ESR-REIT target price raised by SCCM on ‘robust’ 2022 outlook

ESR-REIT property near Singapore’s Tai Seng MRTESR-REIT property near Singapore’s Tai Seng MRT

Investment bank SooChow CSSD Capital Markets (Asia), or SCCM, boosted its forecasts for ESR-REIT on expectations operating metrics would be “robust” in 2022 and on the merger with ARA LOGOS Logistics Trust (ALLT).

“We expect portfolio occupancy and rental reversions to improve further given gradual reopening of the economy and higher market rents,” analyst/Insight Provider SCCM Asia Research, which publishes on Smartkarma, said in a note Tuesday. “We are positive on the pending merger with ALLT, and we believe unit price’s reaction post the merger announcement (up around 5 percent) implies unitholders’ approval as well.”

SCCM raised its target price on ESR-REIT to S$0.54 a unit from S$0.48 previously, keeping a Buy call, citing an around 19 percent potential total return and possible further upside if the merger with ARA LOGOS Logistics Trust, or ALOG, is successful.

ESR-REIT has proposed acquiring ALOG, for a total consideration of around S$1.4 billion in cash and shares, in a deal which will create an industrial REIT with around S$5.4 billion in assets across Singapore and Australia.

In October, ESR-REIT reported its third quarter net property income increased 8.6 percent on-year to S$43.9 million, mainly on the absence of year-earlier Covid-related rental rebates for tenants and contributions from the acquisition of 46A Tanjong Penjuru. Portfolio occupancy was 91.2 percent, excluding properties in the pipeline for divestment and redevelopment, in the third quarter.

SCCM said it raised its occupancy and passing rent estimates by 2.6 percentage points and 1.7 percent on-year to 93.7 percent and S$1.85 per square foot pm for fiscal 2022, citing robust portfolio occupancy and rental reversions as the economy gradually reopens and on higher market rents.

“We expect the favourable high-specs industrial portfolio and logistics/warehouse portfolio (contributed 41 percent of gross rental income) to outperform other segments, due to robust demand from e-commerce, precision engineering and electronic sectors,” the note said.

The investment bank was also positive on the potential merger with ALOG, advising ESR-REIT’s unitholders to vote in favor, noting the deal is distribution per unit (DPU) accretive on a pro forma basis, it increases exposure to freehold properties and properties with longer land leases, and provides an opportunity to scale quickly with diversified assets.

ESR-REIT units ended Thursday down 1.01 percent at S$0.49.