• Keep BUY, lower SGD0.35 TP (from SGD0.38), 21% upside, c.8% yield. ESR- LOGOS REIT remains in healthy financial shape, benefitting from its divestment and asset repositioning strategy which has helped it weather the current high interest rate environment. Portfolio recycling and rejuvenation is expected to continue, with selective acquisitions from the sponsor’s asset pipeline. Operationally, its logistics portfolio continues to do well, offsetting some weakness in business parks with continued positive double-digit rent reversions. EREIT is trading at a c.10% discount to book value.

• Active portfolio recycling to stay. In April, EREIT completed the divestment of 182-198 Maidstone Street in Victoria for AUD66m (c.SGD58m), at a 7.4% premium to the latest valuation and c.20% premium to the purchase price (Apr 2022). The key reason for the divestment, in our view, is the asset’s low exit yield of 2.5%, which is well below its borrowing cost of 4.1%, making it yield accretive. With this, EREIT has divested 17 assets since 2021, raising its total divestment proceeds to SGD663m (Figure 2). More divestments are anticipated this year, with management guiding for SGD200-300m in value for 2024. Post-divestment gearing is healthy at 36.3%, providing ample debt headroom for some targeted acquisitions. Proceeds have been used for targeted buybacks, with 11.4m shares repurchased at SGD0.299/unit in 1Q.

• Asset redevelopments on track, with two of four planned redevelopments completed by end-2023, and another expected to be done by early 2025. The bigger redevelopment of 2 Fishery Port Road into an in-demand cold storage facility is currently in planning stages. The estimated yield on cost for redevelopments is 6-7%. EREIT also committed USD70m (c.SGD93m; 8.4% of total) to the ESR Japan Income fund, which is expected to provide a 5% cash-on-cash yield, which is well above the current JPY borrowing of <2%.

• Healthy 1Q rent reversion of 10.8%, following on last year’s 11%. Positive rental growth continues to be led by the logistics portfolio, while reversions for business parks were flattish. Full-year rent reversions are expected to be in high-single digits. However, portfolio occupancy fell 1.1ppts QoQ to 91.7%, which we believe was mainly driven by lower occupancy in its business parks portfolio.

• Balance sheet. About 74% of its debt remains hedged with no refinancing due this year. FY24 financing costs are expected to be at c.4.2%.

• We lower our FY23-26F DPU by 5-8%, factoring in divestments and imputing higher financing costs. EREIT’s latest sustainability report showed modest progress towards its goals, with room for improvement. Our TP includes a 0% ESG premium/discount.

Source: RHB Research - 10 Jun 2024