RHB Group Research analyst Vijay Natarajan has maintained his “buy” call for <a href="https://www.theedgesingapore.com/tags/esr-reit" target="_blank">ESR-REIT</a> with a higher target price of 54 cents, up from 48 cents previously.

In a Sept 9 research note, Natarajan notes that ESR-REIT’s share price has risen some 17% year-to-date, surpassing the 4% average performance of industrial S-REITs. He attributes this to ESR-REIT’s inclusion into the FTSE EPRA Nareit Global Developed Index.

See also: <a href="https://www.theedgesingapore.com/capital/brokers-calls/cgs-cimb-raises-tp-esr-reit-acquisitions-and-potential-inclusion-ftse-epra" target="_blank">CGS-CIMB raises TP for ESR-REIT on acquisitions and potential inclusion in FTSE EPRA Nareit Index</a>

Natarajan believes the upwards share price movement has also been driven by operational performance improvements. The REIT’s portfolio occupancy in 2Q has increased to 91.7%, its highest level over the past two years on the back of stronger leasing momentum.

“With industrial demand drivers remaining firm and supply likely to be pushed back on construction delays we expect occupancy to be sustained above 90% levels and flattish rent reversions for rest of the year,” he says.

Natarajan sees further upside for ESR-REIT’s share price on the back of stable DPU growth from improving operating metrics, accretion from recent acquisitions and asset enhancements, as well as continued narrowing of the valuation gap to large-cap peers.

To that end, Natarajan has revised his FY2021-2023 ending December distribution per unit (DPU) upwards by 2%-3% factoring in acquisitions and higher occupancy. He has also cut his cost of equity assumptions by 50 basis points, resulting in his higher target price.

He highlights ESR-REIT completed its acquisition of a logistics facility at 46A Tanjong Penjuru in end-June, with management guiding that the property may see a rental upside of up to 25% upon completion of planned asset enhancements. The REIT also recently acquired a 10% stake in its sponsor’s Australia logistic fund, which Natarajan believes offers good growth potential for the REIT to expand in the Australian market.

For more stories about where the money flows, <a href="https://www.theedgesingapore.com/section/capital" target="_blank">click here for our Capital section</a>

He also points out that ESR-REIT’s divestments of three assets year-to-date, along with a recent equity fundraising of $150 million for acquisitions, should bring gearing to a “more comfortable” level of around 40%. “Overall funding costs have also fallen by 30 basis points since the start of the year to 3.24% and costs are expected to fall further,” he adds.

Meanwhile, Maybank Kim Eng has kept its "buy" call for the counter with an unchanged target price of 55 cents.

Matthew Shim and Chua Su Tye, analysts for the brokerage, believe that ESR-REIT's inclusion with the FTSE EPRA Naret Global Index is the first step in the right direction towards a re-rating.

Nonetheless, they maintain that the inclusion alone is insufficient to drive a "convincing" rerating. The way they see it, the focus will now lay upon ESR-REIT's 2HFY2021 earnings in order to ascertain confirmation of "strong industrial tailwinds".

The analysts say they will be looking for stronger rental reversions and occupancies, better than expected segmental performance for ESR-REIT's industrial and business parks, and execution of the manager's strategy to pivot into more future-proof assets.

As at 4.09pm, units in ESR-REIT are trading up 1.5 cents or 3.26% higher at 47.5 cents.

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