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Sunday, July 19, 2020

ESR-REIT (Previously Cambridge Industrial Trust) Analysis @ 19 July 2020

Basic Profile & Key Statistics
ESR-REIT is previously known as Cambridge Industrial Trust, renamed in June 2017 after ESR acquired a dominant stake in Cambridge Industrial Trust. Subsequently, ESR-REIT merged with Viva Industrial Trust in October 2018 and again announced another merger news with Sabana REIT this week. ESR-REIT adopted half-yearly reporting but maintain its quarterly distribution.

Lease Profile
Occupany is slightly low at 91.1%.  Both WALE and weighted average land lease expiry are short at 3.4 years and 28.82 years respectively. The highest lease expiry of 23.4% fall in the year 2022, which is close to SREITs median level.

Debt Profile
Gearing is high at 41.8%. Cost of debt is high at 3.5% but all of its debts are unsecured debt. Fixed rate debt of 88.3% is high. Interest cover ratio is low at only 3.4 times. WADE at 2.7 years is close to SREITs median. The highest debt maturity of 32.7% fall in the year 2023, which is also close to SREITs median level.

Diversification Profile
All of ESR-REIT properties are in Singapore, which is not geographical diversified. However, it is diversified in terms of properties and tenants. Its top property contribution, top tenant contribution, and top 10 tenants contribution are 15%, 5%, and 30.6% respectively.

Key Financial Metrics
Property Yield is slightly high at 5.9%. Management fess over distribution at 13.8% is close to SREITs median which translates into S$ 7.25 for every dollar paid. Distribution on capital is close to SREITs median. Distribution margin is slightly low at 44.8%. 9.4% of the past 4 quarters distribution comes from the partial distribution of properties divestment. I have previously shared this in detail for ESR-REIT in Case Studies for SREITs with Capital Distribution from Disposal post.

Related Party Shareholding
Shareholding for directors of REIT manager is high at 24.02%.

To be fair, let's look only at trends after ESR-REIT renamed, which is from 2Q 2017. DPU trend looks stabled after 2Q 2018, however, these were supported by partial distribution from assets disposal. From 2Q 2018 to 4Q 2019, the total DPU is 7.021, where 11.5% is from distribution from asset disposal. Actual DPU without such distribution is around 6.214, average out over 7 quarters would get only 0.888 per quarter. After merger with Viva Industrial Trust in October 2018, NAV per unit is going downtrend but the distribution margin is improved.

Fundamental Valuation
Favorable Less Favorable
Diversified Sector WALE
Unsecured Debt Weighted Average Land Lease Expiry
Property Diversification Gearing
Top Tenants & Top 10 Tenants Diversification Cost of Debt
  Interest Cover Ratio
  Geographical Diversification
  NAV per Unit Downtrend
As merger with Sabana REIT is not yet materialized, I have yet to take that into consideration for my analysis.

Relative Valuation
i) Average Dividend Yield
The average value is 7.29%, apply past 4 quarters' DPU of 3.162 cents will get S$ 0.435. However, if we consider DPU without retention due to the COVID situation and without distribution from asset disposal, DPU is estimated to be at 3.061 cents, which translates into S$ 0.42.
ii) Average Price/NAV 
The average value is 0.96, apply the latest NAV of S$0.41 will get S$ 0.395

Author's Opinion
After the merger with Sabana, ESR-REIT fundamentals would be improved. It would be more diversified in terms of properties and tenants; the cost of debt will be lowered and the interest cover ratio should follow. From the merger presentation, DPU before capital distribution (distribution from asset disposal) is expected to increase by 3%. Let's sum out the valuation: 
i) Fundamental Intrinsic Value = (Removed)
ii) Relative Valuation - Dividend Yield = S$ 0.42
iii) Relative Valuation - Price/NAV = S$ 0.395
At the current price of S$0.40, it seems that ESR-REIT is at its fair value.

*Disclaimer: Materials in this blog are based on my research and opinion which I don't guarantee the accuracy, completeness, and reliability. It should not be taken as financial advice or statement of fact. I shall not be held liable for errors, omissions as well as loss or damage as a result of the use of the material in this blog. Please always do your own due diligence before any decision is made. 

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