SINGAPORE (Dec 11): DBS is upgrading ESR-REIT to “buy” with unchanged 62 cents target price given its recently announced portfolio reconstitution exercise and an infusion of new capital via the sale of perpetual securities.
Planned acquisitions will drive ESR-REIT’s earnings higher, says DBS, complemented by a stable operational outlook as the industrial supply risk dissipates.
“Estimated DPU CAGR of 5% over FY18-19 will be the first reversal in a number of years. Upgrade to “buy” on the back of rising yields of 7.1%-7.5%,” says lead analyst Derek Tan in a Monday report.
Following the issuance of $150 million in perpetual securities and $35 million in divestment proceeds, the manager has injected the funds into Tuas South Lane, which comes with a long-term master lease.
The move boosts income visibility by lengthening the weighted average lease expiry (WALE) from 3.4 years to 4.2 years.
And ESR-REIT has an additional $70 million in proceeds that is yet to be deployed.
One immediate benefit of this is the ability to be more active in acquisitions, given a potentially more significant pipeline of deal opportunities.
The market will start to price in premiums to NAVs once the sponsor and the REIT reveal their roadmap, says Tan, which could involve overseas diversification.
Units in ESR-REIT are trading at 56 cents, giving an FY18 distribution yield of 7.1%.
