Recent Singapore REITs earnings have been underwhelming to say the least. Many have underperformed, delivering lower distributions to unitholders and have also provided gloomy forecasts for the upcoming quarters.
Here we look at some disappointing results from prominent SREITs.
Suntec REIT (SGX: T82U)
Although a disappointment, its earnings has not been unexpected as the management previously provided guidance on its recovery and earnings prospects.
In 1Q23, Suntec REIT reported Distribution Per Unit (DPU) of 1.737 cents, 27.4% lower YoY.
Operational performance continued to strengthen across the office, retail and convention properties resulting in a 9.6% YoY rise in gross revenue in 1Q23 and net property income(NPI) climbing 2.7% YoY.
However, higher financing costs as well as the weaker Australia dollar and Pound Sterling against the Singapore dollar contributed to the decline in distributable income.
Although operating performance is expected to continue to improve across its properties, interest rate and energy cost are likely to remain high which will impact distribution for the year.
Mapletree Pan Asia Commercial Trust (SGX: N2IU)
MPACT which was formed from the merger of Mapletree Commercial Trust and Mapletree North Asia Trust reported DPU of 2.25 cents for 4Q23, flat YoY. This was the second quarter that MPACT is recording a flat performance after recording a flat DPU of 2.42 cents for 3Q23.
While a flat performance sounds like a robust performance, it is worth noting that MPACT recorded a YoY growth of nearly 13% in 1H23 and growth subsequently slowed after the meger.
MPACT’s core Singapore assets such as VivoCity set new milestones with sales level exceeding pre-pandemic levels but this was offset by the continued weakness in its Greater China assets due to the COVID-19 pandemic. Higher utility and finance costs also took its toll on its overall performance.
In local currency terms, most of the properties have maintained stable valuations when compared to a year ago. However, the weaker foreign currencies (against Singapore dollar) have led to lower values when translated to Singapore dollars. Fortunately, approximately 93% of MPACT’s distributable income was derived from or hedged into Singapore dollar. These measures help to mitigate the effects of volatilities in interest and foreign exchange rates.
Keppel REIT (SGX: K71U)
Keppel REIT (KREIT)’s 1Q23 net property income was 1.3% higher YoY due to higher rentals achieved on leases committed in 2022 and higher portfolio occupancy.
However, 1Q23 distributable Income was 6.7% lower than 1Q 2022 due mainly to higher borrowing costs which increased by 27.3%. The strong Singapore dollar also took a toll on the total distributable income despite income hedging.
In a previous announcement, KREIT announced that it will be supplementing its distributable income until 2026 by distributing a total of $100 million, with S$5 million declared for 1Q23. Including this capital distribution, total distributable income is up 2.6% YoY. Investors will do well to note that this capital gains distribution arose from past divestments and could be viewed as a distribution of excess capital.
Digital Core REIT (SGX: DCRU)
DC REIT saw distributable income decline by 10% YoY and was also 13.7% lower when compared to the forecast figures disclosed in its IPO prospectus. This was attributed to financing expenses which quadrupled as well as property expenses that outpaced revenue growth.
Its growth forecast also did not pan out as forecasted and although DC REIT was able to complete a 25% acquisition in a freehold data centre in Frankfurt in December 2022.
This transaction was floated as one of two possible scenarios in Sep 22. The alternative was to acquire majority interests in both the Frankfurt data centre and another freehold data centre in Texas.
The larger deal was preferred, and the transaction had to be funded by a combination of external bank borrowings and an equity fundraising. Due to the prevailing market conditions and DC REIT’s low share price, it was unable to carry out an equity fundraising and had to settle for a debt funded 25% acquisition which provided little to no accretion to DPU.
Keppel Pacific Oak US REIT (SGX: CMOU)
KORE reported a decline in adjusted distributable income by 12.5% YoY in 1Q23, due to divestments of assets and higher financing cost. Net property income fell 2.7% while income available for distribution fell 21.2%.
KORE is forecasting a rent growth of 1% in the next 12 months in the key markets where it is present, however KORE posted a negative 6.5% rental reversion in the quarter, largely due to its tenant; Spectrum Reach’s renewal and expansion in Maitland, Orlando, where the asking rents were significantly below the in-place rent.
Investors are concerned with the stability of US REITs and although KORE has disappointed operationally, it is currently still financially stable. KORE’s aggregate leverage stood at 38.7%, with no long-term refinancing requirements until Q4 2024. Its weighted average term to maturity of its debt was 3.4 years.
Closing statements
There seem to be a few common suspects as to reasons for these underperforming REITS such as higher borrowing costs, the stronger Singapore dollar as well as country and sector specific challenges.
2023 will continue to be challenging for SREITs. You should pay close attention to the next cycle of earnings for a clearer idea of how things would unfold.
Looking for REIT investing ideas? Alvin shared his study of SREIT that had outperformed in the last 10 years.
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