RHB Bank Singapore has lowered its target price for ESR-LOGOS REIT J91U (E-LOG) following the divestment of its logistics facility in Australia’s state of Victoria back in April, from 38 cents to 35 cents.
However, the analyst Vijay Natarajan has kept his “buy” call on the REIT, on the basis of it being on “the right trajectory”.
E-LOG remains in healthy financial shape, benefitting from its divestment and asset repositioning strategy which has helped it weather the current high interest rate environment, says Natarajan.
The REIT’s divestment of its 182-198 Maidstone Street in Victoria for A$66 million (about $58 million), at a 7.4% premium to the latest valuation and about 20% premium to the purchase price was due to the asset’s low exit yield of 2.5%, well below its borrowing cost of 4.1%, making it yield accretive, the analyst notes.
He says that with this, the REIT has divested 17 assets since 2001, raising its total divestment proceeds to $663 million, with more divestments anticipated to come this year of $200 million - $300 million in value.
As a result, the REIT’s post-divestment gearing is “healthy” at 36.3%, providing ample debt headroom for some targeted acquisitions, says Natarajan, and proceeds have been used for targeted buybacks, with 11.4 million shares repurchased at 29.9 cents/unit in 1Q2024.
The analyst notes that the REIT has its asset developments on track, with four planned redevelopments completed by end-2023, and another expected to be done by early 2025.
“The estimated yield on cost for redevelopments is 6% - 7%. EREIT also committed US$70 million (about $93 million; 8.4% of total) to the ESR Japan Income fund, which is expected to provide a 5% cash-on-cash yield, which is well above the current Japanese yen borrowing of less than 2%,” Natarajan notes.
The REIT also has positive rental growth from its logistics portfolio, with a “healthy 1Q2024 rent reversion of 10.8%” following last year’s 11%, while reversions for business parks were flattish, says the analyst.
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About 74% of the REIT’s debt remains hedged with no refinancing due this year, and its full year financing costs are expected to be at about 4.2%, he notes.
As such, the analyst lowers his FY2023-FY2026 distribution per unit (DPU) by 5% - 8%, factoring in divestments and imputing higher financing costs.
As at 10.40am, units in E-LOG are trading flat at 28.5 cents.
