Growth Outlook for ESR-Logos REIT Trimmed on Weaker Leasing Sentiment; FVE Lowered

The merger with ARA Logos Trust in April 2022 drove ESR-Logos REIT’s 2022 net property income higher by 41% year on year to SGD 244 million on the back of a 42% increase in revenue. Despite higher borrowing costs due to the rising interest-rate environment, the amount available for distribution rose 54.8% year on year to SGD 177 million. This is due to distribution top-ups amounting to SGD 29.5 million, and income from its strategic investment in the ESR Australia Logistics Partnership and two property funds that were previously held by ARA Logos Trust. Consequently, the trust delivered an in-line distribution per unit of SGD 0.03, implying a 2022 distribution yield of 7.9% based on current prices. However, the weaker leasing sentiment for industrial and logistics spaces, and lower income ahead following its asset divestment, led us to cut our revenue growth assumptions and fair value estimate to SGD 0.41 per unit from SGD 0.48. While the trust still trades at an attractive 2023 distribution yield of 7.1%, we encourage investors to wait for a better entry point given the challenging outlook.