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RHB lowers TP and estimates on ESR-LOGOS REIT despite portfolio rejuvenation

Felicia Tan
Felicia Tan11/22/2022 09:09 AM GMT+08  • 3 min read
RHB lowers TP and estimates on ESR-LOGOS REIT despite portfolio rejuvenation
Post-merger, the REIT has been delivering on its promises of revamping its portfolio, making a series of divestments at a premium and redeploying it into high-quality Japanese freehold logistics assets. Photo: E-LOG REIT
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RHB Group Research analyst Vijay Natarajan has kept “buy” on ESR-LOGOS REIT (E-LOG) as the REIT’s portfolio rejuvenation continues.

Post-merger, the REIT has been delivering on its promises of revamping its portfolio, making a series of divestments at a premium and redeploying it into high-quality Japanese freehold logistics assets.

Year-to-date (ytd), the REIT manager has divested five assets totalling some $155 million at an estimated 15% premium to their latest valuations.

In the coming quarters, the REIT manager says it expects more divestments with an additional $400 million worth of assets identified for divestments in the next one to two years. The proceeds from the REIT’s recent divestment will be used for its maiden Japanese acquisition of ESR Sakura Distribution Centre, in Chiba, Tokyo for JPY17.8 billion ($183.5 million).

To Natarajan, these moves are part of E-LOG’s efforts to refresh its portfolio by divesting non-core shorter lease assets and add good quality freehold assets from a visible sponsor pipeline of US$2.0 billion ($2.76 billion).

At the time of writing, the analyst also notes that the REIT’s portfolio metrics remain sound. E-LOG’s rent reversion has been strong at 11.4% ytd.

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“Management remains confident that based on its forward demand and discussions with tenants, it expects it to remain at mid-single digit levels next year,” Natarajan writes.

“Occupancy, though, dipped slightly in 3Q mainly on the back of redevelopment plans, but remains healthy at 92.4%. Asset enhancement initiatives (AEIs) and redevelopment are progressing in the right direction with the REIT achieving full occupancy for revamped 19 Tai Seng Avenue (conversion to high-tech building) and 53 Pengerine Drive (increase in gross floor area or GFA). The yield on cost for AEIs ranges from 6% to 8%,” he adds.

Post its recent divestments and acquisition, the REIT’s gearing is expected to stay at around 40%. About 66% of its debt is hedged with every 50 basis points expected to cause a distribution per unit (DPU) impact of 2%.

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The REIT currently has about $390 million, or 20%, of debt due in 2023, a large part of it due for refinancing in the 4QFY2023.

In his report dated Nov 21, Natarajan has lowered his target price to 46 cents from 53 cents. The new target price has already factored in a 2% environmental, social and governance (ESG) premium to his intrinsic target price due to the REIT’s ESG score of 3.1 out of 4.0, one notch above RHB’s country median score.

The analyst has also lowered his estimates for the FY2023 and FY2024 by 8% after factoring in divestments and higher interest costs for the REIT’s debt and perpetual securities.

In early November, the REIT announced that it would not be redeeming its $150 million worth of perpetual securities. The perpetual securities would be extended and reset to a higher coupon rate of 6.632% per annum (p.a.) from 4.6% previously.

“The move will result in [a] $2.0 million p.a. increase in pay out and is not surprising considering the challenging perpetual securities market conditions and alternatives,” Natarajan notes.

The analyst’s cost of equity (COE) is also raised by 60 basis points to reflect the rising interest rate environment, he says.

“Operationally [E-LOG’s] assets remain well positioned - with positive rent reversions and high occupancy - but this will not be enough to offset an increase in interest costs (66% hedge) and reset of perpetual securities interest,” Natarajan writes.

“Key catalysts remain strong sponsor support and asset revamp and recycling,” he adds.

As at 9.09am, units in ESR-LOGOS REIT are trading 0.5 cent lower or 1.43% down at 34.5 cents.

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