Analysts at DBS Group Research, CGS-CIMB Research and OCBC Investment Research (OIR) have maintained their “buy” calls on ESR-LOGOS REIT (E-LOG) with lower target prices following the REIT’s 3QFY2022 business update.
E-LOG has reported another quarter of strong double-digit reversions of 11.4%, DBS analysts Dale Lai and Derek Tan note. All of the REIT’s property segments reported positive rental reversions, with the strongest reversions coming from its logistics and hi-specs property segments.
However, portfolio occupancies dipped by 1.7 percentage points q-o-q, mainly due to non-renewals at two properties.
CGS-CIMB analysts Lock Mun Yee and Natalie Ong point out that E-LOG has renewed 213,000 sqm of space. They add that the REIT has 6.4% of leases expiring in 4QFY2022 and a further 27% in FY2023. “We anticipate the positive reversion trend to continue in FY2022.”
In terms of capital management, E-LOG’s all-in cost of debt stood at 3.27% at end-3QFY2022. An estimated 66.6% of borrowings are on fixed rates. E-LOG has $390 million of debt due to be refinanced in 4QFY2023, says the analysts.
Meanwhile, as part of its strategy to rejuvenate its portfolio, E-LOG has divested S$132.2m worth of properties year-to-date, at 15.1%-21.7% premium to valuation, and announced the acquisition of ESR Sakura Distribution Centre, a 5-storey modern logistics facility in Japan. The purchase would enable E-LOG to replace the income vacuum from divested properties and rejuvenate its portfolio at the same time, the CGS-CIMB analysts add. "In addition, the planned $143 million worth of asset enhancement initiatives announced earlier is on track to complete progressively over 4QFY2022-1QFY2024."
The total acquisition fee for ESR Sakura Distribution Centre is about $187 million, which will be funded by internal sources of funds and bank borrowings, OIR analyst Chu Peng notes. “NPI yield is 4.35% including 12 months rental support for the vacant space by the sponsor. Post-acquisition, DPU is expected to increase by 2.9% while gearing will increase to 42% on a pro-forma basis,” says Chu.
Although E-LOG had previously expected to benefit from lower margins and financing costs following the merger with ARA LOGOS Logistics Trust, the rapid rise in interest rates will lead to higher overall borrowing costs, says DBS analysts. As such, they have revised their projections and assumed higher interest expenses going forward, leading to a lowering of FY2023 and FY2024 DPU projections by 2%-3%. DBS’s target price for E-LOG was revised to 44 cents from 50 cents previously.
Similarly, CGS-CIMB’s Lock and Ong has tweaked their DY2022-FY2024 DPU estimates down by 0.46%-1.56% to factor in higher interest costs, income vacuum from divested properties as well as contributions from new acquisitions. Their target price is 44 cents, down from 51 cents previously.
OIR’s Chu has lowered his FY2022-FY2025 DPU forecasts by 3.2%-4.8% while raising their cost of equity assumption from 7.6% to 8% due to higher beta and a higher risk-free rate assumption of 3.5%, while lowering their terminal growth assumption to 0.5% given a weaker economic growth outlook in 2023. Collectively, the new assumptions lead to a lower fair value estimate of 42 cents from 48 cents previously.
As at 2.20pm, units in E-LOG are trading at an unchanged 34 cents.