Although ESR REIT’s FY2024 distributions per unit (DPU) fell by 17% y-o-y to 2.119 cents, DPU is set to rebound this year. “We expect 2024 to be the trough,” says Adrian Chui, CEO of ESR REIT’s manager.
In 2023 and 2024, ESR REIT restructured and rejuvenated its portfolio. It divested $535 million of assets. As a result there was no income from these divestments. Secondly, ESR REIT held an equity fund raising (EFR) in 2024, raising $300 million, increasing the number units in issue.
Proceeds from the EFR were used to acquire 20 Tuas South Ave 4 and ESR Yatomi Kisosaki Distribution Centre. The acquisitions were completed in December 2024. The two acquisitions will contribute a full year of income in 2025.
In addition, ESR REIT decommissioned 2 Fishery Port in preparation for redevelopment into a cold storage facility.
The rejuvenation of ESR REIT’s portfolio has lengthened its land lease to 43.8 years in 2024, from 37.4 years in FY2022. The portion of assets on freehold land and/or land lease of more than 30 years comprises 71.6% in FY2024. “In terms of portfolio land lease, underlying land lease two years ago was 37.4. Today, it’s close to 44 years, and this will help to reduce the land lease decay problem that affects Singapore portfolios of industrial land that usually has 20 or 30 years land lease remaining,” Chui says.
New economy assets accounted for more than 70% of total assets in 2024. “New Economy, essentially means logistics and high specs,” Chui adds.
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On the capital management front, ESR REIT’s gearing has crept up to 42.8%. However, average cost of debt has fallen from 4.03% during 1HFY2024 to 3.84% for FY2024 due to early refinancing of existing 2025 debt at margins that were 15 bps lower. The loans for 20 Tuas South Avenue 14 and ESR Kisosaki Distribution Centre were done at cheaper margins than existing loans while refinancing of existing portfolio hedges were done at lower rates.
“We expect interest cost to trend down because we are working at 2026 debt at lower margins for the $420 million of expiring debt. We have $75 million of expensive perpetual securities that we plan to either refinance with cheaper debt or use divestment proceeds to redeem,” Chui says, adding that he plans to divest a further $200 million of assets this year.
With a lower cost of debt, full-year contribution from the acquisitions and AEIs such as 7002 AMK, and double-digit rental reversions, NPI is likely to be higher y-o-y this year. On the cost front, 90% of utilities will pass through to the tenants. Repairs and maintenance costs are expected to rise but this amount is likely to be offset by an increase in service charge.
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In an update, CGS International says management expects these two acquisitions to be 3.0% DPU-accretive on a pro-forma basis. “As ESR REIT continues to rejuvenate its portfolio, we believe a recovery in earnings should start to gather momentum from FY2025. We maintain our Add rating for ESR REIT on attractive FY2025 dividend yield of 8.4%,” CGS says.
