All eyes on asset valuations, capital management strategies as S-Reits gear up for FY results

THERE is an air of expectancy as the Singapore-listed real estate investment trusts (S-Reits) start to release their financial results for the period ending December 2022 from this week.

On one hand, China’s reopening has sparked hopes of a Reit revival. The country’s lifting of Covid-19 curbs is expected to be a welcome shot in the arm for the sector, after a dismal 2022 that saw one of the worst sell-offs in the 20-year history of S-Reits.

However, the uncertainty of higher-for-longer interest rates will keep investor attention firmly fixed on how the Reit managers wrestle with challenges on the capital management front.

Some of the key metrics that market watchers – such as Maybank analyst Krishna Guha – will be paying special attention to in the upcoming result announcements include the Reits’ “asset valuations, aggregate leverage and funding costs”.

“In terms of valuation, the focus will be more on offshore commercial assets and any impact of recent transactions in the Singapore commercial space,” Guha said.

The magnitude of the impact of declining asset valuations became apparent to S-Reit investors at the end of 2022, when Manulife US Reit disclosed that the real estate valuation of its US office portfolio had fallen by 10.9 per cent.

This led to a surge in its aggregate leverage to 49 per cent – just slightly under the regulatory limit of 50 per cent.

With the majority of the other S-Reits expected to disclose their updated portfolio valuations following the year-end asset revaluation, this might throw up more unpleasant surprises.

Key metrics and trends to watch

The way Morningstar analyst Xavier Lee views it, the market is already starting to see evidence of yield expansion in Singapore-based assets.

For example, he said, Link Reit’s acquisition of two suburban malls in Singapore came at an entry yield of 4.9 per cent – some 90 basis points above the yield in CapitaLand Integrated Commercial Trust’s sale of JCube 12 months earlier.

“This is likely just the beginning, and I expect to see yields adjust upwards during the course of the year,” Lee said.

Yield is expressed as a percentage based on the net property income (NPI) and the market value of an asset. Assuming NPI remains unchanged, an expanding yield thus implies a decline in asset value.

However, Lee is careful to add that yield expansion alone may not necessarily mean a downward revaluation across all properties. Other factors, such as rental growth, occupancy rates and void periods play a part as well, he said.

“I think the important thing to look out for here is to scrutinise how aggressive a Reit has been in valuing their assets,” Lee added.

At the same time, Lee warns that S-Reits with overseas assets could experience bigger movements on the valuation front.

“Investors should also bear in mind that foreign exchange risk exposure has the potential to be a multiplier on downward asset revaluation and pay close attention to S-Reits with significant foreign risk exposure,” he said.

Reits specialist Kenny Loh said he will be keeping an eye out for net asset value and distribution per unit growth trends.

“This is a test of the experience and capability level of the Reit management, the resiliency of their portfolio, and how the Reit manager navigated the tough external environment for the past year,” said Loh, who is also an independent financial adviser.

“Another area I will be paying attention to is how the Reits manage their debt by looking at the gearing ratio, interest coverage ratio, debt maturity profile, current interest cost and secured borrowing,” he added. “Failing to manage the liability aspect of the balance sheet will destroy the long-term prospect of the Reits.”

Subsectors in the crosshairs

At the top of market observers’ watchlist this earnings season will be the hospitality S-Reits, which are expected to ride on the tailwinds of the return of Chinese tourists.

“We look forward to commentary around forward bookings for the hospitality sector and visibility around supply of rooms which were offline for asset enhancements or government contracts,” said Maybank’s Guha.

Hospitality S-Reits scheduled to release their results for the full year ended December include CapitaLand Ascott Trust and CDL Hospitality Trusts on Jan 30, as well as Far East Hospitality Trust on Feb 14.

S-Reits in the retail space are also likely to reap the benefits of the Chinese tourist dollar.

After three years under Covid-19 lockdowns, Loh said the “revenge travelling” and “revenge spending” phenomenon is expected to emerge.

“We see Singapore as a major beneficiary of the relaxation of travel restrictions in mainland China,” added Morningstar’s Lee. “Besides ranking high on the list of travel destinations for Chinese travellers, Singapore – unlike countries such as Japan and South Korea – also did not impose any Covid restrictions on Chinese travellers.”

Singapore suburban mall landlord Frasers Centrepoint Trust will release its first-quarter business update on Jan 26, while retail peer Starhill Global Reit will announce the results for its first half on Jan 27.

Meanwhile, China-focused Sasseur Reit is slated to release its full-year results on Feb 17.

At the same time, investors will also be wise to pay heed to warnings surrounding the office subsector.

“We think the strong rental growth seen in 2022 will be moderated by a slowdown in office leasing demand as companies turn cautious in the face of the rising risk of recession,” said Lee.

He noted that the expected completion of IOI Central Boulevard office development in Singapore this year would add significant new office supply.​

Office landlord Keppel Reit will announce its full-year results on Jan 27, while the trio of US office S-Reits – Keppel Pacific Oak US Reit , Prime US Reit and Manulife US Reit – will release their full-year results on Feb 1, Feb 8 and Feb 9, respectively.

Other diversified S-Reits with office and commercial assets that are releasing their results for the year ended December 2022 include Suntec Reit (Jan 20), OUE Commercial Reit (Jan 30), Mapletree Pan Asia Commercial Trust (Jan 31), CapitaLand Integrated Commercial Trust (Feb 1), CapitaLand China Trust (Feb 3), and Lendlease Global Commercial Reit (Feb 7).

Industrial S-Reit Mapletree Logistics Trust is expected to kick off the Reit results announcements with its third-quarter update on Jan 19.