In its most recent 3Q business update presentation, ESR-LOGOS said there would be: “No Resetting of PERP ‘coupon’ Until 2027: Redemption at E-LOG’s Discretion”. Does this mean that the company’s credit health is in question here? Let us take a closer look at the business.
Source: Company’s 3Q2023 Presentation
Company Background
Previously known as ESR-REIT, the real estate investment trust company merged with ARA LOGOS to form ESR-LOGOS Real Estate Investment Trust (“ESR-LOGOS REIT”). It began trading on Singapore Exchange Securities Trading Limited (SGX-ST) on 5th May 2022. It invests in income-producing industrial properties also known as “New Economy” properties alongside its business parks, and it has a total of $5.5bn in total assets under management. Its portfolio consists of 81 properties located in Singapore (60 assets), Australia (20 assets) and Japan (1 asset). ESR-LOGOS REIT current market capital stands at 2.71 billion as of 3rd November 2023. ESR-LOGOS REIT is managed by ESR-LOGOS Funds Management (S) Limited (the “Manager”) and sponsored by ESR Group Limited (“ESR”). The Manager is owned by ESR (99.0%) and Shanghai Summit Pte. Ltd. (1.0%), respectively.
3Q23 Business Update
ESR-LOGOS had reported a 19.2% YoY improvement in its Gross revenue from $243.9million in 3Q2022 to $290.7million in 3Q2023. Likewise the REIT’s Net Property Income (NPI) has also grew by 19.4% YoY from $172.7million in 3Q2022 to $206.1million in 3Q2023. Given the favorable demand-supply dynamics in the Logistics segment, YTD 3Q2023 the REIT has reported positive rental reversion of 12%. Portfolio Occupancy has fallen a little from 92.4% previously in 3Q2022 to 90.3% in 3Q2023. This decline was mainly due to the divestment of 2 Tuas South Avenue 2, planned redevelopment for 2 Fishery Port Road, and the newly completed AEI 7002 Ang Mo Kio Avenue 5. Despite the decline, ESR-LOGOS’s occupancy level is still above JTC’s industrial average of 89.1% which was released in 2Q2023.
If we zoom into their capital management, the REIT has been actively managing its credit metric with its gearing improving from 40.2% in 3Q 2022 to 37.7% in 3Q2023. Additionally, there are divestments of its Non-Core assets (4 & 6 Clementi Loop, 6 Chin Bee Avenue, 70 Seletar Aerospace View and 2 Tuas South Avenue 2) that have or will be completed post 3Q2023. The net proceeds will be fully used to be reinvested into New Economy Assets/Redevelopments, AEIs and also repaying its existing debt lowering its gearing even further to 35.3%.
In terms of the REIT’s debt maturity profile, there will be no refinancing that is required in FY2023 as the divestment proceeds will be utilized to repay the debts in the current financial year as mentioned above. Additionally, post-debt repayment with divestment proceeds, approximately 11.9% of their debts will be left for FY2024. Currently, the REIT has an all-in cost of debt of 3.93% (up from 3.66% on 31 Dec 22 – due to the rising interest rate environment) with 81.2% of its debts being fixed.
Source: Company’s 3Q2023 Presentation
In this 3Q2023 business update, ESR LOGOS has mentioned in their presentation that “No Perpetual Security coupon resetting or refinancing requirements until 2027”.
Source: Company’s 3Q2023 Presentation
Therefore, for ESR-LOGOS REIT 6.632% and 5.50% perpetual note holders, investors should be prepared to hold on to their notes for a little longer before the management guides for any probability of redemption on their call date in 2027 or resetting of coupon.
Conclusion
All in all, the REIT has commented that it will be more favourable for its shareholders to do a share buyback (to reload more confidence for its shareholders) than a perpetual redemption at the moment due to the high-interest rate environment. Furthermore, the AEI completion of its 7002 Ang Mo Kio Ave 5, that has attained TOP and achieved approx. 50% occupancy, will bolster its revenue stream in conjunction with potential positive rental reversion. The REIT has also approx. $274million of a committed undrawn revolving credit facility available if any refinancing is required.
Current ESR Perpetuals on the market:
