• Results met expectations
• Likely one more AEI in FY20
• Higher FV estimate of S$0.60

4.011 S Cents DPU for FY19

ESR-REIT’s 4QFY19 results came in within our expectations. Revenue and net property income increased by 7.0% YoY and 9.3% YoY to S$62.5m and S$46.2m respectively, on the back of 1) full quarter contributions from Viva Industrial Trust’s 9 properties; 2) the acquisition of 15 Greenwich Drive in Oct 2019; 3) the leasing of 30 Marsiling Industrial Estate Road 8 following the completion of its AEI in Jan 2019; and 4) rental escalation from its existing property portfolio.

This growth was partially offset by the lease conversion from single to multitenancies for certain properties. 4QFY19 DPU fell 0.5% YoY to 1.00 S cents while full year DPU rose 4.0% YoY to 4.011 S cents. As such, 4QFY19 and FY19 DPU comes up to 25% and 101% of our initial full-year forecasts respectively, in-line with our expectations.

Rental Reversion Turned From Negative in FY18 to Flat in FY19

Portfolio occupancy remained stable at 90.5%, which was above JTC’s average of 89.3%. Rental reversions were flat in FY19, an improvement from FY18’s -2.9% and FY17’s -15.8%. We expect rental reversions to remain flat in 2020, given softer demand and large pipeline supply across the various industrial space. YTD tenant retention rate improved from 56.6% in 4QFY18 to 69.6% in 4QFY19. WALE remained flat at 3.8 years.

In terms of leases expiries, 17.5% of ESR-REIT’s portfolio will be due for renewal in FY20, with 13.4% from multi-tenanted and 4.1% from single-tenanted. Out of the 4.1% single-tenanted leases due for expiries, management noted that one tenant with its lease expiring in Jul 2020 is likely not to renew the lease but the size is small, and management is also looking at divestment opportunities for other small non-core assets.

Update on AEIs

The rejuvenation works for UE BizHub East commenced in 4Q19 and is on track to complete in 1Q21. The property will remain fully operational during AEI. As for 7000 Ang Mo Kio Avenue 5, management has signed an MOU with a potential tenant who is looking to utilise the building as a data centre. Pending authorities’ approval, management noted that we are likely to see some delay in commencement of AEI. Should the approval be granted, management is confident to find alternative tenants (management has received enquiries for the building).

Looking ahead, ESR-REIT will continue to divest non-core and small assets with short land tenures and limited AEI potential. It will continue its rejuvenation works to enhance and upgrade its assets to ensure they are future-ready (one more AEI is likely to be carried out this year). Rolling forward our estimates, we maintain BUY with a higher fair value estimate of S$0.60 (previously $0.58).

Source: OCBC Research - 28 Jan 2020