3 Things You Should Know About Singapore 4th Largest Industrial REIT

ESR-REIT is Singapore's 4th largest industrial REIT with a market capitalization of $1.3 billion and total assets worth $3.1 billion. It focuses on income-producing industrial properties islandwide in Singapore.  The properties are in the following business sectors: Business Park, High-Specs Industrial, Logistics/Warehouse, and General Industrial, and are located close to major transportation hubs and key industrial zones island-wide. ESR-REIT is one of Singapore's lesser-known industrial REITs compared to the top 3 Singapore industrial REITs (Ascendas, Mapletree Industrial Trust, Mapletree Logistics Trust). The COVID-19 pandemic has revealed that industrial REITs are much more resilient than retail/hospitality REITs in tough economic times. Moreover, the emergence of e-commerce and the boom of online shopping in the 21st century has gradually increased the demand for industrial/logistics properties while decreasing the demand for retail properties. Here are 3 things you should know about Singapore's lesser-known ESR-REIT. 

1. Long Dividend History and High Dividend Yield

ESR-REIT has a 15-year consistent dividend history and is one of the oldest REITs in Singapore. They have been consistently paying out dividends to shareholders every year without fail since 2006. Investors can be assured that they will definitely receive their dividends regularly from ESR-REIT and there is a very low chance that ESR-REIT will stop paying dividends. The average 5-year dividend yield for ESR-REIT is pretty high at 10.9% which is double the average blue-chip REIT's dividend yield of 4-5%. However, the downside to this high dividend yield is that the share price of ESR-REIT has remained stable at around $0.54 for the past 5 years. Investors can receive a high dividend yield of 10% at the expense of close to 0 capital appreciation from ESR-REIT while blue-chip REITs have a combination of lower dividend yield and possible capital appreciation. Due to the COVID-19 pandemic, ESR-REIT's distribution per unit decreased from 2.011 cents in 1H 2019 to 1.359 cents in 1H 2020. Their gross revenue decreased by 11.5% year-on-year to $113.8 million for 1H 2020 and their net property income down 16.8% year-on-year to $80.2 million in 1H 2020. ESR-REIT's performance was not significantly affected in the COVID-19 pandemic compared to retail/hospitality REITs due to it being in the resilient industrial sector. ESR-REIT's long consistent dividend history and high dividend yield are some of the factors that attract dividend investors. 

2. Prudent Capital Management

ESR-REIT has a debt gearing ratio of 41.8% as of 30 June 2020 which is slightly higher than my appropriate debt gearing ratio (40%). Nevertheless, this is still well within the allowed debt gearing ratio set by the Monetary Authority of Singapore (50%). REITs often use debt as leverage to acquire more properties and investments to expand their portfolio at a faster rate. It is of utmost importance that REITs stagger their debt payments and do not over-leverage to not run into cash flow problems in the future. ESR-REIT's weighted average debt expiry is 2.7 years as of 30 June 2020 and 88.3% of their interest rate is fixed for 2.5 years. ESR-REIT's management has exercised prudent capital management by staggering the REIT's debt maturity profile such that no significant amount of debt is due in any one year. Furthermore, ESR-REIT has a strong balance sheet with total assets worth $3.2 billion and total liabilities worth $1.6 billion as of 30 June 2020. It is highly unlikely that ESR-REIT would face any significant cash flow problems in the future due to their prudent capital management which even allowed them to reduce their all-in cost of debt to 3.54% in 2020. ESR-REIT's prudent capital management boosts investors' confidence in the REIT's future performance and management. 

3. Diversified Tenant Portfolio and High Occupancy Rate

ESR-REIT's portfolio consists of 57 industrial properties in Singapore with a total valuation of $3.1 billion as of 30 June 2020. Many of these properties are located close to major transportation hubs and within key industrial zones in Singapore. They have a well-diversified portfolio across sub-sectors with over 343 tenants with no subsector contributing more than 32.1% of rental income. Moreover, they have a well-diversified tenant base with tenants coming from many different trade sectors. The top 10 tenants accounted for 30.7% of rental income in 1H 2020 with no tenant contributing more than 5.2% of ESR-REIT's rental income. This well-diversified tenant portfolio protects ESR-REIT during tough economic times and prevents them from becoming overly-reliant on only a few tenants/properties for the majority of their income. This is evidenced by how ESR-REIT was only slightly affected in the COVID-19 pandemic. Furthermore, ESR-REIT has a high tenant occupancy rate of 91.1% (>90%) in 2Q 2020 which is comparable to the other blue-chip industrial REITs. The high occupancy rate ensures that ESR-REIT can maximize its properties to generate as much income as possible for its portfolio. The weighted average lease expiry remains stable at 3.4 years ensuring that ESR-REIT's portfolio remains consistent in the coming years. ESR-REIT's diversified tenant portfolio and high occupancy rate make it an attractive stable industrial REIT to own for investors. 

Verdict

In my opinion, ESR-REIT is a good industrial REIT to have if you are seeking high dividend payouts with low to no capital appreciation. In other words, it is a good buy if you are looking to own REITs for high dividend payouts and have no intention of selling them for capital appreciation in the future. However, ESR-REIT is currently trading at a discounted price of $0.385 and a price to book of 0.85. You might be able to achieve both high dividend yield and slight capital appreciation at this current undervalued price. If you are looking for industrial REITs with both capital appreciation and lower dividend yield, it would be better to add the blue-chip industrial REITs to your portfolio. 

What do you think of ESR-REIT?