Future of ESR-REIT

Future of ESR-REIT

ESR-REIT, formerly known as Cambridge Industrial REIT, is a Real Estate Investment Trust listed in Singapore since 2006. Owning a REIT can help to generate passive income in Singapore. ESR-REIT concentrates on income-producing industrial properties in Singapore. Under their portfolio are Business Parks, Logistics/ Warehouses, High-spec Industrial buildings, General Industrial buildings and Light Industrial buildings.  

The biggest news about ESR-REIT recently is the potential merger between ESR-REIT and Viva Industrial REIT (VIT). Previously, I have attended the dialogue session between ESR-REIT and unitholders and as of yesterday, ESR-REIT unitholders have approved the merger. 

Let’s look at exactly what ESR-REIT is and how the merger will change the REIT.  

By the way, we also wrote an article on 800 Super Share PriceSingtel Share Price and Viva Industrial Trust (VIT) if you are looking to invest to make passive income.

Cambridge Industrial REIT 

Formerly known as Cambridge Industrial REIT, ESR-REIT was renamed in 2017 to take on the name of their sponsor, ESR Group. With a market capitalisation of $831 million and a portfolio size of $1.68 billion, ESR-REIT is one of the S-REITs with current dividend yield of over 7%. 

As of June 2018, ESR-REIT has a total of 47 properties valued at a total of $1.65 billion, their properties are located near major transport hubs and industrial zones in Singapore.  

 Future of ESR-REIT - Properties Location

In total, ESR-REIT has 8.8 million square feet of Net Lettable Area. Occupancy stands at 91.4% with a diversified tenant base of 197 different tenants. All these looks quite decent.  

 Future of ESR-REIT - Tenant Base


However, one small concern that I have is that the top 10 tenants are responsible for 41.6% of rental income with the top 5 tenants responsible for 30.2% of rental income. This leaves them a tad bit exposed to these tenants.  

 Future of ESR-REIT - Top 10 Tenants

Due to the structure of REITs, debt is always one of the first concern of investors. ESR-REIT is currently operating under a gearing ratio of 30.5% and $513 million of unsecured loans. This gives ESR-REIT another headroom of $443.4 million of additional leverage. The weighted average debt average stands at 2.4 years.  

These shows that ESR-REIT is a REIT that is quite well-run in terms of leverage.  

Next up is the weighted average lease expiry (WALE), a calculation of the average lease left between tenants and the REIT. Currently, the WALE for ESR-REIT is 4.5 years, which is a decent number for industrial S-REIT.  


Financial Numbers 

Looking at the financial numbers, the Revenue and Net Property Income for the past 5 financial years are quite stable, not too impressive in terms of growth, but not too drastic in regression as well. 

Future of ESR-REIT - Revenue & Net Property Income

 Net distribution income and distribution per unit has been decreasing as well.  

 Future of ESR-REIT - Distribution Income & DPUSimilarly, Net Asset Value per unit has also been decreasing for the past 5 years. 

  2017  2016  2015  2014  2013 
NAV per unit  $0.593  $0.634  $0.673  $0.681  $0.695 
Net Asset  $934, 004,000  $827,029,000  $872,911,000  $866,333,000  $861,546,000 
No. Of units  1,320,852,333  1,304,434,416  1,304,434,416  1,278,503,627  1,247,021,116 


From the information from the table, we can see that NAV per unit has been decreasing although overall, Net Asset has increased. The reason for the decreasing NAV per unit is in increase in the number of units. The increasing number of units signifies the decrease in ownership of the REIT for all unitholders.  

At current price of $0.53, ESR-REIT is trading at 0.89x Price-to-NAV. Together with a distribution yield of 7.13%, it indicates a Buy at normal circumstance. However, with the announcement of the acquisition of Viva Industrial Trust, let’s take a look at the terms of merger to see if it is a case of diversification or diworsification.  


The merger of ESR-REIT and Viva Industrial Trust is essentially the acquisition of Viva Industrial Trust by ESR-REIT.  

ESR-REIT will take over the assets of VIT to create a REIT that is the 4th largest industrial REIT in Singapore at $3.0 billion asset size. After the acquisition, the enlarged REIT will still be under the management of ESR-REIT’s manager, however, the manager of VIT will come on board to assist in the management.  

The acquisition will be satisfied by 10% in cash and 90% in newly-issued ESR-REIT units. New units will be issued at $0.54 each. This will double the number of units from 1,576,473,000 to 3,161,477,000.  

According the CEO Mr Adrian during the dialogue session between ESR-REIT and unitholders, the new enlarged REIT is expected to benefit from larger economics of scale and lower cost. Liquidity will also increase as there would be more floating shares in the market. With an enlarged REIT, ESR-REIT will also be a potential candidate for index inclusion.  


Post-merger financial numbers 

There will be a lot changes post-merger to the financial numbers to ESR-REIT. The first of which, as mentioned, would be the massive increase in the number of units, leading to massive dilution to ownership of unitholders.  

Let’s take a look at the other interesting figures post-merger such as distribution per unit, weighted average lease expiry, gearing ratio, NAV per unit, occupancy rate and weighted average land expiry.  

   Now  Post-Merger 
No. of properties  47  56 
Distribution per unit  $0.03853  $0.04068 
NAV per unit  $0.582  $0.493 
Price to NAV Ratio  0.89  1.08 
Occupancy Rate  91.4%  90.9% 
No. of tenants  197  350 
Gearing Ratio  30.5%  38.9% 
Weighted Average Debt Tenor  1.5 years  2.4 years 
Weighted Average Lease Expiry (WALE)  4.5 years  3.8 years 
Weighted Average Land Expiry  33 years  34 years 


With the massive dilution of units, we can see that despite the onboarding of 9 properties that actually increased the “aging properties” claimed by management by 1 year, NAV per unit actually decreased by $0.0893.  

ESR-REIT CEO Mr Adrian Chui mentioned in his dialogue session with unitholders, the reason for acquisition of VIT is that ESR-REIT has an aging property portfolio and that the property portfolio for VIT will rejuvenate the properties of ESR-REIT. Post-merger, no doubt the average land expiry has increased, however, to increase by only 1 year seems limited. For more information about the condition of VIT’s land lease, please see related article on VIT 

Unfortunately, despite the increase in land lease, WALE actually decreased by 0.7 years. An unwelcomed fact.  

The cost of having an enlarged portfolio are additional debt that increases the gearing ratio to 38.9%, getting uncomfortably close to the limit of 45%. This reduces the leverage ability of the enlarged REIT by a lot, therefore, in order to expand the portfolio, my guess is that the manager is very likely to turn to unitholders for additional capital, thereby, further diluting unit count.  

On the plus side, unitholders are expected to receive more distribution, increasing from $0.03853 to $0.04068. 


Now that the deal has been casted in stone, the merger is expected to be completed at the end of October 2018. ESR-REIT looks to be a decently managed REIT with low debt and high WALE. It is not an amazing REIT in my opinion, nonetheless, it is a decent REIT.  

VIT on the other hand, is a REIT that I would definitely not touch. I feel that VIT unitholders has more to benefit than ESR-REIT and ESR-REIT unitholders. Although I applaud the initiative by CEO Mr Adrian Chui to expand the REIT and bring it to greater heights, however, I confess myself disappointed that the merger has gone through.

This also goes to show that small individual retail investors cannot really fight against the big boys holding large number of shares. These also emphasize that it is terribly important for investors to be educated about investing, to know what they are getting themselves into before devoting their hard-earned monies into the investment.

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