ESR- : J91U 0%Logos : J91U 0%Real Estate Investment Trust’s : J91U 0%(ESR-Logos Reit) S$300 million equity fundraising earlier this year has caused its distribution per unit (DPU) to fall 5.6 per cent to S$0.01378 for its first half year ended June, from S$0.01460 the year before, due to the enlarged unit base.

But Adrian Chui, chief executive of its manager, wanted to draw attention to how proceeds from the fundraising, combined with that from the announced divestments of seven assets for S$337 million, has recapitalised and strengthened the Reit’s balance sheet.

That has, in turn, eased concerns around gearing pressures and the continued high interest rate environment for the Singapore-focused industrial Reit.

Speaking to reporters at an earnings call on Wednesday (Jul 26), Chui said “we have to start paying bills”, pointing to asset enhancement initiatives (AEI) on the cusp of completion. 

The earliest ones relate to 7002 Ang Mo Kio Avenue 5, its high-specs industrial asset that is costing some S$53.3 million to redevelop, and its general industrial property 21B Senoko Loop, being developed at an estimated cost of S$38.5 million.

Said Chui: “After paying all the bills, we should probably end up with (a low leverage of) about 34 per cent to 35 per cent. We’d have no more debt to refinance in 2023, and 75 per cent of interest cost is being fixed for 1.7 years.” 

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The Reit’s pro forma gearing will be reduced to 33.6 per cent, from 39.4 per cent as at Jun 30, upon completion of the announced divestments. The lower gearing grants the Reit headroom to “pursue organic growth”, undertake more AEIs, redevelopments, and acquisitions to improve the quality of its asset portfolio, Chui said.

“Not selling crown jewels”

Chui, meanwhile, addressed disquiet over the proposal to sell five of its Singapore properties at a 5.1 per cent discount to the portfolio’s latest valuation. A Business Times columnist had written about this, asking why it needs to be selling assets at a loss.

Chui said: “I am not selling my crown jewels. I think people need to understand that these are non-core assets.” They exhibit short remaining land leases, are small in size, have limited AEI potential, and have dated specifications, he added.

The intention was to shelter the Reit from a “double whammy of declining valuation” as land leases get shorter and interest rates rise, in turn impacting capitalisation rates, he stressed.

“You might as well just sell these right now to the market... do our recycling and get the money off the table first before things probably become worse,” he added.

Turning to address asset pricing, Chui said: “What makes these non-core (assets) suddenly become crown jewels for other people?”

Asked if a merger with Sabana Industrial Reit is back under consideration, Chui said: “I have no comments on this. Each one has its own board. I have my own board. Our strategy is very clear. (It is) rejuvenation and focusing on assets.”

If the Reit had not done any equity fundraising, DPU would be flat on the year, he also revealed.

Of the S$0.01378 DPU, the Reit had paid an advanced distribution of S$0.00448 per unit on Apr 14 for Jan 1 to Feb 26, ahead of the trust’s private placement completed earlier this year. The remaining distribution for H1 will be paid out on Sep 27.

Gross revenue was up 33.3 per cent to S$196.8 million for the half-year period, from S$147.7 million in the previous year. This was attributed to full half-year contributions from ALog Trust after the merger in April 2022 and the acquisition of ESR Sakura Distribution Centre in October 2022.

Net property income (NPI) grew 37 per cent on the year to S$140.8 million, from S$102.8 million in the year ago period.

Increases in gross revenue and NPI were, however, partially offset by higher borrowing costs, trust expenses and finance costs following the equity fundraising exercise.

Borrowing costs were 60 per cent higher in H1 due to increased borrowings to partially fund the merger and the acquisition of ESR Sakura Distribution Centre, on top of higher interest rates.

The Reit’s trust expenses registered a 22.2 per cent increase to S$3.6 million, while its finance costs on lease liabilities for leasehold land grew 63.8 per cent to S$14.3 million.

Total amount available for distribution rose 37.9 per cent year on year to S$101.5 million, from S$73.6 million in the previous year.

While positive rental reversions of 11.6 per cent were recorded in the first half, Chui said he expects growth to slow to about 10 per cent in the second half, as the ongoing economic slowdown could affect the manufacturing sector.

“We’ve not seen tenants returning space to us or downsizing. However, expansion space discussion has taken a longer time, and they are definitely more cautious,” he said.

Units of the Reit traded down 1.5 per cent or S$0.005 at S$0.34 as at 1.40 pm on Wednesday.