• BUY, new TP of SGD0.45 from SGD 0.46, 18% upside with c.7% FY23F yield. ESR-LOGOS REIT’s 2H22 and FY22 results were broadly in line. Its operational performance should continue improving in FY23, on resilient industrial demand, but offset by interest cost and inflation pressures. Key catalyst: The successful execution of its ongoing portfolio rejuvenation, with the likely divestment of assets and capital recycled into asset enhancements and selective acquisitions. The strong sponsor backing and visible growth pipeline presents strong medium-term growth.

• 2H22 DPU grew 7.5%YoY, aided by merger contributions and past gains distribution top-ups of SGD14.5m – to offset divestment losses, as well as interest and inflation cost pressures. With the ongoing portfolio revamp and rising cost pressures, management plans to continue leaning on capital top- ups, for up to c.10% of DPU. Overall portfolio value declined marginally as gains from Singapore assets (+1.2%) were offset by a decline in Australia (-5.7%), which in turn was due to a c.50bps cap rate expansion. c.72% of its debt is on fixed interest rates as of 4Q22 (3Q22: 67%), with every 50bps increase expected to impact DPU by about 3%. The REIT also indicated that it will likely redeem its SGD100m perpetual securities, which is due for a rate reset in Feb 2023.

• Divestment of SGD450m in non-core assets on the cards. EREIT is currently marketing a SGD450m portfolio of non-core Singapore assets. The move comes closely on the heels of its SGD150m worth of divestments announced last year, at a c.15% blended premium to valuations. We are positive on management’s strategy of rebalancing its portfolio towards modern and longer lease assets and divesting shorter-lease assets. While there is a visible pipeline of SGD2bn worth of sponsor assets, it remains cautious on acquisitions ahead amid the rising cost of capital. Management is also currently evaluating the potential redevelopment of an existing logistics asset into a cold storage ramp-up logistic facility, for which there is high demand. Asset enhancement exercises are also ongoing at three of its assets, at an estimated yield-on-cost of 6-7%.

• Positive mid-single digit reversions for FY23F following a strong 2022, in which its portfolio saw a healthy c.12% rental reversion –driven mainly by logistics and high-specification buildings. Passing rental rates for its overseas assets are also 20-40% below spot rental rates, indicating good room for rental growth. Overall portfolio occupancy improved 0.3ppt QoQ to 92.7%, and should stay around these levels for FY23.

• We trim FY23-24F DPU by 1% and 2%, factoring in higher operating and interest costs. EREIT has an ESG score of 3.1 out of 4.0. As this is one notch above the country median, we applied a 2% ESG premium to its intrinsic value to derive our TP.

Source: RHB Research - 1 Feb 2023