In yet another significant milestone, we completed a transformational merger, unifying the ESR-REIT and Viva Industrial Trust (“VIT”) portfolios... a landmark transaction in the S-REIT sector and for the interests of Unitholders.
On behalf of the Board of Directors of ESR Funds Management (S) Limited (“ESR-FM” or the “Manager”), we are pleased to present ESR-REIT’s Annual Report for the year ended 31 December 2018 (“FY2018”).
It has been a transformational year for ESR-REIT and has exemplified the importance of having a committed and strong Sponsor like the ESR Group (“ESR” or “Sponsor”).
The decision to undertake an Equity Fund Raising exercise via a Preferential Offering of approximately S$141.9 million in March was well-supported by ESR, with our Sponsor agreeing not only to take up its full pro rata entitlement but to also undertake to subscribe to any unsubscribed units to a total of around S$125.0 million, thus not only validating the transaction but displaying its commitment and support for ESR-REIT. More details on this are outlined in the Financial Review section on pages 38 to 39.
In yet another significant milestone, we completed a transformational merger, unifying the ESR-REIT and VIT portfolios, thereby marking the first-ever merger between Singapore Real Estate Investment Trusts (“S-REITs”) via a Trust Scheme of Arrangement, a landmark transaction in the S-REIT sector executed for the interests of Unitholders. Once again, ESR demonstrated its commitment towards ESR-REIT’s growth by paying S$62.0 million for VIT Manager to facilitate the merger.
At the Extraordinary General Meeting (“EGM”) held on 31 August 2018, Unitholders of ESR-REIT demonstrated strong support of the transaction with more than 94% of ESR-REIT Unitholders voting in favour of the merger, a clear validation of our proposed strategy outlined in the EGM circular. For their efforts in bringing this transaction to fruition, our team received the “Best Singapore Deal” at the FinanceAsia Achievement Awards 2018, the “Best Domestic M&A” award at The Asset Triple A Regional Awards 2018 and a “Certificate of Excellence in Investor Relations” at the IR Magazine Forum & Awards South East Asia 2018.
Positive impacts are starting to flow through from the merger with VIT, in line with the Manager’s expectations. For example, the enlarged ESR-REIT has also benefited from a larger market capitalisation of c.S$1.62 billion(1), which has resulted in higher liquidity and trading volume and increased coverage from research houses.
ESR-REIT will be able extract value from exposure to highervalue asset classes such as Business Parks and High-Specs Industrial and access to a wider pool of tenants.
In 4Q2018, ESR-REIT completed the S$95.6 million acquisition of 15 Greenwich Drive, a modern four-storey ramp-up logistics facility at Tampines LogisPark. The addition of 15 Greenwich Drive and the nine properties under Viva Trust (“VT”) have bolstered ESR-REIT’s portfolio. This has created a more robust, diversified and competitive platform aggregating a total portfolio size of S$3.02 billion which is better able to adapt to market cycles and evolving customer trends.
This year’s annual report embodies growth and the spirit of change as well, incorporating our Sustainability Report into a comprehensive and integrated report, reflecting what we do, how we operate and the impact our broader actions have on our customers, communities, partners and employees. More details on our Sustainability Report are available on pages 106 to 128.FINANCIAL PERFORMANCE
Total revenue for the year was S$156.9 million and net property income (“NPI”) was S$112.0 million, up year-on-year (“y-o-y”) by 43.0% and 42.8% respectively. The improvement in the NPI was mainly due to full-year contributions from 8 Tuas South Lane and 7000 Ang Mo Kio Avenue 5 which were acquired in December 2017 and the acquisition of 15 Greenwich Drive and the VIT portfolio in October 2018. Distribution per Unit (“DPU”) for FY2018 was 3.857 cents which was 0.1% higher than the previous year.
The acquisitions have strengthened ESR-REIT’s asset base, with total portfolio valuation as at 31 December 2018 doubling to S$3.02 billion, as compared to the end of 2017.
Cultivating diversified sources of capital and strengthening a strong credit profile enables us to better manage risks. In doing so, we have been able to capitalise on opportunities when they arise and leverage on opportunities to further create value for our unitholders.
As part of our proactive approach towards capital management, we have successfully completed a Preferential Offering in March 2018, with 262.8 million new units issued, raising gross proceeds of S$141.9 million. This deal was well-supported by our Sponsor ESR agreeing not only to take up its full pro rata entitlement but to also undertake to subscribe to any unsubscribed units to a total of S$125.0 million. The Preferential Offering was 1.7 times subscribed. Proceeds from the Preferential Offering were used to repay debt drawn to partially fund the acquisition of 7000 Ang Mo Kio Avenue 5.
As part of the merger between ESR-REIT and VIT, we entered into a S$700.0 million unsecured loan facility agreement with HSBC, Maybank, RHB Bank and United Overseas Bank, with the proceeds applied towards refinancing VIT’s existing loan facilities, funding the cash consideration for the Scheme relating to the merger, and the payment of other expenses incurred as part of the merger. In the same month, we also completed the acquisition of 15 Greenwich Drive, a modern ramp-up logistics facility. In connection with the completion of this acquisition, we entered into a S$100.0 million unsecured loan facility agreement with BNP Paribas, with the facility drawn down for the purposes of the completion of the acquisition.
Our focus for the year ahead will be on integrating the enlarged portfolio to achieve operational synergies and economies of scale.
In November 2018, the Manager redeemed all the outstanding S$155.0 million 3.5% notes due in November 2018, pursuant to the S$750.0 million Multicurrency Debt Issuance Programme and the redeemed notes were cancelled in accordance with the terms and conditions.
As at 31 December 2018, ESR-REIT’s Debt to Total Assets was at 41.9%. The portfolio remains 100% unencumbered, with Weighted Average Debt Expiry at 2.7 years, as compared to 2.4 years as at 31 December 2017. ESR-REIT has a wellstaggered debt maturity profile, with no more than 27.0% of debt expiring in each year over the next five years. Amidst an expected rising interest rate environment, we have also reduced risk by fixing 83.4% of interest rate exposure for a weighted average tenor of 3.0 years. More details on ESRREIT’s capital management can be found on pages 40 to 41.OPERATIONS
ESR-REIT’s portfolio fundamentals remain stable with an occupancy rate of 93.0% as at 31 December 2018, unchanged from the occupancy rate recorded at the end of FY2017 and above the JTC Industrial average of 89.3% recorded at the end of 2018.
For FY2018, we completed new leases and lease renewals for 1.7 million sq ft of space. Although downward pressure on rents has resulted in a rental reversion of -2.9% for FY2018, it is a significant improvement from the -15.8% rental reversion in FY2017. The Weighted Average Lease Expiry (“WALE”) is 3.8 years. We have embarked on an exercise to convert single-tenanted buildings (“STB”) to multi-tenanted buildings (“MTB”) since 2012. The current mix of STB and MTB by rental income as at the end of FY2018 stands at 30.5% and 69.5% respectively and creates flexibility for us to capture potential rental upside and improve our tenant mix and quality in an increasingly stabilised demand / supply environment.
We have also taken the opportunity to reposition our portfolio. Following the completion of the merger with VIT, our portfolio profile has further diversified, with Business Parks and High-Specs Industrial spaces making up c.45% and logistics assets comprising 19% of ESR-REIT’s portfolio by Rental Income. These sub-sectors enjoy higher average rents amidst a balanced demand / supply industrial space environment. As the Singapore economy moves towards Industry 4.0 through digitalisation and automation of manufacturing processes, specifications and building infrastructure needs to keep up with such trends and technologies.
Enhancing our assets helps them retain an attractive leasing profile and remain resilient as the type of industrialists changes with global trends. We have put this into action with the Asset Enhancement Initiative (“AEI”) at 30 Marsiling Industrial Estate Road 8. What was formerly a General Industrial building is now a High-Specs building. The property obtained its Temporary Occupation Permit (“TOP”) in 25 January 2019 and is 100% occupied, with facilities and amenities in place to meet the needs of tenants from high-valued added manufacturing sectors. More details on the project are on page 37.
As at 31 December 2018, ESR-REIT has a portfolio of 57 investment properties valued at S$3.02 billion, compared to 48 investment properties, valued at S$1.68 billion the year before. ESR-REIT’s portfolio comprises quality industrial properties across Singapore’s key industrial zones, with a total gross floor area (“GFA”) of approximately 14.1 million sq ft across the following sub-asset classes: General Industrial, Light Industrial, Logistics/Warehouse, High-Specs Industrial and Business Parks. The REIT now has a diversified base of 339 tenants and following the acquisition of the nine Viva assets and 15 Greenwich Drive, we have also reduced our top 10 tenant concentration risk. Top 10 tenants now account for 30.1% of Rental Income as at 31 December 2018, compared to 38.7% the year before.
We look forward to building a diversified and stable portfolio that is future-ready in order to meet the evolving needs of the tenants of tomorrow.OUTLOOK FOR 2019
We ended the year with a larger and diversified portfolio, at a time of increased uncertainty in global markets. Risks such as protectionist trade policies, volatile financial markets and a rising interest rate environment continue to contribute towards this challenging operating environment.
While this uncertainty may impact rents and occupancy, data from JTC points towards an increasingly stable supply of industrial real estate. We remain cautiously optimistic that this, coupled with the tapering future supply of industrial space expected to come on stream over the next few years, will support the leasing demand and rentals of industrial space as Industry 4.0 takes shape in Singapore’s economy.
Our focus for the year ahead will be on integrating the enlarged portfolio to achieve operational synergies and economies of scale. One example of how we are doing this is the selfmanagement of our property management services, an initiative that was rolled out in 4Q2018. The enlarged portfolio has also given us the flexibility to undertake asset rejuvenation and/or AEIs to enhance the building specifications and unlock further value respectively. Up to 35.7% of our portfolio comprises the older generation General and Light Industrial properties which may be suitable for asset rejuvenation. In addition, we have an unutilised plot ratio providing up to 1 million sq ft of additional GFA. Updates on these AEI projects will be announced in due course.
It is important that our decisions are determined by long-term considerations and in understanding mega trends and issues in the market, our experienced team is able to anticipate and respond quickly to ongoing opportunities to protect and enhance the interest of stakeholders.BOARD AND SENIOR MANAGEMENT RENEWAL
We would like to thank the Board of Directors for their support and contributions over the year. Their extensive experience, broader business and commercial knowledge has enabled ESR-REIT to plan for the future.
In the last year, there have been some changes to the Board as part of ongoing succession planning. Former Non-Executive Directors Mr. Shen Jinchu and Mr. Akihiro Noguchi have stepped down after serving with dedication for 2 years and close to 5 years respectively.
We are also pleased to welcome several new board members who were former directors and senior management of VIT manager for continuity. Dr. Leong Horn Kee and Mr. Ronald Lim have been appointed Independent Non-Executive Directors while Mr. Tong Jinquan and Mr. Wilson Ang have been appointed as Non-Executive Directors.
There have also been changes to the senior management team. We welcomed Mr. Lawrence Chan, former Chief Financial Officer (“CFO”) of VIT Manager, to the ESR-FM management team, as the new CFO.
We look forward to working with the new members of the Board and senior management team to build on ESR-REIT’s strong foundations.NOTES OF APPRECIATION
On behalf of the Board, we would like to thank our stakeholders, our Trustee, our Auditors, our real estate services partners, our legal advisors and banks for their continued support. Special appreciation goes to our customers – our tenants. Mr. Shane Hagan, Chief Operating Officer and Chief Financial Officer resigned in October 2018 to pursue other interests. We would like to extend our gratitude to him for his significant contributions to ESR-REIT over the last few years. Without them, the ongoing stability and transformation of ESR-REIT would not have been possible.
We would also like to personally thank the senior management and the entire team, for their continued dedication, enthusiasm and perseverance over the year.
Last but not least, we would like to express our gratitude to you, our Unitholders. The confidence and the support shown by you towards the Board and the Manager is sincerely appreciated. On behalf of the Board, we again look forward to your attendance and active participation at ESR-REIT’s Annual General Meeting (“AGM”) which will be held on 24 April 2019.