Companies & Markets
HOCK LOCK SIEW; ESR-Reit cash call on the cards?
Tay Peck

28 January 2021
Business Times Singapore
STBT
English
© 2021 Singapore Press Holdings Limited

Could ESR-Reit be next to tap the equity market to raise funds, following such cash calls recently made by First Reit and Lippo Malls Indonesia Retail Trust?

After a failed bid to bring peer Sabana Shari'ah Compliant Industrial Reit (Sabana Reit) into its fold last month - due to a "lowball" offer price - ESR-Reit has nonetheless not given up on pursuing portfolio acquisitions to scale up.

The listed real estate investment trust in industrial properties shared in its financial results announcement last week that acquisitions remain an integral part of its portfolio growth strategy, and it will explore overseas and local acquisition and development opportunities.

However, how is the Reit going to fund such acquisitions?

Although it has S$59 million in capital gains on hand, the Reit has intended for the fund to make up for the temporary loss of income at some of its properties as they undergo improvement works.

DEBT HEADROOM

As for the up to S$50 million proceeds from divestment of non-core assets that ESR-Reit is expecting, the Reit may use it to pare down outstanding debt and/or fund asset rejuvenation projects, ESR-Reit said in its results presentation.

The Reit noted it has debt headroom of S$507.7 million, given the limit on debt-to-asset ratio or leverage was raised to 50 per cent from 45 per cent by the Monetary Authority of Singapore last year. Its leverage was 41.6 per cent as at Dec 31, 2020.

However, does it want to borrow to the hilt, when it has just reported rental reversions of minus 0.6 per cent for FY2020, and also expects industrial market rents to remain soft in the coming quarters against a backdrop of continued business uncertainties and projected supply coming on-stream in 2021 and 2022?

HIGHEST LEVERAGE

Its leverage already is the highest among the Singapore-listed industrial Reits, which have an average gearing ratio of 37.2 per cent and range from 33.5 per cent (Sabana Reit) to 41.6 per cent. ARA LOGOS Logistics Trust's 39 per cent is the second highest after ESR-Reit's.

As ESR-Reit is working to refinance 16.1 per cent of its S$1,186 million debts maturing this year, another 25.7 per cent of borrowings will be due in 2022, 32.9 per cent in 2023 and 25.3 per cent in 2024.

PERPETUAL ISSUE

Further, recorded on its book as equity is S$150 million of perpetual securities with a coupon rate of 4.60 per cent per annum. The Reit would have to make coupon payments on this perpetual issue if it wants to make distribution to its unitholders.

DBS Group Research in a report published last week flagged as a key risk that ESR-Reit with a "relatively high gearing" would require fund-raising to pay for major capital expenditure.

The Reit, in fact, doesn't rule out an equity cash call for acquisitions or asset enhancement initiatives, according to its response to an interview with the Singapore Exchange released on Tuesday.

"Our portfolio remains 100 per cent unencumbered, which provides financial flexibility to lever up with various debt sources. Should we undertake any equity fund raising exercise, there will be a clear use of proceeds in line with our strategies and we may consider reducing our gearing if market conditions permit," commented ESR-Reit on its higher-than-industry-average leverage.

Unitholders should scrutinise the quality and yield of the assets that ESR-Reit intends to buy, before parting with their money, should there be a rights issue to fund acquisitions.

Singapore Press Holdings Limited

how long have you been holding these?

I wonder how much capital appreciation per year we can expect for these REITs.

hi all experts - most of SG REITS drop past few days, good time to go in now? thanks.