E R-REIT aims to be “uneventful” for the next 12 months or so. From FY2022, the REIT underwent a period of active portfolio rejuvenation — closing properties for asset enhancement initiatives (AEIs) and redevelopments — and acquisitions with equity fund raising.
Now, CEO and executive director of the manager Adrian Chui says the industrial REIT is entering a phase focused on maintaining asset and earnings quality, driving asset performance and delivering stable returns.
“The key for us is to show our investors that the earnings are stable, sustainable and coming from core operations, rather than capital gains,” says Chui to The Edge Singapore.
The REIT, which has assets and investments across Singapore, Australia and Japan, is making good on these plans, starting with a strong set of results for 1HFY2025 ended June 30.
ESR-REIT’s core distribution per unit (DPU) rose 8.1% y-o-y to 10.765 cents during the period, with earnings from core operations accounting for 96% of the total 11.239-cent DPU.
Management expects this high percentage of core operations earnings accounting for total DPU to continue moving forward. The total core DPU increase took into account a 4.4% increase in the number of units to 802.1 million, mainly due to the preferential offering completed in 4QFY2024 for the acquisitions of 20 Tuas South Avenue 14 and ESR Yatomi Kisosaki Distribution Centre in November 2024, partially offset by unit buybacks completed in 1HFY2025.
Revenue rose 23.2% y-o-y in 1HFY2025 owing to the two acquisitions and contributions from 7002 Ang Mo Kio Avenue 5 and 21B Senoko Loop, which completed their asset enhancement initiatives (AEI) in 3QFY2023 and 1QFY2024, respectively.
Net property income (NPI) rose 30.1% y-o-y to $166.3 million over the same period.
According to Chui, who joined the manager in March 2017, some investors had commented that the REIT had been “trying to do too many things too quickly in the last two years”.
He adds: “We closed down buildings, we undertook asset enhancements, we sold properties, we raised funds, and that resulted in DPU coming down quite a fair bit. Their feedback to us was [that] while they understand the need for asset rejuvenation, especially in light of short land leases for Singapore industrial properties, sometimes they were a little confused with the earnings growth visibility.”
Unitholders have started to see the “upturn” in earnings, says Chui. “Now that everything is coming into the picture — AEIs are completed, assets are contributing income, the two acquisitions are done — now they start to see where we’re coming from, especially with earnings growth driven by underlying core operations, which is more sustainable. Every line item in the income statement is now contributing positively.”
To assure investors, the manager is now “taking a little bit of a breather”, adds Chui. “They want to see that the income is sustainable and stable, so we take their feedback, and that brings us to our first-half results, where we said we will focus on our core operations.”
Since April 29, ESR-REIT’s share price is up 33.7% from $2.05 to $2.74 as at Aug 29.
Core operations
To Chui, the REIT’s core operations include “leasing, marketing, filling up space, managing costs, making sure that the buildings are well-taken care of and understanding which tenants or industries are coming into or leaving Singapore”.
The REIT juggles this alongside AEIs and divesting noncore assets, while staying mindful of the impact of US President Donald Trump’s sweeping tariffs forcing changes in the global supply chain.
“We won’t know the real impact until at least six months after the implementation of the tariffs,” says Chui. “How the global supply chain will change, which sectors will move out of Singapore — everybody’s still working out where things should be while the Trump administration is still talking about more sectoral tariffs to come… It will affect the fabric of the economy, which in turn impacts our asset relevance.”
Amid the current uncertainty, Chui reiterates that ESR-REIT will remain focused on its core operations over the next 12 months.
Still, history has shown that trade flows will adjust, he adds. “I like to say that trade flows are like water; they will find their way. Countries won’t stand still and not come up with strategies to position their economies.”
Singapore’s economy, in particular, is “quite nimble and flexible”, adds Chui, a former real estate banker at UBS and Standard Chartered. “In my working lifetime, we have gone through a few crises, starting with the 1998 Asian Financial Crisis, followed by the dot-com bubble burst, followed by the Global Financial Crisis (GFC) and Covid-19. Singapore, in my view, has come out stronger, reinvented ourselves; which is also the reason why, as an industrial REIT, with 70% of our assets in Singapore, we have to continue our strategy of rejuvenating our assets [and] making sure that we are relevant.”
A recent example of this rejuvenation strategy in action is the completion of the major redevelopment at 21B Senoko Loop (21BSL), which achieved its Temporary Occupation Permit (TOP) status in January 2024.
According to Chui, 21BSL was a dated, general industrial building built in 2015 with a dormitory attached. “We faced challenges leasing out the premises on an ‘as-is’ basis and post-Covid-19, the demand for non-centralised dormitories all but evaporated. Hence, we redeveloped 21BSL into a high-specification property and master leased it to NTS Singapore on a long lease with rental escalations built in.”
NTS Singapore is a one-stop supplier of complex and qualified mechanics and mechatronics (cleanroom) assemblies based on vertical integration of sheet metal and frames, serving high-tech OEMs in the analytical and semiconductor sectors, Chui adds.
Another example is the recently completed AEI at 16 Tai Seng Street. This project, which added an additional 2,793 sq m of high-specification industrial space and increased the asset’s plot ratio from 3.08 to 3.50, reflects ESR-REIT’s commitment to unlocking value from within its core existing portfolio, rather than relying solely on external acquisitions.
By rejuvenating core assets, the REIT aims to strengthen income resilience and improve leasing momentum, ensuring long-term sustainability. This approach aligns with ESR-REIT’s broader strategy of focusing on operational excellence and maintaining relevance in a dynamic economic environment.
Flattening debt expiry
As at end-June, ESR-REIT’s gearing stood at 42.6%, with ongoing efforts to reduce it below 40%.
Chui believes keeping gearing around 40% is “appropriate” for ESR-REIT. “We are comfortable with 41%-42% leverage because of where we operate; our operations are in developed countries of Singapore, Japan and Australia, where there is a stable economy, rule of law, and a very transparent and very liquid loans and bonds market,” says Chui.
Chui says the REIT’s gearing number should not be a “be-all-and-end-all” figure. Instead, his team is more concerned about extending ESR-REIT’s debt expiry profile. “Is it better to have a REIT that has low 30% gearing, but 50% of all their loans are up for renewal in the next one year? Or is it better to have a REIT that has maybe low 40% gearing, but in each year, no more than approximately 27% of loans are up for expiry, with the majority of the assets on an unsecured basis in developed countries where valuations are more stable?”
After ESR-REIT’s 1HFY2025 results, the manager conducted results briefings and updates with investors. Chui asked them: “Do you want us to have a 39% gearing — which means we have to sell about $400 million of assets to repay debt — which will result in a DPU ‘hole’? Or are you OK with my current gearing with improved earnings quality from underlying operations and a flat expiry profile?” The overwhelming responses were for the latter.
“Some even suggested that we continue divesting non-core assets and recycle them into longer land lease assets to reduce further the land lease decay impact of the Singapore portfolio on NAV while maintaining DPU stability,” he adds.
ESR-REIT has extended its weighted average lease expiry to 4.1 years as at June 30, up from 3.3 years a year ago. The REIT has no further refinancing requirements in 2025 as all expiring loans have been refinanced early at lower margins.
“Our principle has always been to try and make sure that before we enter into a new financial year, we refinance them first… No more than approximately 27% of our loans expire in any year,” says Chui.
Choosing divestments
ESR-REIT has guided for continued rationalisation of its asset portfolio with the divestment of “relatively small-sized, short land lease, non-core assets”.
Proceeds will be redeployed to paying down some debt, making unit buybacks and undertaking AEIs and sustainability efforts. If the divestment proceeds are relatively sizeable, we could then possibly look at recycling them into new acquisitions to ensure stable and better earnings quality.
Chui says the REIT could do another $200 to $400 million worth of divestments in 2026. “You won’t see us trying to make huge divestments, like in 2024, of like $600 million, but [we will] pace it.”
The REIT could shed “small” assets worth $20 million or $30 million, with “short” land leases of under 15 or 20 years.
“The kind of assets that are too small for us to do AEI or redevelopment,” says Chui. “Our estimates show that to do AEI, your asset value needs to be at least about $70 million or $80 million… [otherwise] the returns just don’t make sense for us.”
Overseas footprint
As at June 30, ESR-REIT has 70 properties in its portfolio, along with investments in three property funds, with assets under management totalling $5.2 billion.
With 50 assets here, Singapore makes up just under 75% of ESR-REIT’s property portfolio. The REIT has 18 properties in Australia, making up 10.4% of AUM, and two relatively larger assets in Japan, making up 9.8% of AUM. The remaining 4.8% of AUM are ESR-REIT’s exposure to three property funds in Australia.
ESR-REIT had only entered Japan in 2H2022; could the REIT be looking at another potential overseas foray?
Chui cites three “principles” when making such a decision. “The first principle is [that] we will be in countries where ESR Group has operations in. The second will then be: Is there a liquid market for funding? The third principle is whether the return on asset and funding is commensurate with the type of risk and the type of assets we are investing into?”
Chui is satisfied with ESR-REIT’s current geographical reach. “I’m not saying that we will forever stay in Japan or Australia, but right now, it fits into the three principles that we have — looking at the demographics, looking at the economic situation, looking at the ESR footprint support for us, [and] the availability of funding and the cost of funding in these countries.”
The fourth principle, Chui later adds, is scalability. Despite the buzz surrounding the Johor-Singapore Special Economic Zone (JSSEZ) initiative, this principle likely precludes Malaysia, even though sponsor ESR Group has a considerable portfolio there.
“Malaysia is natural, [as it is] across the Causeway. However, I think the challenge there is getting a meaningful portfolio that allows you to scale up. Getting a RM1 billion portfolio of income-producing assets or industrial assets in Malaysia is already a challenge, and when you convert back to Singapore dollars, the scalability question comes in,” says Chui.
Despite Malaysia’s recent focus on building data centres, the strength of the Singapore dollar is a key consideration, he adds. “This is not a sector that I think we are experts in yet, nor do our current costs of funding allow us to get into [it]; we still want to focus on logistics… I’m not saying we won’t go into Malaysia, but I think a foray into Malaysia is probably better led by my sponsor first.”
