• ESR-REIT’s FY20 DPU of 2.8 cents (+5.9% q-o-q) came in line with our forecast.
• Occupancy remained high at 91%; rental reversions came in flat at -0.6%.
• Reiterate ADD. ESR-REIT offers an attractive dividend yield of > 7%.

ESR-REIT's FY20 DPU Declined Y-o-y But Improved Q-o-q

• ESR-REIT (SGX:J91U)’s FY20 DPU of 2.8 cents (-30.2% y-o-y) came in line at 104% of our FY20F DPU of 2.7 cents. 2.8 cents DPU includes the 0.197 cents DPU it retained from 1QFY20, indicating that operating environment and cash flow are stabilising. 4QFY20 core DPU (excluding the redistribution of retained income) of S$0.741 improved 5.9% q-o-q.
• ESR-REIT's revenue declined 9.1% and NPI decreased 12.6% y-o-y in FY20 mainly due to transitional downtime during conversion of five properties from single-tenanted buildings to multi-tenanted buildings, rental rebates as well as lower renewals and leasing rents.

Operational Metrics Remain Healthy Despite COVID-19

• Despite COVID-19, ESR-REIT's occupancy rate has been maintained at 91% and retention rate at 85% year-to-date. It managed to renew and secure new leases of 3.87m sf in FY20 vs 2.75m sf in FY19.
• Rental collections for FY20 remain healthy at > 97%, very close to pre-COVID-19 level. Year-to-date rental reversions are relatively flat at -0.6% which is expected, as weaker rental rate from general industrials and logistics warehouse (2 large tenants renewed during the peak of COVID-19) offset the higher rental rate from business parks and high-specs industrial.
• ESR-REIT has ~20% of leases expiring in FY21 of which 2.1% are single-tenanted leases. The REIT expects these tenants to renew leases.

Lower Cost of Debt and Higher Occupancy to Drive FY21 DPU Growth

• We expect negative to flat rental reversion in FY21. While business sentiment has improved, expansion plans are on hold with many businesses looking to consolidate the usage of industrial space. Supply will also spike in 2021/22 due to construction delays.
• ESR-REIT does not expect to provide much rental relief in 2021 and substantial impact from Realignment Framework. FY21 DPU growth would be driven by higher occupancy and lower cost of debt as the REIT refinances its S$191m loan (16.1% of total debt) due in FY21.
• Two AEIs (19 Tai Seng and UE Bizhub) which will be completed in 2021 will also help to lift DPU. ESR-REIT has identified 2-3 more properties for AEIs which could be funded with proceeds from divestments of non-core assets of S$50m. Income disruptions due to AEI can be offset by distributions of capital gain of S$59m. It is also actively looking for acquisitions and open to income producing and development projects.

Reiterate ADD With An Unchanged DDM-based Target Price of $0.494

• We raise our ESR-REIT's FY21-22F DPU forecasts by 1.7-6% factoring in mainly lower cost of debt. Reiterate ADD.
• Re-rating catalysts/downside risks include acquisitions/weaker-than-expected rental reversion.

Source: CGS-CIMB Research - 20 Jan 2021