Natarajan names several factors that have led to his “buy” call. He says that the REIT offers an attractive value proposition with strong sponsor backing and a healthy acquisition pipeline, presenting good medium-term growth potential.
The REIT’s distribution per unit (DPU) for the 2HFY2023 ended Dec 31 met the analyst’s expectation. He adds that FY2023 was “a good year” in terms of execution of its portfolio recycling strategy, with the divestment of 10 assets placing its balance sheet in a comfortable position.
“The REIT has been actively recycling its portfolio with 16 asset divestments since 2021 for a total value of about $600 million and redeploying capital into newer and longer-leased assets. Asset rejuvenation plans are on track with two of its planned four redevelopments completed,” says Natarajan.
ESR-LOGOS REIT’s latest acquisition of a stake in the Japan portfolio presents further diversification opportunities into newer freehold logistics assets, Natarajan notes. The REIT’s US$70 million investment into the ESR Japan income fund, which currently holds five fully occupied, recently completed logistic assets with an aggregate valuation of $1.75 billion.
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“The targeted cash-on-cash yield is 5% and the acquisition is DPU accretive (+1.8% to FY2023 pro-forma) based on assumed full JPY debt funding cost of about 1.5% p.a. Gearing post acquisition is expected to be at a comfortable 37%,” he says.
Meanwhile, after two years of double-digit positive rent reversion, Natarajan expects FY2024’s rent reversion to be in high single digits at about 7%-9%, as the overall Singapore industrial market rents remain on an uptrend with favourable demand-supply dynamics.
Portfolio occupancy remains healthy at 92.8% (+0.1 basis points y-o-y), and is expected to be flattish in FY2024, he adds.
The REIT’s FY2023 DPU declined 14.5% y-o-y as higher revenue (+13%) and net property income growth (+12) was offset by new unit issuance and higher financing costs, while overall valuation on a same store basis fell slightly (about 2%) due to a lease decay effect for Singapore assets and forex impact, the analyst notes.
Its financing cost saw a marginal q-o-q decline of 2 basis points to 3.91% and is expected to peak at about 4%, while about 82% of its debt is currently on fixed rate with a hedge tenor of 1.3 years.
“Management has obtained commitments for refinancing $163 million of loans maturing this year with a sustainability-linked loan,” he says.
With that, the RHB analyst revises his FY2024/FY2025 DPU by 2% and 3%, factoring in the recent acquisition and divestments, and fine tuning interest cost assumptions. His target price remains unchanged at 38 cents.
Likewise, Lai and Tan from DBS note that ESR-LOGOS REIT is now the fifth largest industrial S-REIT with a total asset base of about $5.5 billion, and a dividend yield of more than 10%, or about 400 basis points higher than it’s large cap industrial S-REIT peers. “It looks attractive,” they note.
“The rejuvenation of its portfolio entails redevelopment projects and asset enhancement initiatives (AEIs) to drive organic growth in earnings and net asset value,” say Lai and Tan.
While the REIT’s peers find it increasingly challenging to make accretive acquisitions given the negative cap rate spreads in most major markets, ESR-LOGOS REIT can look to its “enviable” sponsor’s pipeline that is valued at about US$2 billion, the analysts note.
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As the REIT continues to actively look at redeploying its proceeds into better quality assets in the long term, Lai and Tan note that earnings may remain depressed if this happens slower than anticipated.
But despite the near-term challenges as interest rates continue to rise, and the REIT’s recent $300 million equity fund raising exercise leading to a dilution in DPU, the analysts see the REIT’s ongoing AEIs and redevelopment projects as key drivers to its earnings in the future.
Their target price remains unchanged at 34 cents.
As at 3.08pm, units in ESR-LOGOS REIT are trading 0.5 cents higher, or 1.61% up at 32 cents.
