SINGAPORE (Dec 14): OCBC Investment Research is starting coverage on ESR-REIT at “buy” with a fair value estimate of 59 cents, following the recent completion of the REIT’s merger with Viva Industrial Trust (VIT) on Oct 15.

Including 15 Greenwich Drive, this has increased ESR-REIT’s portfolio size to $3.1 billion of assets from $1.7 billion previously.

In a Friday report, analyst Deborah Ong highlights that the REIT is still trading at valuation multiples closer to its small-cap peers despite its new portfolio size; at the unit price of 50 cents it is trading at 0.9 times FY19F book value, and offers a 7.8% FY19F dividend yield.

Ong notes that ESR-REIT’s peers with large portfolios of over $2 billion in valuation, on the other hand, are trading at an average P/B of 1.19 times sand an average dividend yield of 6.5%.

Going forward, she believes three main benefits of the merger have yet to be fully appreciated by the market.

The first is the sheer size of ESR-REIT’s enlarged portfolio, which would mean that the merged entity is less affected by events such as sudden tenant defaults, master lease conversions, and any fall off in income support.

Another benefit is the potential to refinance at lower costs and access to a greater pool of financing options.

Lastly, Ong believes a significantly greater number of institutional investors will consider ESR-REIT an investable asset now that it enjoys greater liquidity and boasts a larger market cap over US$1 billion.

“We believe it is an opportune time to gain exposure to the SG industrial space through the REIT. While we are wary of the back-end loaded supply injection expected in 4Q18 (518K sqm of new industrial space), we believe the relatively slower pace of supply increase from 2019 to 2022 will lead to a better demand-supply situation as well as a further improvement in rents,” says the analyst.  

“To put things into context, the average annual demand and supply from 2015 to 2017 were 1.2m sqm and 1.6m sqm respectively, while the average annual supply coming up for 2019 to 2021 is 1.0m sqm,” she adds.

As at 3:16pm, units in ESR-REIT are trading flat at 50 cents or 0.9 times FY19F P/NAV.