• ESR-REIT’s 1H21 DPU of S$0.0155 (+14.3% y-o-y) came in above our expectations.
• Occupancy remained high at 92%; rental reversions registered sequential improvement to -0.2% in 2QFY21 (1QFY21: -5%).
• Reiterate ADD rating for ESR-REIT with a higher target price of S$0.52 and an attractive yield of over 6.5%.

Lower Rental Rebates and Expenses Boosted ESR-REIT's 1H21 Performance

• ESR-REIT (SGX:J91U)’s 1H21 DPU of 1.55 cents (+14.3% y-o-y; +7.8% h-o-h) came in above at 53% of our FY21F DPU of 2.93 cents. 1H21 revenue/NPI rose 5.4%/8.4% y-o-y due to the absence of provisions for COVID-19 related rebates to tenants and lower property expenses.
• ESR-REIT distributed rental rebates from provisions made in FY20 to F&B tenants in 2Q21. Lower borrowing costs boosted distributable income by 18.7% y-o-y to S$56.8m.

Operating Metrics Remain Robust

• ESR-REIT's portfolio occupancy rate inched up 0.9% pt q-o-q to 91.7% in flat in FY21F against a backdrop of uncertainties with Singapore reinstating COVID-19 restrictions, slightly hindering business sentiment.

Stable Portfolio to Pursue Inorganic Growth Opportunities

• We do not expect ESR-REIT to make any more COVID-19 provisions in FY21F as it has enough reserves to provide targeted support to tenants if needed.
• ESR-REIT remains well capitalised with a gearing of 42.9% and 3.9x interest coverage ratio. All in cost-of-debt fell from 3.5% to track record, we think the ESR-REIT’s focus could be on acquiring more ramp-up logistics assets in Australia and Japan.

Reiterate ADD on ESR-REIT With Higher DDM-based Target Price

• We raise our FY21-23F DPU forecast for ESR-REIT by 2-3% to factor in the acquisitions and divestments. This raised our DDM-based target price (COE from 7.4% to 7.3%). We have also factored in a premium for ESR-REIT's potential inclusion into FTSE EPRA Nareit Index.

• ESR-REIT offers attractive dividend yields of over 6.5%.
• Re-rating catalysts/ downside risks include inclusion into the NAREIT Index, accretive acquisitions, weaker rental reversions.

Source: CGS-CIMB Research - 23 Jul 2021