ESR-Logos REIT: Cutting Valuation by 8% Due to Currency Headwinds and Weak Occupancy Numbers

We lowered our fair value estimate for ESR-Logos REIT to SGD 0.35 from SGD 0.38 after a slightly disappointing third-quarter business update. The trust’s portfolio occupancy rate declined to 90.3% this quarter from 92.9% in the previous quarter because of the addition of 7002 Ang Mo Kio Ave. after the completion of its asset enhancement initiative; the planned redevelopment for 2 Fishery Port Road; and a pretermination of a lease at 46A Tanjong Penjuru. This was below our expectations, as we have modeled an average portfolio occupancy rate of 92.9% for 2023 with the assumption that the trust’s Singapore office portfolio will achieve an average occupancy rate of 90% for 2023. We update our model to revise our blended occupancy rates slightly lower by 1.5 percentage points across the forecast period, as well as the impact of the weaker Australian dollar against the Singapore dollar. Consequently, our fiscal 2023, 2024, and 2025 distribution per unit estimate is lowered by 1.3%, 5.4%, and 4.9% respectively. Based on its previous closing price of SGD 0.25, we think the trust is undervalued as it trades at a 2024 distribution yield of 9.5%.