• Cautiousness amongst tenants…
• But potential capital dist. could provide some comfort
• Upside to our fair value as at 23 Jul

2Q19 DPU Up 0.3% YoY

ESR-REIT’s 2Q19 revenue, net property income and distributable income roughly doubled YoY mainly due to last year’s merger with Viva Industrial Trust. 2Q19 DPU increased 0.3% YoY to 1.004 cents, which comes up to 26.5% of our initial full-year forecast. We consider this above expectations due to higher-than-expected capital distributions.

For reference, S$3.8m in capital gains was distributed in 2Q19 and S$2.1m in 1Q19 while our initial full-year forecast was conservative at S$8m in capital distributions. That said, in terms of distributable income (or distributable amount before capital gains), 2Q19 results were in line with our expectations.

As at 30 Jun 2019, ESR-REIT’s gearing stands at 39.0% with ~89.2% of interest rate exposure fixed for the next 2.9 years. Rental reversions were flat for leases signed in 1H19, and management noted that businesses have been more cautious about their expansion plans given trade war uncertainties.

Preferential Offering Details to be Announced at a Later Date

Recall that the manager launched an equity fund raising (EFR) exercise in Jun to raise gross proceeds of up to S$150.0m comprising a Private Placement and a non-renounceable Preferential Offering to finance 1) the acquisition of PTC Logistics Hub, 2) two AEIs at 7000 AMK and UE BizHub EAST, and 3) debt repayment.

On 18 June 2019, the Private Placement of S$100.0m was successfully placed at the issue price of S$0.515 per new unit. Details of the launch date and issue price of the Preferential Offering (gross proceeds up to S$50.0m) will be announced at a later date.

One of Our Few BUY-rated REITs as at 23 Jul’s Close

Note that both AEIs will likely start in 4Q19 and take time to complete: 12 months for UE BizHub and 18- 24 months for 7000 AMK. Due to the time gap between the EFR and the additional income expected from the AEIs, our FY19F and FY20F forecasts for distributable income have previously been adjusted downwards.

However, in terms of distributable amount (distributable income plus capital distributions), we expect this to remain fairly stable given that ESR-REIT currently has >S$60m to distribute in capital distributions which can be used to smoothen out DPU. After adjustments and decreasing our risk-free rate from 2.3% to 2.0%, our fair value increases from S$0.56 to S$0.58.

As at 23 Jul’s close, ESR-REIT is trading at a 7.4% FY19F yield. We re-iterate BUY on ESR-REIT.

Source: OCBC Research - 24 Jul 2019