ESR-REIT announces SGD NC5 perpetuals at an IPG of 6.00%

ESR-REIT is an industrial REIT with a diversified portfolio of logistics properties, industrial properties, and business parks. Perpetual (Asia) Limited, as trustee of ESR-REIT, intends to issue new SGD NC5 perpetuals at an initial price guidance (IPG) of 6.00% for accredited and institutional investors only. These perpetuals can be called 5 years from issuance (and every distribution date thereafter), while they reset every 5 years. The reset rate will depend on the initial spread (over 5y SORA) on issuance and will not come up with a step-up.

The issuer is unrated, while the new bond is expected to be unrated too. Net proceeds will be used to refinance or repay existing borrowings, particularly its existing perpetuals (EREIT 6.632% Perpetual Corp (SGD)). Proceeds may also be used for other purposes, including to refinance or repay other investments, acquisitions, or asset enhancement initiatives, or to finance the general working capital and capital expenditure requirements of ESR-REIT.

(Note: The size of this new issue is capped at $125m, slightly higher than the $75.25m outstanding amount of perpetuals it intends to refinance.)

Financial highlights

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

Investors who want a deeper look into ESR-REIT’s FY24 financials can look at our article published last month regarding their senior unsecured issuance back then. In this article, we will primarily recap these financial highlights.

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

ESR-REIT’s revenues declined from $386m in FY23 to $371m in FY24 (-4%), primarily due to the loss of revenue contributions from properties divested in FY23 and FY24 (offset by increased contributions from property acquisitions). Property expenses fell by a smaller extent from $113m to $109m (-4%), resulting in net property income dropping from $273m to $262m (-4%).

Other expenses remained well-managed. Net borrowing costs fell from $76m to $69m (-9%), while other costs, like management fees and lease liabilities, declined in FY24 (compared to FY23). However, the broad drop in expenses failed to fully mitigate the decline in net property income: net income (before fair value changes) fell by -4% to $141m.

Total losses after tax, however, widened in FY24 due to large fair-value declines in its investments and investment properties. The fair value of its investment properties fell by -$220m in FY24, compared to -$167m in FY23 (+32%). Management attributed this primarily to investments in Australia, exacerbated by the weakening of the AUD against the SGD in FY24.

ESR-REIT’s operational metrics look more resilient than what its total losses suggest above. Rental reversions remained decent at +10.3% in FY24, helped by the ‘New Economy’ space, especially high-specs industrial and logistics. ESR-REIT’s group portfolio occupancy rate remained at a decent 92.3%. Operating cashflow also remained positive at $270m in FY24 (FY23: $262m), a reflection of the major impact of fair value changes (a non-cash item) on overall profits.

Outlook

As we shared in our previous article, management guidance appears cautiously optimistic. Rental reversions could moderate but are expected to remain positive, and the ‘New Economy' segments should continue being the primary driver of growth in FY25 and beyond. On the other hand, macro uncertainties could affect the demand backdrop and investor sentiment. Barring a major downturn (not our base case), we expect net property income to remain stable.

Fair value changes will be an ongoing concern in FY25, considering back-to-back fair value losses in FY23 and FY24. While management is positive on ‘New Economy’ assets, we think it is important to consider the rest of ESR-REIT’s portfolio, especially business park assets like Changi Business Park.

(Note: Non-‘New Economy’ assets generated about 30% of ESR-REIT’s FY24 rental income, including about 15% from Business Parks.)

Credit highlights

ESR-REIT’s credit profile generally weakened from FY23 to FY24. Total debt increased by +45% to $2,270m due to recent acquisitions, contributing to the overall increase in aggregate leverage (debt to total assets) to 42.8% in FY24 (FY23: 35.7%). Adjusted interest coverage ratio came in at 2.5x in FY24. Both figures (leverage and interest coverage) remain below and above regulatory requirements of 50% and 1.5x respectively.

However, based on its recent results, we think ESR-REIT remains operationally strong and should make sufficient cashflows to pay its debts eventually. As shared above, non-cash items like fair value losses were among the larger impacts on total profits / losses. However, we would grow more concerned if we see substantial fair value declines in FY25 and after, as these could affect ratios (e.g. leverage) related to MAS requirements or loan covenants.

Other factors which investors should consider include (i) moderating cost of debt (3.91% in FY23 / 3.84% in FY24), and (ii) decent proportion of investment properties unencumbered (72.4%), both of which suggest lesser interest pressures (e.g. if management chooses to pledge its properties) if required.

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

(Note: Our analysis is based on the IPG of 6.00%, though the eventual final price guidance [FPG] is likely to come in below this IPG.)

The new issue’s IPG of 6.00% represents a decent spread over 5y SGS yields of 2.44% as of 12 March 2025 (spread of about 356bps). The IPG is also slightly higher than the yields of existing perpetuals, such as EREIT 6.000% Perpetual Corp (SGD) with a yield-to-worst of 5.69%, though we caution that the FPG of this new issue may come in lower than the 6.00% IPG. In addition, the 6.00% IPG is quite a big uplift over EREIT 4.050% 27Feb2030 Corp (SGD), which is trading at yields of around 3.8%+; the new issue is about 5 years to call, while EREIT 4.050% 27Feb2030 Corp (SGD) is about 5 years to maturity and is more senior to perpetuals.

We first compare this new issuance with existing perpetuals issued by AIMS APAC REIT and Mapletree Logistics Trust, both of which are business trusts with an industrial and/or logistics focus. The new issue’s IPG of 6.00% represents a significant yield pickup over its peers, including the recently issued AAREIT perpetual trading at just over 4.7% yields.

We also look at bonds (perpetuals and non-perpetuals) from issuers from other industries, like GuocoLand, CapitaLand Ascendas REIT, and Hotel Properties. These are property-related issuers similar to ESR-REIT, but have different industry focuses (e.g. residential or hospitality) compared to ESR-REIT. Nonetheless, we note that the yield pickup for their perpetuals over seniors generally trends around the 50-80bps mark. This is lower than the pickup for this new ESR-REIT (perpetual) issuance against the EREIT 4.050% 27Feb2030 Corp (SGD).

We emphasise that perpetuals (including this new issuance) come with higher risks than senior bonds, especially non-call risks. There may be many factors in the future (e.g. 5 years from now) that could affect whether an issuer will call its perpetuals, including whether it is economically incentivised to do so. We think this new issuance appears fairly priced compared to existing ESR-REIT perpetuals, and should primarily be considered by those who (i) are comfortable with non-call risks and other perpetuals-related risks; (ii) are looking for yield pickups over other outstanding perpetuals; (iii) or are generally looking for yields close to the 6% level.

Table 1: Peer comparison

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 LREIT 4.750% Perpetual Corp (SGD). The analyst who produced this report holds an NIL position in the abovementioned securities.