• Interest expense savings from early refinancing; no refinancing in 2020.
• Earnings relatively sheltered for now; retail tenants facing more challenges.
• Long-term goals still intact despite a pause in near-term inorganic growth plans.

ESR-REIT Investors' Call

• We just hosted an investors’ call earlier this afternoon with ESR-REIT (SGX:J91U) to get an update on how the current COVID-19 situation has affected its operations. There was quite a healthy turnout with almost 40 participants dialing in and many questions revolved around how tenants are being affected by COVID-19 and updates on the recent sell-off in ESR-REIT’s shares.
• The call was timely given that ESR REIT share price has fallen 55% since the start of the year, before staging a 17% daily rebound today!

Mitigating Impact of COVID-19 on Operations. Nil Refinancing in 2020

• Having already done an early refinancing of borrowings due in FY20, ESR-REIT will not have any refinancing risk for the rest of this year.
• 100% of the portfolio is unencumbered currently; ESR-REIT will have the flexibility to negotiate secured financing if necessary.
• It may be difficult to take on new financing given current market conditions, but refinancing should not be an issue.

No Major Arrears; Earnings Relatively Sheltered

• Approximately 2% of tenants are late on their rental payments on average and remains in this range currently.
  • Will put some planned AEIs on hold for now but works at UE BizHub and 7000 Ang Mo Kio Ave 5 will continue (albeit at a possibly slower rate at Ang Mo Kio).
  • Based on worst-case scenario sensitivity analysis, earnings will drop S$40m if all expiring leases this year are not renewed and there are no new leases signed (still represents an implied 12% dividend yield).
  • In fact, leasing activities in the first two months of FY20 have been very encouraging; approximately 2% of the portfolio has been renewed so far and rental reversions remain flat.
  • Do not expect portfolio to be too adversely affected; only experienced a 3% decline in portfolio valuation during GFC in 2008-2009.
• 4.1% of leases that are expiring in FY20 are from four single-tenanted assets on master leases.
  • One has renewed its master lease.
  • Two have already been converted into multi-tenancies; average occupancy of 94% currently.
  • One has been identified as a non-core asset and has been put up for sale.

Retail Tenants Are Most Affected

• Retail (and F&B) clients make up approximately 7.5% of Gross Rental Income. So far only some of these retail tenants have come forward to ask for rental rebates; ESR REIT will pass on government property tax rebates to these retail tenants.
• Industrial tenants have not asked for any rental rebates at this point.
• The convention hall and hotel component at UE Bizhub is on a master lease with UE, and ESR REIT will receive a fixed contribution from the master lease and thus will not be impacted in terms of cash flows.

Long-term Goals Still Intact

• Stronger financing position. Expect further savings in borrowings once the bonds due in April/May FY20 are redeemed.
  • Will be refinanced with a loan facility that has been committed.
  • Projected interest savings of S$1.7m in FY20 once the bonds are redeemed.
• Will put on hold M&A activities for now, but long-term goal to expand overseas and extend portfolio land lease expiry remains.
• Recent sharp sell-offs possibility due to margin-calls on investors.
  • Most of its major shareholders remain the same; one major shareholder has only decreased his holdings by 1% (not too significant and should be strategic in nature as this shareholder has an ownership stake in the Manager as well).

Maintain BUY

• We continue to like ESR-REIT for its proactive management of its portfolio and operations. Despite the relatively high gearing of 41.5% currently, there is no refinancing risk in FY20, and there would be interest expense savings from 2Q20 onwards.
• About 2% of the 13.5% of leases expiring this year have already been renewed and we take comfort in the flat rental reversions especially in the current turbulent economic landscape. For single-tenanted assets (4.1% of expiries in FY20), three out of four assets have been repositioned, and the remaining asset will be divested.
• Lastly, it is the financial might and support of a strong Sponsor that will help names like ESR-REIT stand out in times of uncertainty.
• In fact, ESR Cayman (the Sponsor), just increased its stake in AIMS APAC REIT (SGX:O5RU) by S$13m last week.
• At current prices, the implied FY20 dividend yield is approximately 14%. We maintain our BUY call with a Target Price of S$0.59.

Source: DBS Research - 25 Mar 2020