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ESR-REIT’s Latest Earnings: What Investors Need to Know

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ESR-REIT (SGX: J91U) is an industrial real estate investment trust (REIT) that owns 48 industrial properties located all over Singapore. This morning, the REIT announced its financial results for the full year ended 31 December 2017 (FY2017).

Here’s a quick rundown on the financial figures from the earnings release:

1. Gross revenue for the year fell 2.1% year-on-year to S$109.7 million. The fall was attributed mainly to the partial benefit received from the purchases of 8 Tuas South Lane and 7000 Ang Mo Kio Ave 5 that were completed very close to the year-end.

2. Net property income tumbled 4.7% to S$78.4 million mainly due to a loss of income during the transition phase of properties moving from single-tenanted to multi-tenanted, and a rise in property operating expenses.

3. FY2017’s distribution per unit (DPU) was at 3.853 cents, down 7.7% from FY2016’s DPU of 4.173 cents.

4. The net asset value per unit was at S$0.593, as at 31 December 2017.

In the final quarter of FY2017, ESR-REIT completed two acquisitions as mentioned earlier, and this brought about a more than 28% increase in its portfolio size.

During the same period, it also divested two properties – 87 Defu Lane 10 and 23 Woodlands Terrace. These divestments “continue ESR-REIT’s on-going efforts to rejuvenate its portfolio by recycling capital released from divestments of lower yielding non-core assets to scalable and value-adding acquisitions which will benefit unitholders in the long term”.

For the whole of 2017, more than 1.19 million square feet of leases were renewed, with a tenant retention rate of 51.1% and a rental reversion of negative 15.8%.

As at 31 December 2017, the portfolio’s weighted average lease expiry was 4.3 years, an increase from the 3.4 years recorded in the 2017 third quarter, mainly due to the two acquisitions. The portfolio occupancy was at 93%, an improvement as compared to the previous quarter’s 91.1% but a decline as compared to 2016 fourth quarter’s 94.7%.

ESR-REIT does not have any significant refinancing requirements until the fourth quarter of FY2018. As at the end of 2017, its gearing was at 39.6%. To rebalance ESR-REIT’s capital structure, its manager is considering an equity fundraising to issue up to 263 million of new units in the REIT. If the proposed equity fundraising takes place, the gearing is expected to fall to around 32.4%.

Looking ahead, the REIT said:

“Although an increase in enquiry has been noted recently, the Manager expects the leasing market to remain competitive due to high levels of new supply that are not expected to abate until late 2018. Accordingly, ESR-REIT’s portfolio performance will be further impacted by the downward pressure on rents. Nevertheless, the Manager will continue to focus on improving asset quality and maintaining occupancy in the current challenging leasing market.”

ESR-REIT is selling at S$0.58 per unit now. This gives a price-to-book ratio of close to one and a distribution yield of 6.6%.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.