from 35.7%), but EREIT guided that it is still working on $200 million - $300 million of potential divestments that should lower gearing further,” he says.
Natarajan trimmed his FY2024-FY2026 DPU estimates by 2%-3%, by lowering capital top-up assumptions. He has not factored in acquisitions, and is pending shareholder approvals.
Likewise, Li from Maybank says that the REIT's lower revenue was led by recent divestments, leasing downtime at 2 Fishery Port redevelopment, and transient occupancy dip. He notes that the proposed acquisitioons in Japan and Singapore are estimated to add $13 million and $26 million of NPI in the first year of full income contribution.
As such, the analyst raises his FY2025 revenue forecasts by 8.2%, while triming his FY2025 DPU by 1.1% on a larger unitholder base of about 9% from 1H2024. His target price remains unchanged at 32 cents.
As at 3.15pm, units in ESR LOGOS REIT are trading 1 cent lower or 3.636% down at 26.5 cents.
