ESR-REIT Cuts DPU By 50% In 1QFY20 – Dividend Yield Still High But What is The Risk?

If you didn’t know, ESR-REIT used to be known as Cambridge Industrial Trust. In 2018, ESR-REIT merged with Viva Industrial Trust. I used to own Cambridge Industrial Trust but divest it back in 2016.

ESR-REIT released their 1QFY20 financial results on 23rd April 2020. While I though industrial REITs are not so badly impacted by COVID-19, ESR-REIT has retained S$7.0 million as part of prudent cash flow management.

In 1QFY20, Gross Revenue fell 10.9% to S$57.8 million. Net Property Income (“NPI”) fell 15.6% to S$41.0 million. According to what was shared by the manager, the lower Gross Revenue and Net Property Income was mainly due to the lease conversion from single to multi tenancy for five properties where ESR-REIT now has to bear the costs of land rent, property tax and maintenance fees that tenants used to pay under a master lease arrangement, non-renewals and downsizing of certain tenants and rental rebates set aside as part of ESR-REIT’s measures to support tenants whose businesses were adversely affected by the COVID-19 outbreak.

Distributable amount before the capital retention fell 23.5% to S$24.5 million. Distribution Per Unit (“DPU”) fell 50.3% to 0.50 cents declared for 1QFY20.

1QFY20 Financial Results

1QFY20
(S$’mil)
1QFY19
(S$’mil)
YoY(%)
Gross Revenue57.864.8(10.9)%
Net Property Income41.048.6(15.6)%
Distributable Amount (Before Capital Retention)24.532.0(23.5)%
Distributable Amount 17.532.0(45.2)%
Distribution Per Unit (“DPU”) (cents)0.501.007(50.3)%

Occupancy

Occupancy stood at 90.5%. While this is above JTC’s average of 89.2%, I personally felt the occupancy is low. The risk here is the single tenancy. I understand ESR-REIT is trying to convert them into multi-tenancy.

Debt

Gearing ratio stood at 41.7%. I consider this high under normal circumstances (without COVID-19) bearing in mind that the limit is 45%. However, the threshold has been increased to 50% by the government in view of current COVID-19 situation.

The good news is ESR-REIT has no refinancing requirements until 2021 and their portfolio remain 100% unencumbered.

Current Dividend Yield

Based on 4.011 cents paid out in FY19 and the current share price of S$0.32, this translate to a current dividend yield of 12.53%.

If I assume ESR-REIT pay out 0.50 cents for the subsequent quarters, this will translate to an estimated dividend yield of 6.25%.

Summary

The dividend yield for ESR-REIT is high no matter it is before or after the COVID-19 pandemic. This reminds me of another REIT I used to own which is Soilbuild REIT. You can read more on the lessons learnt. Similarly, Soilbuild Business REIT has offered a high dividend yield but there are risks involved. (Read more: SoilBuild REIT High Yield Provided Investors Can Stomach the Risks)