SINGAPORE (Jan 27): Amid a subdued economic environment and a consolidation of portfolios through the merging of real estate investment trusts (REITs), ESR-REIT provides a good investment opportunity, analysts say.

With its 57 properties around Singapore, the REIT has a total gross floor area (GFA) of approximately 15.1 million sq ft and a net property value of $2.93 billion. These properties house some 328 tenants from business parks, high specs industrialisation, logistics and warehousing.

For FY2019 ended Dec 31, 2019, ESR-REIT posted a distribution per unit (DPU) of 4.011 cents, a 4.0% increase from the previous year’s 3.857 cent distribution. The number of units used for DPU calculation rose 71.1%.

Amount available for distribution to unitholders jumped 78.0% to $132.6 million, on the back of a 61.3% increase in gross revenue to $253.0 million and a 67.7% increase in net property income to $187.9 million.

This comes on the back of rental escalations from existing properties, asset enhancements to its Marsiling property as well as the receipt of full year contributions from properties it acquired previously.

Going forward, the group is looking to transform itself by creating a portfolio of freehold assets. One way it is looking at is leveraging its sponsor ESR Cayman's pipeline of properties. ESR Cayman owns 481.7 million sqm in GFA in Australia and has another 35.9 million sqm and four land parcels under construction.

It also has a direct stake in 575 million sqm in GFA of properties under construction in Japan and 1,105 million sqm in GFA of completed properties in China.

“Accessing our sponsor’s pipeline gives us freehold assets which are managed by our sponsor,” noted Adrian Chui, ESR-REIT's CEO, at its recent results briefing.

To this end, analysts are optimistic of the REIT having higher shareholder value and a resultant re-rating in the near term. DBS Group Research, RHB Group Research and CGS-CIMB Research all maintain their “buy” or “add” calls.

DBS has a target price of 59 cents while the other two brokerage houses each have their target prices at 60 cents.

Asset rejuvenation

An upcoming project to look out for is the re-development of ESR-REIT’s Ang Mo Kio facility. Possible rejuvenation plans include the construction of a high-specification industrial building, the group notes.

While this project has received several enquiries, RHB analyst Vijay Natarajan sees it as a positive move. He believes the upcoming development as well as the 225,000 sq ft of space that is presently untilised at the site, brings opportunities for further asset enhancement.

DBS analyst Derek Tan agrees, noting that the REIT’s six non-core assets (identified from low specs and short land tenure) bring potential growth opportunities. “If ESR-REIT is able to divest these assets and recycle the capital into modern industrial properties at a faster-than-expected pace, this could boost shareholder value and lead to a re-rating of the REIT,” observes Tan.

Apart from its re-development plans, the REIT has been successful at finding tenants, especially at its Tuas facility which was hit by the exit of Hyflux which occupied 30%. So far, it has found tenants for 26% of the premise, bringing its total occupancy rate to 56%.

“ESR-REIT is seeing good demand from tenants for the remaining space and expects to ramp up the occupancy rate to 80% in the coming quarters,” Natarajan points out.

Growth opportunities

A possible challenge facing ESR-REIT is a weaker rental environment caused by poorer macroeconomic sentiments, note Lock Mun Yee and Ervin Seow of CGS-CIMB.

This is as businesses may possibly consolidate their operations and rent less spaces to save costs in a weaker economy.

Even so, ESR-REIT’s management expects sentiment to improve across industrial tenants, as some sectors look to expand.  This is in line with Singapore’s purchasing managers’ index (PMI) hitting 50.1 in December 2019 – the first expansion in the last seven months.

To this end, the management “expects to see some improvement in portfolio occupancy and guided for a flattish to slight positive rental outlook,” says Natarajan. This benefits ESR-REIT through higher demand for its spaces.

ESR-REIT closed flat at 56 cents on Friday.