• Operating metrics generally surpassed 2019’s levels despite the pandemic.
• Made accretive acquisitions and AEIs, demonstrating its commitment to grow.
• Reiterate ADD. Lower cost of funding to pave way for accretive acquisitions.

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

• ESR-REIT's share price has appreciated by ~18% year-to-date, driven by accretive acquisitions, divestments, and inclusion into FTSE EPRA Nareit Index. However, we think there is more upside driven by improvements in operating metrics, income contributions from acquisitions/AEIs and narrowing valuation gap with its peers.
• ESR-REIT (SGX:J91U)’s FY22 DPU yield of > 6% remains attractive. We reduce our FY21-23 by 0.4% to 3.2% mainly factoring divestment and delay in AEI. Our target price for ESR-REIT is however raised to S$0.538 (COE from 7.3% to 7.1%), still implies an attractive DPU yield of 5.8% to factor in a premium for its inclusion into FTSE EPRA Nareit Index. Weaker rental reversion would serve as a downside risk.

Healthy Operating and Financial Performance Despite Pandemic

• Despite the pandemic, ESR-REIT’s 1H21 occupancy rate, lease secured (sf) and tenant retention income for the rest of 2021 given its diversified portfolio.

Acquisitions and AEIs to Boost Income

• Despite ESR-REIT’s relatively higher Tai Seng Street and 7000 AMK. 19 Tai Seng which is under conversion from a general industrial to a high-specs property will be completed around 3Q21 and has seen good 63% committed occupancy. These AEIs are expected to generate a good 7% yield (S$6.2m/3.8% of FY20 NPI) on cost on a stabilised basis.

Lower Cost of Funding to Pave Way for More Accretive Acquisitions

• ESR-REIT is trading at 6.4-6.6% FY21/22 DPU yield vs 7.5-9% in Mar 20-Jun 21. Its cost of borrowing has also declined from 3.9% in 2019 to 3.2% in 1H21. We understand that there is still room for lower cost of debt while the inclusion into the FTSE EPRA Nareit index would also potentially further lower its cost of capital.

• With the lower cost of funding. ESR-REIT will be in a better position to make accretive acquisitions.

Source: CGS-CIMB Research - 30 Sep 2021