What You Should Know About ESR-REIT (SGX: J91U) At Its Share Price of S$0.51

At the time of writing, ESR-REIT‘s (SGX: J91U) share price (technically known as unit price for REITs) is at S$0.51. 

According to Seedly’s REITs tool, at that unit price, ESR-REIT is valued at a price-to-book (PB) ratio of 1.2 and a tasty distribution yield of 7.9%.

Is ESR-REIT a good buy at its current price and valuation? 

Let’s find out using my 10-step guide to pick the best Singapore REITs.

As a summary, here are the 10 steps I use to pick the best Singapore REITs:

1. Growth in Gross Revenue and Net Property Income
2. Growth in Distribution Per Unit
3. Property Yield of Between 5% and 9%
4. Gearing Ratio of Below 40%
5. Interest Coverage Ratio of Above 5x
6. Healthy Portfolio Occupancy Rate
7. Positive Rental Reversions
8. Presence of Growth Prospects
9. Acceptable Price-to-Book Ratio
10. Distribution Yield of Above 5%

Business Background

ESR-REIT has been listed on the Singapore stock market since 25 July 2006. 

The REIT invests a diversified portfolio of assets located all over Singapore. The properties it owns are from the business park, high-specs industrial, general industrial, as well as logistics and warehouse business sectors.

ESR-REIT merged with Viva Industrial Trust, a Singapore-focused business park and industrial REIT, in 2018.

1. Gross Revenue and Net Property Income (NPI) Check

Check for: Increasing gross revenue and NPI

ESR-REIT has a financial year that ends on 31 December each year. The REIT announced its 2019 earnings results in January 2020. 

The following table shows how ESR-REIT’s gross revenue and NPI have been over the last couple of years:

Although ESR-REIT’s gross revenue and NPI has been decreasing from 2015 to 2017, we see large year-on-year increases of over 40% each in 2018 and 2019. The huge spikes were mainly due to contribution from Viva Industrial Trust’s portfolio. 

The overall positive uptrend lends to a pass verdict. 

Verdict: Pass

2. Distribution Per Unit (DPU) Check

Check for: Increasing DPU

ESR-REIT’s DPU has a declining trend with a small increase between 2017 to 2019. 

Verdict: Fail

3. Property Yield Check 

Check for: Property yield of between 5% and 9%

Next, let’s explore ESR-REIT’s property yield. 

For 2019, ESR-REIT had an NPI of S$187.9 million while its valuation of investment properties stood at S$2.9 billion. This translates to a property yield of 6.4%, which meets my criterion. 

Verdict: Pass

4. Gearing Ratio Check

Check for: Gearing ratio below 40%

As of 31 December 2019, ESR-REIT had a gearing ratio (also known as debt to total assets) of 41.5%, which is unacceptable for me.

Verdict: Fail

5. Interest Coverage Ratio Check

Check for: Interest coverage ratio above 5 times

ESR-REIT’s interest coverage ratio, for 2019, stood at around 3.7x, which is below my threshold of 5x.

Verdict: Fail

6. Portfolio Occupancy Rate Check

Check for: Healthy portfolio occupancy rate

As of 31 December 2019, the occupancy rate for the portfolio was 90.5%; which is a pass.

The occupancy rate is also above the JTC average of around 89%.

Verdict: Pass

7. Rental Reversion Check

Check for: Positive rental reversions

ESR-REIT had no rental reversion, as of 31 December 2019.

In the previous years of 2017 and 2018, its rental reversions were negative.

Verdict: Fail

8. Growth Prospects Check

Singapore’s GDP grew by just 0.7% for 2019, the slowest full-year growth in 10 years. There will also be a further impact from the ramifications of the COVID-19 outbreak. Demand for space is also expected to remain muted in the short-term. 

However, ESR-REIT is not standing still.

The REIT has commenced asset enhancement initiatives (AEIs) for UE BizHub EAST to unlock value at the property. 

In line with the Singapore government’s push towards Industry 4.0, ESR-REIT is also repositioning its properties to cater to the needs of high value-added manufacturers. Planned AEIs at selected properties to convert buildings from general/light industrial to high-specs industrial enable ESR-REIT to improve building specifications to attract tenants of the future.

ESR-REIT also stands to benefit from its Viva Industrial Trust merger due to improvements in operating cost efficiencies through economies of scale and better market position.

Verdict: Pass

9. Price-to-Book Ratio Check

Check for: Acceptable price-to-book ratio 

At ESR-REIT’s current unit price of S$0.54, it has a PB ratio of 1.2x. 

The REIT looks expensive to me right now since it’s trading at 20% above its book value.

Verdict: Fail

10. Distribution Yield Check

Check for: Distribution yield to be above 5% 

At ESR-REIT’s current unit price of S$0.54, it has a distribution yield of close to 8%, which is clearly more than 5%. 

Verdict: Pass

The Final Verdict

ESR-REIT has a final score of 5/10.

ESR-REIT fails in many factors, including having a falling DPU.

Despite its relatively low score compared to the other REITs we’ve analysed, ESR-REIT could be an interesting candidate to watch. I’d be observing if its DPU increases with the Viva Industrial Trust merger.

Therefore, I’m putting ESR-REIT on my watchlist. 

What Are Your Thoughts on ESR-REIT?

Come discuss them and more in our Seedly Community under a page specifically dedicated to ESR-REIT (SGX: J91U). 

Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. ​Readers should always do their own due diligence and consider their financial goals before investing in any stock.