Is ESR REIT A Good Buy In 2025? [Fundamental Analysis]

In this article, we'll conduct a fundamental analysis and review of ESR REIT and its suitability to achieve the following investment objective: To deliver a stable dividend yield of 5% to 6% per year while having high capital preservation ability.

Business Description

ESR REIT is an industrial REIT that was listed in 2006 and owns industrial properties across Singapore, Australia and Japan.

What I Like About ESR REIT:

• Strong sponsors with a decent portfolio will provide a healthy pipeline that can facilitate ESR LOGO’s asset rejuvenation plan and overseas acquisition.

What I Do Not Like About ESR REIT:

• Poor track record of maintaining a stable distribution per unit and capital preservation for existing shareholders. (Figure 8)

  
  

• A good portion of their properties are sitting on land with an underlying land lease of less than 30 years (FY2024: 28.42%). The impact of lease decay is considerable, especially if it is not managed well. (Figure 10)

  
  

• The manager does not have a good track record for executing capital recycling and asset acquisition strategies. As such, the outcome of their ongoing asset rejuvenation plan is highly uncertain.

Updates From Recent Performance (FY 2024)

General Comments:

• Gross revenue (-4.1%) and Net property income (-4.2%) declined due to the loss of income from the divestment of non-core assets and ongoing asset enhancement initiatives.

  
  

• On the other hand, DPU from operation only decreased by 3.3% due to the lowered finance cost. The reported DPU decreased by 17.36% due to the loss of one-off distribution from the divested asset in FY2023.

  
  

• Operating metrics remained relatively unchanged with the portfolio occupancy rate standing at 92.3%. Rent reversion came in at 10.3% while the tenant retention rate stood at 76.0%.

  
  

• In FY2024, the management has pivoted from business parks (-5.2%) and general industrial (-4.0%) properties to high-tech industrial properties (+9.5%). This is in line with their portfolio rejuvenation focus.

  
  

• The capital management metrics have worsened with the gearing ratio increasing by 7.10% to 42.80%. On the other hand, the cost of borrowing decreased by 0.07% to 3.84%

Positive Headwinds:

• The newly acquired properties in December FY2024 and ongoing AEIs that will be completed in 1H 2025 are expected to contribute to the top and bottom line of FY2025 growth.

  
  

• The cost of borrowing has peaked in FY2024 and is expected to come back down in FY2026 given that there is no debt maturing in FY2025.

Negative Headwinds:

• The ongoing trade war might result in higher unoccupancy rates and lower valuations for industrial properties which may create headwinds for ESR’s operations and ongoing rejuvenation plan.

  
  

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Disclaimer:

This article is meant to be the opinion of the author

This article is for information purposes only

This article should not be seen as financial advice

This advertisement has not been reviewed by the Monetary Authority of Singapore