Overview of ESR-LOGOS REIT
ESR-LOGOS REIT (EREIT SP), a Singapore-based industrial real estate investment trust, is undergoing a strategic portfolio transformation aimed at bolstering its earnings quality and long-term value. With a diversified footprint across Singapore, Australia, and Japan, the REIT is positioning itself to capitalize on strong demand in logistics, high-spec industrial sectors, and other income-generating industrial assets.
Despite recent headwinds like increased borrowing costs and an enlarged perpetual securities base, ESR-LOGOS REIT continues to offer an attractive dividend yield of 8.1% (FY25E) and is trading at a compelling valuation of 0.9x P/B. The REIT has been rated as a “BUY” by the analysts at Maybank Research Pte Ltd, supported by its ongoing portfolio enhancements and promising growth trajectory.
Financial Performance Highlights
Distribution Per Unit (DPU) Decline
In the second half of FY24, ESR-LOGOS REIT reported a DPU of SGD 0.997 cents, reflecting declines of 11.1% half-on-half (HoH) and 15.9% year-on-year (YoY). These reductions were attributed to the absence of top-ups, higher borrowing costs, and an enlarged number of units issued. The FY24 full-year DPU stood at SGD 2.1 cents, marking a 17.4% YoY decline.
Stable Revenue and Occupancy Levels
Gross revenue for 2H24 remained flat YoY at SGD 189.6 million, while net property income (NPI) rose by 1.2% YoY to SGD 133.9 million. Portfolio occupancy improved marginally to 92.3% by December 2024, driven by Singapore’s performance offsetting a slight decline in Japan. Rent reversion metrics stood at +10.3% for FY24, with logistics and high-spec industrial assets contributing the most.
Gearing and Cost of Debt
Aggregate leverage increased to 42.8%, up 6.8% HoH due to mergers and acquisitions (M&A) and asset revaluation. The REIT’s cost of debt fell from 4.03% in 1H24 to 3.84% in 2H24 and is expected to decline further due to refinancing spreads and potential redemption of perpetual securities at a lower coupon rate.
Key Strategic Developments
Portfolio Transformation
The REIT has made transformational acquisitions, resulting in a portfolio comprising 70% of New Economy assets and a higher proportion of freehold or long-leasehold properties. This aligns with its strategy to enhance asset quality and earnings stability.
Asset Enhancements and Rent Reversions
Management has focused on upgrading general industrial assets into higher-value categories such as high-spec industrial spaces. This has contributed to robust rent reversions, with logistics and warehouse assets achieving a 14.4% rent reversion rate in FY24.
Valuation and Analyst Recommendation
ESR-LOGOS REIT is valued using a three-stage dividend discount model (DDM), with a cost of equity set at 7%, aligning with its industry peers. Revised estimates for FY25 and FY26 indicate a downward adjustment in DPU by 11% and 7.5%, respectively, due to higher financing expenses related to acquisitions.
Despite the DPU cuts, the REIT remains an attractive investment option due to its 8.1% yield (FY25E), ongoing portfolio transformation, and strong management execution. The target price (TP) has been adjusted to SGD 0.30 from SGD 0.32, with a reiterated “BUY” recommendation.
Risks and Challenges
Key risks include high gearing, potential NAV erosion, and the possibility of dilutive corporate actions. Other downside risks include a slowdown in economic activity, normalization of funding costs, and weaker-than-anticipated leasing demand, particularly for business parks and general industrial assets.
Environmental, Social, and Governance (ESG) Initiatives
Environmental Commitments
ESR-LOGOS REIT has implemented an Environmental Policy and Green Procurement Policy, targeting a 50% increase in solar power generation by 2025 and net-zero carbon for certain Singapore properties by 2030. The REIT has achieved water efficiency certification for 30 out of 32 multi-tenanted buildings and reduced grid electricity consumption by 5.5% YoY.
Social and Governance Metrics
The management has maintained high employee and tenant satisfaction rates of 81% and 78%, respectively. Female employees represent 69% of the workforce, including Chairperson Stefanie Yuen Thio. The REIT also adheres to transparent governance policies, with independent board oversight and a remuneration structure aligned with industry norms.
