[SINGAPORE] Maybank Securities has upgraded ESR Reit to “buy”, from “hold” previously – with a 50 per cent higher target price of S$3 – on the back of positive developments within the real estate investment trust (Reit) and its relatively high yield.
In a report released on Nov 5, Maybank analyst Krishna Guha noted that the Reit’s 6.8 per cent increase in distributable income to S$134.6 million for the nine months to end-September was underpinned by mid-single digit organic net property income (NPI) growth and contribution from strategic acquisitions.
For the 9-month period, ESR Reit’s NPI rose 28.6 per cent year on year to S$247.8 million.
The Reit manager is also adopting proactive debt management. ESR Reit’s weighted average all-in cost of debt fell to 3.4 per cent as at end-September, from 3.84 per cent as at Dec 31, 2024.
Its gearing ratio edged up to 43.3 per cent in Q3, up from 42.6 per cent in Q2, due to ongoing asset enhancement and redevelopment.
Guha noted that the ESR Reit is actively working towards reducing their gearing to around 40 per cent or lower, and has identified S$250 million to S$350 million of non-core assets to divest.
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RHB analyst Vijay Natarajan said that ESR Reit could see some S$200 million to S$300 million in divestments in FY2026.
“Divestment of its non-core hotel asset at ESR Bizpark @ Changi, though slightly delayed, is still progressing with ESR Reit in discussion with a few potential buyers. ESR Reit has also identified about S$200 million of shorter lease non-core Singapore industrial assets for divestments,” Natarajan said.
“Gearing stands at 43.3 per cent but will drop to 41 per cent if the above divestments materialise,” he added.
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ESR Reit achieved positive rental reversion of 8.4 per cent in the year to date. And Natarajan forecasts that this will land in the 9 to 10 per cent range for the full year – “slightly higher than the earlier high single-digit guidance, indicating healthy Singapore industrial market demand”.
Occupancy rate for the Reit’s portfolio fell to 90.3 per cent in Q3, down 90 basis points from the preceding quarter.
“[This is] due to transient vacancy in a newly acquired Japan asset, expiry of hotel master lease in Singapore, and the inclusion of additional lettable area following asset enhancement in Singapore,” Guha said.
Occupancy at ESR Reit’s 16 Tai Seng Street property, which recently completed an asset enhancement initiative (AEI) in July, stood at 47.2 per cent, with another 9 per cent of net lettable area in negotiations.
Another AEI at 29 Tai Seng Street is expected to be completed by H1 2026, while another asset at 2 Fishery Road currently in the planning stages for redevelopment, said Natarajan.
RHB has maintained its “buy” rating on ESR Reit, with a 1.6 per cent increase in target price to S$3.20.
As at 4.21 pm on Thursday (Nov 6), units of ESR Reit are trading at S$2.80, down 0.7 per cent or S$0.02.
