On behalf of the Board of Directors of ESR Funds Management (S) Limited (“ESR-FM” or the “Manager”), we are pleased to present the Annual Report for the year ended 31 December 2019 (“FY2019”). This report reflects the full-year results since the completion of the merger with Viva Industrial Trust on 15 October 2018.
FY2019 was a challenging year for the industrial property sector with a global slowdown and the slowest expansion Singapore has seen in its gross domestic product (GDP)(1) in a decade. Although the overall manufacturing sector appeared to have a slight uptick towards the end of 2019, it had contracted consecutively over the earlier months.
This could be attributed to the myriad of uncertainties arising from the US-China trade war, Brexit, the Hong Kong protests and the ongoing COVID-19 (Coronavirus Disease 2019) situation, all of which had impacted global business, market sentiments and economic growth in 2019.
Despite these challenges, our focus for FY2019 was to maximise occupancy, improve retention rates and enhance our portfolio while balancing our capital structure risks. Our goal was to have a resilient and diversified portfolio, aligned to industry trends and the evolving real estate needs of industrialists to create long-term value for our Unitholders. To this end, we executed our growth strategies to pursue value-adding acquisitions and asset enhancement initiatives ("AEI") to strengthen our portfolio.
We are now more than a year after consolidating our portfolio and platform with Viva Industrial Trust. We now have a stronger bench strength with new expertise to build a more competitive and resilient portfolio. From optimizing our portfolio to proactively managing our capital structure, we have expanded both our portfolio and capabilities to stay ahead of the curve and position our platform to be future-ready.
In 3Q2019, we successfully completed the value-adding acquisition of 48 Pandan Road for an agreed purchase consideration of S$225.0 million. The newly completed six-storey ramp-up logistics facility located in the Pandan logistics area measures approximately 1.1 million square feet in gross floor area and augments the portfolio’s exposure to in-demand asset classes. The property is 100.0% occupied by Poh Tiong Choon Logistics Limited (“PTC”), an established third-party logistics player, under a 10-year lease with fixed annual rental escalations. The addition of 48 Pandan Road to our logistics and warehouse asset class is part of the broader transformation of our business to build and grow resilient income streams. Concurrently, a strategic partnership was also formed with PTC for us to provide real estate solutions for the latter’s business expansion in Singapore and the region.
In 2Q2019, we unveiled AEI plans for two existing properties in our portfolio, including rejuvenation works at UE BizHub EAST, a business park located in close proximity to Changi International Airport and utilising untapped plot ratio at 7000 Ang Mo Kio Avenue 5 to develop a modern high-specifications industrial facility onsite. AEI works at UE BizHub EAST entailed a reconfiguration of public areas to improve accessibility and traffic circulation, refurbishment of building facade and upgrading of public facilities. The common areas within the property will be improved in order to attract and retain quality tenants. The property will remain operational during the AEI. The development of a new building onsite at 7000 Ang Mo Kio Avenue 5 will increase its plot ratio from 1.7 to 2.1, with approximately 270,000 square feet of brand new high-specification industrial space. The AEI is expected to commence as soon as regulatory approval is granted and is expected to take 18 to 24 months to complete after commencement.
The acquisition and AEIs will cost around S$90.0 million in total. Rejuvenation of UE BizHub EAST has commenced and is expected to complete by the end of the first quarter of 2021.
As part of our ongoing community engagement program, ESR-REIT has partnered with Nanyang Polytechnic’s School of Design for students to produce art installations as part of their final year project. These installations are to be displayed at selected properties in the portfolio. UE BizHub EAST will be the first such platform to showcase the school’s young artistic talents. This is part of our efforts to provide a platform for talented artists to showcase their works and to encourage awareness and appreciation of the arts in Singapore.
During the year, we divested 31 Kian Teck Way, a non-core property for S$5.8 million at 1.7% above book value. This is in line with our strategy of enhancing our portfolio quality by disposing non-core properties and redeploying the proceeds for value-adding AEIs and/or acquisitions.
In FY2019, we registered gross revenue of S$253.0 million, a 61.3% increase year-on-year from FY2018. Consequently, our net property income (“NPI”) at S$187.9 million also increased by 67.7% over the previous year. The increase was mainly driven by contributions from the nine properties in Viva Trust’s portfolio and 15 Greenwich Drive, which were acquired in October 2018, in addition to the leasing up of 30 Marsiling Industrial Estate Road 8 following the completion of its asset enhancements in early 2019, as well as rental escalations from the existing property portfolio.
The total distribution to Unitholders for FY2019 grew by 78.0% year-on-year to S$132.6 million, due to a higher net property income performance of the portfolio related to higher revenue and gains distributed from properties divested in the prior years. Distribution per unit at 4.011 cents for FY2019 was 4.0% higher than the FY2018 DPU of 3.857 cents. This represented a total return of about 12.1%(2) for our Unitholders in FY2019.
The total portfolio valuation as at 31 December 2019 was S$3.2 billion(3), a 4.6% increase as compared to 2018.
As at 31 December 2019, our portfolio occupancy was 90.5% which was consistently above JTC’s average of 89.3%(4). As at 4Q2019, 70.0% of our portfolio comprises multi-tenanted buildings with the remaining being single- tenanted buildings. Our properties were home to over 328 tenants across different industries with no individual trade sector accounting for more than 27.6% of our rental income. The top ten tenants accounted for 30.5% of rental income as at 31 December 2019.
During the year, we have been proactive in tenant retention and space optimization. In FY2019, over 2.7 million square feet of space, approximately 20% of ESR- REIT’s total net lettable area, was leased and renewed. As at 31 December 2019, our tenant retention rate stood at 69.6%. Rental reversions had improved slightly from -2.9% in FY2018 to 0% in FY2019.
The weighted average lease expiry by rental income was 3.8 years, with no more than 20.5% of leases expiring in any given year over the next three years.
We continue to adopt a disciplined and balanced approach towards capital management. As part of our efforts to diversify our funding sources with alternative pools of capital, we activated the distribution reinvestment plan in 1Q2019. Furthermore, we tapped on the equity market with the successful completion of a fund raising exercise to raise gross proceeds of S$150.0 million to fund the acquisition of 48 Pandan Road and the AEI of UE BizHub EAST and 7000 Ang Mo Kio Avenue 5. In June 2019, we launched a S$100.0 million Private Placement at an issue price of S$0.515 per placement unit. The placement was 2.5x subscribed and saw strong participation from new and existing institutional and other investors. Following the Placement, a Preferential Offering was launched in September 2019 at an issue price of S$0.51 per new unit. 98.1 million new units were issued, raising gross proceeds of S$50.0 million. Our Sponsor, ESR Cayman Limited, demonstrated its financial support by providing a full backstop for any unsubscribed units in the Preferential Offer and the subscription was 2.13x subscribed. The rationale for structuring the equity fund raising into a Private Placement tranche and a Preferential Offering tranche was to attract new quality investors to our unitholder base and allowing existing unitholders to participate in ESR-REIT’s growth via the Preferential Offer tranche which was supported by our Sponsor’s backstop in order to reduce execution uncertainty costs and signify alignment of interests.
In 1Q2019, we entered into a S$155.0 million unsecured loan facility agreement with Australia and New Zealand Banking Group Limited, CTBC Bank Co., Ltd., and Standard Chartered Bank with the proceeds going towards refinancing of existing loan facilities and general working capital purposes. In 2Q2019, we also entered into a S$150.0 million unsecured loan facility agreement with CIMB Bank Berhad to refinance existing loan facilities and general working capital purposes. These new loans offered better terms and rates. In addition, a commitment letter for a S$200.0 million club loan facility with MUFG Bank Ltd and Sumitomo Mitsui Banking Corporation was executed on 30 December 2019, bringing our weighted average debt expiry as at 31 December 2019 from 2.6 years to 3.1 years(5). The loan facility agreement was executed on 28 February 2020 with proceeds applied towards refinancing purposes. As at 31 December 2019, ESR-REIT’s interest rate exposure was 88.8% hedged through interest rate swaps and fixed rate borrowings for 2.6 years.
At ESR-REIT, we are committed to creating a sustainable future for our business and caring for the communities in which we operate. We will conduct our business in an environmentally and socially responsible manner while upholding strong corporate governance standards.
We will continue to drive our sustainability practices to deliver greater value for our stakeholders and enhance our performance. In 2020, we will organise more activities to foster closer connections with our stakeholders.
Our sustainability efforts and performance relating to each of our material Environmental Social and Governance factors are documented in our Sustainability Report 2019 on pages 104 to 136.
Uncertainties over the state of US-China trade talks and the dampening of global and domestic demand have impacted business confidence and industrial activities
as output slumped. Consequently, demand for space is expected to remain muted in the short to medium term given the time lag between any improved business conditions and its impact on the industrial leasing market. According to the Ministry of Trade and Industry, the Singapore economy is projected to grow at a modest pace around 0.5% in 2020(6).
In light of the COVID-19 situation, we have taken precautions at our properties in accordance with guidelines from the Ministry of Health. These include temperature screening, administration of historical and future travel declarations and frequent cleaning and disinfecting of common areas. Isolation rooms have also been set up within the properties. Our properties are extending assistance to tenants to implement these measures. We have advised all tenants, visitors, partners and employees to exercise good personal hygiene and monitor their health closely. As the outbreak has now spread globally and has impacted the global financial markets negatively, we expect that there will be some financial impact on ESR-REIT in the coming year due to the unexpected disruption and stress on the global economy and financial markets which the export-oriented Singapore economy is dependent on. Whilst we have limited control over the volatility of our unit price, we will continue to manage our property portfolio diligently to ensure the safety of our tenants and to assist them in continuing with their businesses so as to protect our portfolio value and income stream. The Manager has also put in place business continuity plans to minimise the impact to our daily operations.
Against this backdrop of a tough and uncertain business climate and sentiment, we will remain agile and focused in executing our strategies. Although our portfolio remains Singapore-focused, we will continue to prudently explore opportunities – both within our portfolio and externally – in Singapore and the region by leveraging on potential opportunities in cities where our Sponsor has an established presence.
Industry 4.0 has brought new opportunities for ESR-REIT as tenants and business partners embrace a more digitally and technologically advanced world. The growing demand for smart factories that are well-located and better equipped may present greater opportunities to offer value- adding real estate solutions within our portfolio.
To become future-ready, we have embraced these currents of change and reshaped our portfolio. We are accelerating our portfolio transformation in preparation for a more intelligent future that will radically change the spaces that business owners are seeking.
With the support of our Sponsor, we will continue to pursue opportunities to strengthen the quality and size of our portfolio and diversify our portfolio risks while maintaining a disciplined and balanced capital management approach to generate stable returns and long-term capital growth for our unitholders. We will continue to unlock value in our portfolio to become future-ready for the industrialists-of-tomorrow, today.
On behalf of the Board, we would like to welcome Stefanie Yuen Thio as an Independent Non-Executive Director. With her legal background and vast experience across the real estate and capital markets, we strongly believe Stefanie will be invaluable to the Board in providing valuable perspectives to the business strategic directions and operations of ESR-REIT.
We would like to thank all our Unitholders, tenants, business partners and employees. We remain grateful for the steadfast support shown and we will continue to focus on creating and delivering sustainable long-term value. Our appreciation also goes to the Board and the ESR-REIT team for their unwavering dedication as we continue on our journey for success.
MR. OOI ENG PENG
MR. ADRIAN CHUI
Chief Executive Officer and Executive Director
- Tang, S. K. (2020, January 2). “Singapore economy expands 0.7% in 2019, slowest in a decade”. CNA NewsAsia. Retrieved from https://www.channelnewsasia.com/news/business/singapore-economy-gdp-2019-q4-mti-12226222
- Performance is calculated on the change in unit price over the year, based on the closing price of the last day of the preceding year and the closing price of the current year, including the assumption that distributions paid were reinvested at the closing price on the ex-distribution date.
- Includes 100% of the valuation of 7000 Ang Mo Kio Avenue 5 and 48 Pandan Road, in which ESR-REIT holds 80% interest in 7000 Ang Mo Kio Avenue 5 and 49% interest in 48 Pandan Road, but excludes the effects arising from the adoption of Financial Reporting Standards (FRS) 116 Leases which became effective on 1 January 2019.
- Based on 4Q2019 data from JTC.
- Assume utilisation of new loan facility to refinance the maturing medium term notes post execution of a S$200.0 million loan facility agreement with MUFG Bank, Ltd. and Sumitomo Mitsui Banking Corporation, Singapore Branch on 28 February 2020.
- Ministry of Trade and Industry. (2020, 17 February), MTI Downgrades 2020 GDP Growth Forecast to -0.5% to 1.5%. Retrieved from https://www.singstat.gov.sg/-/media/files/news/gdp4q2019.pdf