ESR REIT: Core strengthening exercise yielding results
- 1H25 DPU of 11.239 Scts consists mainly of core earnings; in line with our FY25 projections
- Strong positive rental reversions of +9.7% in 1H25 to drive core profits
- Overall financing costs have improved c.40bps since the start of the year, and is expected to continue improving
- Maintain BUY with slightly higher TP of SGD3.20
Related Stories
- ESR REIT: 1Q26 Business Updates – Organic income growth continues to support core earnings24 Apr 2026
- ESR REIT: FY25 Results: Organic income growth will be key to core earnings04 Feb 2026
- ESR REIT: <Results First Take>: 3Q25 - Steady growth anchored by organic income growth and lower debt cost29 Oct 2025
Gross revenue surged 23.2% y/y to SGD222.9mn, reflecting full-period contributions from the Yatomi Kisosaki Distribution Centre in Japan and the 51% stake in 20 Tuas South Avenue 14 in Singapore, both acquired in November 2024, alongside uplift from AEIs at 7002 Ang Mo Kio Avenue 5 and 21B Senoko Loop. NPI outpaced the top line, growing 30.1% y/y to SGD166.3mn, aided by lower utility costs and higher service charges. NPI margins improved to c.75% in 1H25, and, we understand, are likely to be maintained at this level going forward. Same-store revenue and NPI modestly gained 2.9% and 4.7% y/y, respectively, bolstered by successive quarters of positive rental reversions.
Healthy portfolio occupancy of 91.2% with sustained strong positive rent reversions. While marginally down 0.2ppt from 91.4% in 1HFY24, the occupancy rate held firm amid ongoing tenant repositioning and AEI-related downtime. Singapore, which contributes over 83% of gross revenue, maintained robust occupancy, supported by demand from e-commerce, food logistics, and precision engineering tenants. Notably, occupancy in the high-spec segment improved due to successful leasing at 21B Senoko Loop post-AEI, while some softness was observed in older single-tenanted assets undergoing transitions or slated for redevelopment.
The Singapore portfolio's occupancy rate saw a slight increase of 0.3ppt, although this was offset by a 6.3ppt decline in occupancy in Japan. Looking ahead, occupancy is expected to increase, particularly with the recent temporary occupation permit (TOP) for 16 Tai Seng Drive granted on 16 July 2025. Currently, the property’s occupancy rate stands at c.40% but is projected to improve to c.47% in the coming quarter as the REIT finalises documentation for several new leases. The goal is to achieve over 50% occupancy by the end of the year, delivering the c.6.0% yield on cost for the AEI works.
Furthermore, EREIT reported continued positive rental reversions in 1H25, +9.7%. This follows the 10.3% positive rental reversions reported for FY24. The +9.7% rental reversions in 1H25 was led by logistics (+12.8%) and high-specs industrial (+9.1%) in Singapore. Management continued its “4R Strategy” of recycling capital into future-ready assets, divesting three non-core properties above book value.
Two other ongoing AEI and redevelopment works at 29 Tai Seng Drive and 2 Fishery Port Road are underway. 29 Tai Seng Drive is to be converted from a single-tenanted general industrial building into a multi-tenanted high-specs industrial building. The AEI is slated to be completed in 1H26, with a target yield on cost of c.6.4%. The other project at 2 Fishery Port Road is currently undergoing planning to convert the property into a food processing and cold storage facility.
All-in cost of debt improved further to 3.47%. Cost of debt fell to 3.47% (from 3.84% in 4Q24) with interest rates continuing to come off. With no further loans due for refinancing in FY25, we expect overall borrowing costs to remain at c.3.5% for the rest of the year. Based on current interest rates, EREIT’s overall financing costs could see further savings when loans in FY26 and interest rate hedges are refinanced.
EREIT currently has c.SGD450mn in outstanding perpetual securities, having already redeemed a more expensive tranche in the previous quarter. The weighted average cost of the remaining perpetuals stands at c.5.76%.
As of now, EREIT's gearing ratio is 42.6%, while its debt ratio (calculated as [debt + perpetual securities] over total assets) is c.55%. Approximately 80% of the REIT’s loans are hedged to fixed interest rates, and its interest coverage ratio (ICR) remains relatively stable at 2.4x.
Looking ahead, if the divestment of Park Avenue Changi Hotel proceeds as planned (Sep/Oct 2025), the bulk of the sale proceeds is expected to be used to reduce debt. Assuming a divestment value of c.SGD110mn, and that the full amount is used for debt repayment, the REIT’s gearing could potentially improve to c.41%.
Our views
We have been positively surprised by EREIT’s strong underlying portfolio performance, which has driven robust growth in core DPU. With the majority of EREIT’s portfolio rejuvenation efforts largely completed, we anticipate a rebound in profits that will be increasingly driven by core operational earnings.
In addition, several ongoing and recently completed AEIs and redevelopment projects are expected to support earnings growth. This will be further complemented by anticipated positive rental reversions, projected in the range of +6% to +7% for the second half of 2025.
While there are currently some transitional vacancies within the portfolio, management remains confident in their ability to backfill these spaces. This optimism is underpinned by the fact that the refreshed and modernised portfolio is now more relevant and future-ready. Occupancy at 16 Tai Seng Street is expected to ramp up, followed by 29 Tai Seng Street once its AEI is completed in 1H26.
At 2 Fishery Port Road, redevelopment plans have been adjusted. EREIT now intends to reposition the property into a mixed-use cold storage and food processing facility, with a targeted composition of 60% cold storage and 40% food processing. Redevelopment is expected to begin in 1Q26, followed by 15-18 months of construction. The targeted yield on cost for this project is estimated to fall within the 6.5%-7.0% range.
We have also revised our financial projections to reflect the stronger-than-expected core earnings from the current portfolio, as well as an assumption of lower financing costs in FY25. Specifically, we are now factoring in a y/y reduction of c.40bps in overall financing cost.
As a result, we are maintaining our BUY recommendation, with a slightly higher target price of SGD3.20 on the back of our revised financial projections indicated above. Although EREIT is currently trading around its NAV, it offers an attractive forward yield of over 8%, reinforcing our positive view on the stock.
FY Dec | 1H2024 | 2H2024 | 1H2025 | % chg y/y | % chg h/h |
Gross revenue | 181 | 190 | 223 | 23.2 | 17.6 |
Property expenses | (53.1) | (55.8) | (56.7) | 6.8 | 1.6 |
Net Property Income | 128 | 134 | 166 | 30.1 | 24.2 |
Other Operating expenses | (10.1) | (10.5) | (12.0) | 19.2 | 14.7 |
Other Non Opg (Exp)/Inc | 0.0 | 0.0 | 0.0 | - | - |
Associates & JV Inc | 1.98 | 0.87 | 2.45 | 23.8 | 182.0 |
Net Interest (Exp)/Inc | (48.0) | (52.3) | (61.1) | (27.2) | (16.8) |
Exceptional Gain/(Loss) | 1.68 | (20.9) | (15.4) | nm | 26.3 |
Net Income | 73.4 | 50.9 | 80.2 | 9.3 | 57.5 |
Tax | (2.3) | (9.4) | (4.2) | 83.6 | (55.1) |
Minority Interest | (1.6) | (18.6) | (6.6) | (320.9) | (64.7) |
Net Income after Tax | 60.4 | 11.7 | 56.4 | (6.6) | 382.6 |
Total Return | (23.1) | (125) | 14.7 | nm | nm |
Non-tax deductible Items | 97.8 | 199 | 58.9 | (39.8) | (70.5) |
Net Inc available for Dist. | 86.3 | 77.8 | 90.1 | 4.5 | 15.9 |
Ratio (%) |
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Net Prop Inc Margin | 70.7 | 70.6 | 74.6 |
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Dist. Payout Ratio | 300.0 | 300.0 | 300.0 |
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