ESR Reit

It’s been awhile since I blogged about my big conviction stock for 2018. Since the beginning of 2018, I have seen the price fall by 16% from my buy in price. Understandably, the dilutive rights issue and overpriced acquisition of Viva industrial trust has not been kind to the stock price.

My lesson from this episode is that Reits need to be of a certain size to be able to take on acquisitions that would allow them to grow. we have seen this happen with Manulife and the recent Keppel-KBS Reit. When the Reit is small, a sizable acquisition would erode prices significantly. I certainly wished I had waited till after the merger to buy the combined entity.

From a Reit manager’s perspective, I can also understand why they needed to do the acquisition and bring in a new growth engine. If left alone, ESR would be like Cache or AIMS, slowly decaying with very little leeway to improve returns.

The big unknown is how the combined entity will perform in future. Obviously, the rosy picture painted by many analysts about the industrial leasing landscape has not panned out as expected. The weak rental reversions of the “old” ESR portfolio and the loss of rental support for UE bizhub has also not helped sentiments.

However, there are several things going for “new” ESR in the next few quarters. Other than the completion of the AEI at Marsiling and acquisition of Greenwich Drive facility we can also look forward to rental renewals for Viva’s business park portfolio which are likely to trend up.

On the debt side the Reit has done well to lower its blended cost of debt to 3.7% while extending the debt tenor to 2.4 years. The recent cancellation of the S$155m 3.5% notes also signals that the Reit is optimistic in sourcing for cheaper sources of debt.

While I am not sure what the future holds, I can say that I don’t foresee any further downside to the Reit and only with more visibility over forward income levels of the combined entity can we possibly a rerating and institutional buying.

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