RHB Bank Singapore is reiterating its “buy” recommendation on ESR-LOGOS REIT J91U (E-LOG), but with a lower target price of 40 cents from 45 cents previously.
“E-LOG is still on track to divest a portfolio of Singapore assets, with proceeds likely for the purchase of newer logistics assets from its sponsor,” says analyst Vijay Natarajan in his June 13 report, noting also that divestment plans are progressing, with exclusivity entered with a potential buyer that is now conducting due diligence on assets.
“We understand from market sources that the portfolio under due diligence is slightly smaller than the targeted $450 million. We anticipate that divestment will be done closer to book value or at a slight discount,” adds Natarajan.
On top of that, the REIT has also recently completed its equity fundraising of $300 million via private placements and preferential offerings. Post fundraising and divestment, gearing is set to fall below 35% levels, offering over $500 million in headroom.
“We believe E-LOG will likely use the proceeds to acquire assets from its sponsor’s pipeline, potentially in Singapore, where LOGOS has a few modern logistics assets. In addition the REIT is also progressing with its redevelopment plans for three of its industrial assets and is likely to convert a logistics asset into a cold-storage logistics facility, which is currently in high demand,” says Natarajan.
However, the equity fundraising exercise has resulted in a temporary earnings dilution, which has caused the overall share price to underperform ytd.
See also: RHB initiates coverage on CSE Global with ‘buy’ call with TP of 58 cents.
Nonetheless, this move has strengthened the REIT’s balance sheet against an uncertain macro backdrop. The analyst remains positive on the mid- to long-term strategy portfolio rejuvenation plans, though this will likely result in some short-term pain.
For the upcoming FY2023 ending December, the analyst is expecting positive mid-single-digit rent reversions of about 6% to 8%, continuing on the rental upcycle seen from the start of FY2022. The strong rent reversion will mostly be driven by the high-spec and logistics segment, where demand remains resilient and is outpacing supply, he reckons.
In April, E-LOG announced that one of its top 20 tenants, CEVA Logistics, renewed its lease at 15 Greenwich Drive in Singapore at rent reversions of +20%. But portfolio occupancy dipped slightly in the first quarter to 92.1%, falling 0.6 percentage points q-o-q, mainly on a nonrenewal of leases at some of the assets it has identified for redevelopment. “We expect it to remain stable at around this level,” adds Natarajan.
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Meanwhile, asset values are expected to remain relatively steady. Despite rising rates, the analyst expects cap rates for Singapore industrial assets to remain stable on continued investor demand. Cap rates for Australian assets are likely to see 50-75 basis points (bps) expansion, in his view, based on recent market transactions. However, the impact on valuation is likely to be offset by the strong rental growth (10%-40%) for logistics assets, driven by increasing demand.
On that note, the analyst has lowered his FY2023-FY2025 DPU estimates by 3% to 5% to factor in the recent equity fundraising via private placements and preferential offerings.
Units in E-LOG closed 1.6% higher on June 14 at 32 cents.
