ESR-REIT announces SGD 5-year senior unsecured bonds at an IPG of 4.25%

ESR-REIT is an industrial REIT listed on the SGX, with a diversified portfolio of logistics properties, industrial properties, and business parks. As of 31 December 2024, it had 72 properties in its portfolio located in Singapore, Australia, and Japan.

Perpetual (Asia) Limited, in its capacity as trustee of ESR-REIT, intends to issue new SGD 5-year senior unsecured bonds at an initial price guidance (IPG) of 4.25%, for accredited and institutional investors only.

These bonds will be issued under the existing SGD 750m Multicurrency Debt Issuance Programme. The issuer is unrated, while the new bond is expected to be unrated too. Net proceeds will be used for (i) refinancing or repaying existing borrowings of ESR-REIT, (ii) financing or refinancing the acquisitions and/or investments of ESR-REIT and any development and asset enhancement works initiated by ESR-REIT, (iii) financing general working capital and capital expenditure requirements of ESR-REIT.

Financial highlights

(Unless otherwise stated: Results are in Singapore Dollars [SGD]. Results are for 12-month FY24 period from January 2024 to December 2024. Growth figures are YoY.)

ESR-REIT reported gross revenues of $371m in FY24, marking a slight -4% decline from FY23 ($386m). Management attributed these lower revenues to the property divestments of $535m in FY23 – FY24, mitigated by higher revenues from properties which completed their asset enhancement initiatives, as well as from two property acquisitions in November 2024. Meanwhile, expenses remained well-managed, with net borrowing costs falling from $76m in FY23 to $69m in FY24 (-4%). These lower revenues resulted in lower net property income of $262m (-4%) and net income (before fair value changes) of $141m (-4%).

However, ESR-REIT also saw large negative changes in the fair value of its investment properties, totalling -$220m in FY24, up by +32% from the -$167m in FY23. The fair value of ESR-REIT’s investments (in 3 Australian property funds) also remained negative at -$27m in FY24. Both fair value changes weighed down on ESR-REIT’s total losses, which worsened from -$64m in FY23 to -$108m in FY24.

Despite these losses, ESR-REIT’s underlying operational metrics look relatively more resilient. Rental reversions were solid at +10.3% in FY24 (FY23: +11.1%), especially driven by the high-specs industrial (+12.0%), and the logistics segments (+14.4%). ESR-REIT’s group portfolio occupancy rate remained fairly stable at 92.3% (FY23: 92.8%), with its Australia portfolio maintaining its 100.0% occupancy rate.

Outlook

Management guidance for FY25 broadly sounded cautiously optimistic, amidst a backdrop of various uncertainties which could affect economic sentiment and economic activities. Nonetheless, ‘New Economy’ segments – a focus of the company over the past few years – are expected to lead the way in terms of broad rental demand. Management expects rental reversions to moderate but remain positive (i.e. single-digit growth rates look more likely).

Management has also highlighted that recent acquisitions (completed in November 2024) could start seeing full-year contributions in FY25, with ESR Kisosaki DC and 20 Tuas South Avenue 14 acquisitions projected to deliver a combined $15.3m in full-year distributable income.

We think that the abovementioned guidance makes sense, and we are looking forward to seeing larger impact from the two November acquisitions in subsequent financial statements, perhaps as early as ESR-REIT’s 1H25 results. Taking these together, we think ESR-REIT’s net property income is likely to remain stable in FY25 notwithstanding macroeconomic uncertainties.

However, our largest concern is on the valuations of its properties, considering the back-to-back negative fair value changes over the past two yearsstraight (FY23 and FY24) highlighted in the previous section. Some of its business park assets (e.g. Changi Business Park) may be facing headwinds (unlike the more positive outlook for ‘New Economy’ assets), as observed from the significantly lower rental reversions in that segment (+3.7% in FY24). We think ESR-REIT’s broader performance (including fair value changes) will depend not just on its growth drivers like ‘New Economy’ assets, but also on the rest of its portfolio.

Credit highlights

ESR-REIT’s credit profile generally weakened from FY23 to FY24, though it remains well within regulatory requirements for now. Total gross debt increased by +45% to $2,270m primarily due to recent acquisitions; even though total assets also increased, aggregate leverage (debt to total assets) still increased significantly from 35.7% in FY23 to 42.8% in FY24. Its interest coverage ratio also weakened from 3.1x in FY23 to 2.5x in FY24. While these remain above regulatory requirements, especially after the recent relaxation of requirements by the MAS, we think this negative trend is something investors should take note of. ESR-REIT’s debt headroom fell from $1,312m to $790m.

Despite this, we do see some positive signs for ESR-REIT. Its average cost of debt has started to moderate (3.91% in FY23 / 3.84% in FY24), and this likely contributed to lower net borrowing costs highlighted in the previous section. We particularly like that ESR-REIT remains operationally strong with consistent positive  operating cashflows (notwithstanding non-cash items like fair value changes), which we think is an important metric in determining whether ESR-REIT can repay its upcoming borrowings.

In addition, ESR-REIT still has a majority of investment properties considered unencumbered (72.4%), though this is notably lower than FY23’s 95.8%. This high 72.4% figure suggests additional room for ESR-REIT to refinance their debt at better rates should they be willing to use these properties as collateral.

Overall, we do not think there are major red flags with ESR-REIT’s credit profile, though investors should note that it is still one of the more levered names within the S-REIT space.

Bond comparison

We compare this EREIT new issue with other outstanding EREIT bonds (non-perpetuals and perpetuals), as well as with bonds from industrial or logistics-related issuers like Mapletree Industrial Trust, Mapletree Logistics Trust, AIMS APAC REIT, and Sabana Industrial REIT.

Looking specifically at non-perpetuals, we observe that spreads have tightened quite significantly within this space, with many of its peer bonds yielding in the low-3% region. EREIT’s 2026 bonds are trading at yields of around 3.4%, which represents a pickup of around 60bps over Singapore sovereigns of comparable tenors. Meanwhile, this IPG of 4.25% represents a pickup of close to 150bps over 5y benchmark SGS yields of 2.77%.

We think this new issue is fairly priced. Its nominal yields do look attractive versus similar peers, and even against its own 2026 bonds. However, this is amidst an environment of broadly tight spreads within the SGD market. We think the IPG of 4.25% (which may be revised lower when the final price guidance comes out) fairly reflects the more leveraged profile of ESR-REIT today compared to before, and compared to its peers.

Table 1: Peer comparison (non-perpetuals bolded)

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in AAREIT 5.375% Perpetual Corp (SGD) and MLTSP 3.725% Perpetual Corp (SGD). The analyst who produced this report holds an NIL position in the abovementioned securities.