All eyes on how S-Reits navigate rate hikes as earnings season looms
THE units of real estate investment trusts (Reits) listed on the Singapore Exchange (SGX) have fared relatively well in the first quarter of the year despite concerns over the impact of persistently sticky inflation and the banking turmoil in the US and Europe.
The iEdge S-Reit Index rose 2 per cent in the first quarter of 2023, snapping a four-quarter-long losing streak. It outperformed the Straits Times Index, which gained just 0.2 per cent over the same period.
The outperformance from Reits came amid greater investor hopes that increasing macroeconomic headwinds and signs of financial instability in US banks could signal an imminent pause to the US Federal Reserve’s aggressive rate hikes.
But even as investors grow slightly more optimistic, analysts are keeping a close watch in the upcoming earnings season on Reits’ operational metrics – such as occupancy and rent reversion – and how their financials are holding up in the current higher interest rate environment.
“In general, we are expecting the S-Reits to deliver quarter-on-quarter improvement in net property income (NPI) given that the real estate cycle still remains in the landlords’ favour,” said Derek Tan, analyst at DBS Group Research.
He added that the research house is watching the overall financial metrics such as interest coverage ratios and gearing to ensure they are in line with growth estimates for the sector.
“While NPI is growing, (interest rate) increase is estimated to outpace a lot of the good work done by the managers,” Tan said.
Meanwhile, Maybank analyst Krishna Guha also noted that the house would be monitoring commentary around lending spreads and watching if there have been any changes to funding cost guidance since the last quarter.
Other things to watch closely, according to Guha, are how capitalisation rates are trending as well as rental reversions for industrials, office and retail Reits, and forward booking for hotels.
“We will look (for) improved operating metrics and guidance for commercial Reits with downtown malls and hospitality Reits,” he said. “On Singapore offices, we will look for guidance on leasing trends given that spot rent growth has slowed down.”
DBS’ Tan expects operational metrics to remain fairly stable for now. “We favour the retail and industrial sub-sectors with hotels expected to still deliver year-on-year improvement in RevPAR (revenue per available room),” he said.
Analysts also noted that portfolio valuations are another area they would be monitoring to ensure that the property net asset values are resilient and supported in the current environment.
RHB analyst Vijay Natarajan noted that overseas S-Reits, especially those with portfolios in the US and Europe, are currently the ones “under significant stress” amid sharp interest rate increases, economic slowdown and a pullback in bank financing.
“We will be monitoring this sector closely for financial stress,” Natarajan said.
The earnings season for S-Reits will start with first quarter business updates from Keppel Pacific Oak US Reit and Keppel DC Reit on Tuesday (Apr 18).
S-Reits that are scheduled to release their results for the full year ending March include Aims Apac Reit and the trio of Mapletree Reits. Mapletree Pan Asia Commercial Trust and Mapletree Industrial Trust will release their results on Apr 27.
Maybank’s Guha said he will be looking out for the impact of Singapore’s manufacturing sector slowdown on the operating metrics of Mapletree Industrial Trust, as well as further guidance on US data centre leases.
For Mapletree Pan Asia Commercial Trust, Guha noted that areas of focus would include operating trends for VivoCity and Festival Walk, as well as the impact from reopening.
The trio of Frasers Reits are also set to release their earnings report card for the first-half period ending March. Frasers Centrepoint Trust (FCT) will release its results on Apr 26, followed by Frasers Hospitality Trust on Apr 28 while Frasers Logistics and Commercial Trust will do so on May 4.
The performance of FCT is one that analysts are keeping a close eye on.
DBS’ Tan said: “We are keenly looking at FCT for its operational stats to see how consumer sentiment is affected by the high inflation rate.”
RHB’s Natarajan added: “FCT remains one of our preferred retail sector picks for its resilient and defensive suburban mall portfolio exposure, which has generally performed well in market downturns. The only concern here has been on the balance sheet and interest cost side with close to half of its debts due for refinancing this year and next.”
