CGS International Securities Singapore Pte. Ltd. April 23, 2025

ESR-REIT Poised for Growth: Q1 Strength, 10%+ Yield, and Strategic Moves Underpin ‘Add’ Rating

ESR-REIT (EREIT) demonstrated a promising start to the year, with its first-quarter 2025 (1Q25) results aligning with analyst expectations and signaling potential for growing core distributions. Bolstered by recent acquisitions and stable operational performance, the REIT maintains its positive outlook despite minor sequential dips in occupancy.

Strong Start to FY25: Acquisitions Drive NPI Growth

EREIT reported substantial year-on-year growth in its 1Q25 financials.

• Revenue: Increased by 24.2% YoY to S\$110.5 million.
• Net Property Income (NPI): Grew by an impressive 31.3% YoY to S\$82.5 million.

This growth was primarily fueled by contributions from newly acquired assets: the ESR Yatomi Kisosaki Distribution Centre and 20 Tuas South Avenue 14. These acquisitions contributed approximately S\$16 million to the 1Q25 NPI.
Excluding these new additions, the same-store portfolio performance also showed positive momentum:

• Same-Store Revenue (1Q25): S\$92 million (up 3.4% YoY).
• Same-Store NPI (1Q25): S\$66 million (up 5.3% YoY).

This underlying growth was driven by positive rental adjustments from lease renewals, income from newly signed leases, and the continued occupancy ramp-up at properties that recently completed asset enhancement initiatives (AEI).
Furthermore, the NPI margin saw an improvement, edging up to 75% in 1Q25 compared to 71% for the full year FY24. This enhancement was mainly attributed to lower utilities expenses during the quarter.
The distributable income for 1Q25 reached S$44.2 million, representing 26% of the full-year FY25 forecast, indicating the results are well on track.

1Q25 Results Summary

Operational Performance: Healthy Reversions Amidst Occupancy Dip

EREIT’s operational metrics remained largely stable in 1Q25.

• Rental Reversion: Achieved a positive rental reversion of +8.6% for the 4.5% of leases renewed (by gross rental income). While this is lower sequentially compared to the +10.3% recorded in 4Q24, it surpasses the management’s guidance of mid-single-digit growth for the full year FY25F.
• Lease Expiry Profile: A significant portion of leases remains to be addressed, with 22.7% expiring in the remainder of FY25F and another 23.0% due in FY26F.
• Portfolio Occupancy: Committed portfolio occupancy saw a slight dip of 0.7 percentage points, settling at 91.6% as of March 2025.
• Divestments: During 1Q25, EREIT successfully completed the divestment of two non-core assets: 1 Third Lok Yang Road and 79 Tuas South Street 5. These properties contributed approximately 0.4% of FY24 gross rental income (GRI). The aggregate sale consideration was S\$16.65 million.

Capital Management: Lower Costs and Stable Gearing

EREIT continued its focus on optimizing its capital structure.

• Borrowing Costs: The average cost of debt was further reduced by 19 basis points quarter-on-quarter to 3.65% in 1Q25. This marks a significant reduction of 46 basis points since its peak in March 2024.
• Hedging: A high proportion of borrowings, 81.7%, remained on fixed rates, mitigating interest rate volatility.
• Gearing: The gearing ratio remained largely stable at 41.9% as of March 2025, compared to 42.8% at the end of 4Q24.
• Perpetual Securities: Management intends to utilize the proceeds from newly issued S\$125 million perpetual securities (priced at 5.75%) to replace the remaining S\$75.25 million of the more expensive “Series 006 Perps” (priced at 6.632%).

Strategic Initiative: Proposed Unit Consolidation

In February 2025, EREIT announced a proposal for a unit consolidation.

• Ratio: The proposal involves consolidating every 10 existing units held by unitholders into one consolidated unit, representing a consolidation ratio of 10x.
• Approval Process: The REIT manager is set to convene an Extraordinary General Meeting (EGM) on April 23 to seek unitholder approval for this consolidation.

Investment Outlook: Maintaining ‘Add’ Rating with Attractive Yield

The ‘Add’ rating for EREIT is reiterated with an unchanged DDM-based target price of S$0.36.

• Valuation & Yield: The stock offers an attractive FY25F dividend yield of 10.3% at the current price of S\$0.205, presenting a significant potential upside of 75.6% to the target price. The current CGSI forecast is 20.0% above consensus.
• DPU Forecasts: FY25-27F Distribution Per Unit (DPU) estimates remain unchanged.
• Portfolio Transformation: EREIT has actively managed its portfolio, divesting approximately S\$534.6 million worth of non-core assets in FY23 and FY24. This was accompanied by topping up distributions with about S\$42 million of capital distribution.
• Future Growth Drivers: As newly acquired assets (like ESR Yatomi Kisosaki Distribution Centre) and properties undergoing AEIs (specifically 16 and 29 Tai Seng Street) begin contributing fully in FY25-F27F, the quality of DPU is expected to gradually improve.
• Catalysts: Potential re-rating catalysts include further accretive acquisitions.
• Risks: Downside risks primarily involve unfavourable foreign exchange rate movements and unexpected lease non-renewals by tenants.

Key Financial Summary & Forecasts

Market Information

• Current Price: S\$0.205
• Target Price: S\$0.36
• Market Cap: US\$1,256m / S\$1,644m
• Average Daily Turnover: US\$2.02m / S\$2.71m
• Current Shares Outstanding: 7,685m
• Free Float: 81.7%
• Major Shareholders: Tong Jinquan (10.5%), ESR Cayman (6.6%), Mondrian Invt Partners (3.2%)
• Bloomberg Ticker: EREIT SP
• Reuters Ticker: ESRE.SI

ESG Profile: Focused Sustainability Efforts

EREIT’s commitment to Environmental, Social, and Governance (ESG) factors is reflected in its LSEG ESG Combined Score of B- in FY23.

• Pillar Scores: Environmental (B+), Social (B-), Governance (C-).
• Post-Merger Focus: Following the merger with ARA Logos Logistics Trust (ALOG) in April 2022, EREIT aims to be a leading new economy and future-ready APAC industrial SREIT, engaging stakeholders to validate material ESG topics.
• Key Sustainability Targets:
  • Achieve Green Mark Certification for 80% of Singapore buildings by 2030.
  • Lower total energy consumption for multi-tenant buildings (MTBs) by 7% from 2023 to 2030.
  • Achieve a 50% increase in solar power generation by 2025 (from FY19 baseline).
  • Obtain Water Efficiency Building (WEB) certifications for all MTBs by 2025.
  • Reduce water intensity for MTBs by 2% per year (14% total by 2030 from 2023 baseline).
  • Obtain 100% supplier compliance with its green procurement policy by 2030.
• GRESB & Disclosure: EREIT aims to attain the GRESB Real Estate Benchmark through continued submissions and provided enhanced ESG disclosures with its first GRESB submission in 2023.

Current ESG Initiatives & Implications

• Solar Program: Properties identified for solar harvesting over the next three years aim to boost generation by 50% by FY25 (vs FY19). With two more properties being commissioned, EREIT will soon have 12 buildings installed with a combined solar capacity of 18.32 MWp. Enhanced disclosures are expected to improve ESG rankings over time.
• 1HFY24 Achievements & Plans:
  • Converted existing lighting to LEDs and installed motion sensors in common areas/staircases for all Singapore MTBs.
  • Equipped an estimated 20% of Singapore MTBs with EV chargers.
  • Achieved c.20% supplier compliance with its Green Procurement Policy (target 25% by 2024).
  • Plans to complete smart meter installation in 50% of buildings in 2024F to improve ESG data accuracy.
  • Aims to commission at least five more assets with solar panels by FY25.
• Social & Governance: EREIT ranks 46th out of 104 Singapore companies and 15th among real estate peers. It scores well for resource use (A), environmental innovation (A-), product responsibility (A-), and workforce (A), but lower on community (D+). To address this, EREIT aims for at least 500 hours of staff volunteerism annually.
• Valuation Impact: Currently, no explicit ESG premium or discount is factored into EREIT’s valuation.

S-REIT Peer Comparison

The following table provides a comparative overview of ESR-REIT against its peers across various S-REIT sub-sectors based on data as of April 22, 2025. (Note: Forecasts for Not Rated (NR) companies are based on Bloomberg consensus estimates).