Reits must be consistent in how they compute rental reversions

THE recent disclosures by Keppel Reit revealing inconsistencies in how it computed rental reversions last year have raised the question of whether there is a need for a prescribed standard for the industry.

Currently, there is no uniform way of calculating rental reversions - an industry jargon for change in rents upon lease renewal - among real estate investment trusts (Reits). It is not a mandatory disclosure requirement to begin with.

But with rental reversion being one of the key indicators that investors look at to assess the health of leasing activities of Reits, being consistent and transparent in the calculations is necessary, if this information is to be presented at all.

Keppel Reit's case provided a classic example of how different methodologies and discretion on the type of leases and assets to be included can drastically swing rental reversion trends, even in the opposite direction.

In its regulatory filing with the Singapore Exchange last month, Keppel Reit said that for the fiscal first half of 2016, it calculated rental reversion based on new, renewal and forward renewal leases during the period. Review leases - referring to long leases that are periodically up for review and mark-to-market - were not included; its Singapore portfolio, excluding one asset, was included but its Australian portfolio was excluded.

But for the first nine months of 2016, a different approach was adopted. It included review leases in addition to new, renewal, and forward renewal leases and included the Australian portfolio. More interestingly, other income such as lease pre-termination compensation received and building advertising income was included.

While acknowledging the inconsistencies, Keppel Reit has decided to revert back to the methodology used for the first quarter ended March 31, 2016. For fiscal 2016 results reported last week, its rent reversions included the rental income of new, renewal, forward renewal and review leases for all assets.

By using this methodology, however, Keppel Reit's rent reversions for H1 2016 and the first nine months of 2016 became a negative 11 per cent and 9 per cent respectively, instead of the positive 2 per cent and 3 per cent earlier reported.

This disclosure came as a surprise to the industry. For one thing, lease pre-termination compensation and building advertising income are not classified as rental income and hence excluded from the rental reversion computation of most Reits. It was also unclear why a certain portfolio or asset would be excluded in one period and included in the next.

Keppel Reit's Australian portfolio - which makes up less than 10 per cent of the Reit's asset value - comprises mainly long leases with large tenants. It could be that there were no expiring leases being concluded in some periods or that such expiring leases may unduly swing rental reversion figures.

But whatever the reason, there has to be consistency in the methodology for such figures to be meaningful to investors, and when there are exclusions in certain periods - that deviate from the methodology - for good reasons, such exclusions should be disclosed in a timely fashion.

To this end, Keppel Reit has rightly realised that and rectified the matter.

Given the lack of a uniform standard in the industry on rental reversion calculations, there is no way investors can compare rental reversions across Reits given their differing methodologies.

BT's check with some Singapore-listed Reits found that they vary from one another in the types of leases they include in rental reversions and how they compare rents.

But there are some similarities too. These Reits generally do not include newly created and reconfigured units when computing rental reversions, since there is no past rental record for these spaces. Most agree that they may have to exclude a property from the calculation if there is only one lease renewal in that property and including it would expose the tenant.

Among commercial Reits, Frasers Commercial Trust looks at the first-year rent of the new lease period over the last payable rent of the expiring lease period; Mapletree Commercial Trust, on the other hand, compares the average rents of the new lease period over the preceding rents of the expiring leases.

When average rents over a lease period are used in rental comparisons, the annual rental escalations are effectively priced into the rental reversions.

Among industrial Reits, Cambridge Industrial Trust includes new leases - for existing spaces taken up by new tenants in place of outgoing tenants - but Viva Industrial Trust and Ascendas Reit do not include new leases in their rental reversion calculations.

Some Reits deviate from providing rental reversions in percentage terms. Mapletree Industrial Trust discloses for each property type, the pre-renewal and post-renewal gross rents (weighted by net lettable area) as well as gross rents of new leases in each financial period, thus allowing investors to compute rental reversions on their own.

Office landlord CapitaLand Commercial Trust (CCT) also presents the information in a way investors can do their own calculations. For every quarter, it shares the average expired gross rent and a range of committed gross rents at each property. It also discloses the average expiring rent of each major property for the next three years - which is updated every quarter.

Kevin Chee, head of asset management of CCT's manager, explained that since there is no prescribed standard for computing rental reversions, CCT provides such data to enable investors to compute their own numbers to get a good sense of how its properties perform.

Clearly, there may be no perfect way to present rental changes in a property portfolio. Even if a uniform methodology is applied across Reits, it might not be a straightforward comparison that investors can make across Reits given their varied asset portfolios with varying lease terms.

It may also become an administrative nightmare for Reits to re-calculate past rental reversion figures based on a new prescribed method. But at the very least, investors do expect a consistent and transparent methodology being applied by each Reit over time. A lack of a prescribed market practice is no excuse for any inconsistencies.