facebookIs ESR-REIT (SGX: J91U) Share Price At S$0.51 Considered A Steal?
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Is ESR-REIT (SGX: J91U) Share Price At S$0.51 Considered A Steal?

profileSudhan P
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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.

Source: ESR-REIT investor presentation

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:

 20152016201720182019Compound annual growth rate (CAGR)
Gross revenue
(S$' million)
112.2112.1109.7156.9253.022.5%
Net property income
(S$' million)
86.282.378.4112.0187.921.5%

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. 

 20152016201720182019CAGR
Distribution per unit (Singapore cents)
4.7934.173 3.8533.8574.011-4.4%

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.

Source: ESR-REIT investor presentation

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.

Source: ESR-REIT investor presentation

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.

Source: ESR-REIT investor presentation

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. 

Source: ESR-REIT investor presentation

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. 

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About Sudhan P
It isn't fair competition when only one company in the world makes Monopoly. But I love investing in monopolies. Before joining the Seedly hood, I had the chance to co-author a Singapore-themed investment book – "Invest Lah! The Average Joe's Guide To Investing" – and work at The Motley Fool Singapore as an analyst.
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