The Positives
+ Credit metrics little change. Gearing and interest coverage remained mostly unchanged. Revenue was down YoY 8.1% due to rental rebates of S$7mn recognised. A further S$3.1mn is expected to be recognised.
+ Healthy leasing activity from pharma and precision engineering sectors. Total leases signed in 3Q20 was 829,000sqft or 5.4% of total GLA. Occupancy was stable at 90.8%. Leasing demand was from stockpiling as well as pharma and manufacturing sectors with expansion and relocation needs. 5.3% of leases remain to expire in 4Q20. EREIT has a well-staggered lease expiry profile and a WALE of 3 years.
+ Rental collections remain stable. Rental collections were at 95% for the past 3 quarters, similar to pre-COVID. No surprises expected in the company’s outlook. Rental rates are expected to remain the same or slightly positive as rental reversions find a floor of -0.2% in 3Q20 vs -4.3% in 3Q19.
+ 100% of portfolio is unencumbered.
The Negatives
– Legacy assets may experience negative rental reversions. Assets that have been on long leases have rental rates slightly higher than current market. Renewal of the leases could see negative rental reversions, however impact is slight at estimated 2%.
Outlook
No surprises guided. No debt maturity until June 2021. Some AEIs expected to convert some properties to high spec, requiring 12-18 months construction and capex of S$70-80mn in FY21, however gearing is guided to remain stable after some divestments of non-core assets. Management is working on expiring land leases ranging from 12 to 39 years, particularly Viva Business Park, 9% of total portfolio value. Given the stable outlook, we are sanguine on EREIT’s credit profile.
Valuation
We are NEUTRAL on the EREIT 4.6% NC5 Perpetual (SGD). The EREIT 4.6% Perp trades at a yield to worst of 3.27% and a yield to call of 6.04%. The bond’s coupon rate will reset on 3 November 2022 at the prevailing 5-year SGD Swap-Offer Rate (SOR) plus 2.6% if it is not called. The current 5-year SOR is 0.4825%, implying a reset yield of 3.0825%. Given the low interest rate outlook up to 2 years, there is potential for non-call event, thus we take a cautious view on the bond.
No pricing indicators on the EREIT 3.95% 09May23 Corp (SGD) bond.
About ESR-REIT
ESR-REIT has been listed on the Singapore Exchange Securities Trading Limited since 25 July 2006. ESR-REIT invests in quality income-producing industrial properties and as at 30 June 2020 holds interest in a diversified portfolio of 57 properties located across Singapore, with a total gross floor area of approximately 15.1 million square feet and an aggregate property value of S$3.1 billion. The properties are in the following business sectors: Business Park, High-Specs Industrial, Logistics/Warehouse and General Industrial, and are located close to major transportation hubs and key industrial zones island-wide.
About the Sponsor, ESR
ESR is the largest APAC focused logistics real estate platform by gross floor area (GFA) and by value of the assets owned directly and by the funds and investment vehicles it manages. Co-founded by its senior management team and Warburg Pincus, ESR and the funds and investment vehicles it manages are backed by some of the world’s preeminent investors including APG, SK Holdings, JD.com, CPP Investments, OMERS, PGGM and Ping An. The ESR platform spans across the People’s Republic of China, Japan, South Korea, Singapore, Australia and India. As of 30 June 2020, the fair value of the properties directly held by ESR and the assets under management with respect to the funds and investment vehicles managed by ESR recorded approximately US$26.5 billion, and GFA of properties completed and under development as well as GFA to be built on land held for future development comprised 18.7 million sqm in total. ESR has been listed on the Main Board of The Stock Exchange of Hong Kong Limited since 1 November 2019.
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