ESR-Logos REIT: Business Update in Line; Active Capital Management to Improve Balance Sheet

We retain our fair value estimate of SGD 0.38 per unit for ESR-Logos REIT J91U following an in-line business update. First-quarter 2023 net property income grew 78.2% year on year on the back of a 63.9% year-on-year increase in revenue due to the merger with ARA Logos Trust in April 2022. Portfolio occupancy rate declined slightly to 92.1% this quarter from 92.7% in the previous quarter due to a nonrenewal of a general industrial tenant in Singapore. This was slightly below our expectation as we have modeled an average portfolio occupancy rate of 94.3% for 2023 with the assumption that the trust’s Singapore office portfolio will improve its occupancy rate to an average of 92% for 2023 as compared with 91.3% registered in 2022. Nevertheless, we think that this is just a transitional vacancy and expect occupancy rates for its Singapore industrial properties to pick up in the coming quarters. Rental reversion numbers continue to come in strong for the trust with a positive 7.3% rental reversion. As the trust’s portfolio passing rent remains below market levels, management expects to continue to deliver positive rental reversions for upcoming expiries.

On the capital management front, the trust ended the quarter with a gearing of 41.6%. Management expects to bring this down to 38% upon completion of its equity fund raising. To recap, the trust has decided to pre-emptively raise SGD 300 million to recapitalize its balance sheet. Half of the amount was raised through a private placement that is oversubscribed by three times while the remaining half was raised through a preference offering that management expects to complete on April 28, 2023. While we commend management for exercising prudence in the rising rate environment, we think that the 7% dilution to its distribution per unit is a pretty steep price to pay for a slight improvement to its gearing.