Investors to focus on finance costs, operational resilience as S-Reits report Q3 results

MARKET watchers will be keeping a keen eye on the impact of higher financing costs and operational resilience, as the Singapore-listed real estate investment trusts (S-Reits) report their results for the period ended September in the coming weeks.

For Reit investors, the bottom line is the impact of debt levels and interest expenses on distributions per unit (DPUs).

Amid a higher-for-longer interest rate environment, RHB research analyst Vijay Natarajan recommended paying close attention to gearing levels and debt hedges.

“Reits will likely continue to prune their portfolio for possible divestments in order to repay some of the expensive debts, as well as to keep their gearing levels in check to mitigate potential valuation declines,” he said.

Even as interest costs continue to be in focus, however, DBS analyst Derek Tan does not expect any real surprises. He argued that the rising interest rate trend has been well-documented, and higher finance costs are expected.

Instead, he expects more emphasis to be placed on how Reits are handling the current “slow growth, high inflation and interest rate environment”.

The way he sees it, industrial Reits with logistics assets, and those in the suburban retail sector currently have the “best operational earnings potential”.

The analysts are also bullish on the hospitality sector.

“I think hotels will outperform and surprise on the upside, with Q3 being the best quarter that they will report,” Tan said.

Natarajan also believes Singapore-focused names such as Far East Hospitality Trust and CDL Hospitality Trusts could outperform in their Q3 earnings.

This is on the back of a strong return of Chinese visitors to Singapore, and continued growth in revenue per available room, he said.

On the flipside, analysts are more cautious about the office sector.

Darren Chan, senior research analyst at Phillip Securities Research, said: “We expect office rents in Singapore to plateau in the coming quarters, especially with the incoming supply of 1.26 million square feet from IOI Central Boulevard Towers in Q1 2024.

“It will thus be tougher for Singapore office Reits to maintain stable DPU year on year with the higher interest rates.”

Tan said that while DBS is “generally cautious” on the office sector, the research house believes that the sector would remain resilient, given tight vacancy.

“While rents have peaked, we do not expect them to slide significantly,” he said.

RHB analyst Natarajan also observed that Singapore has “healthy” return-to-office trends, relative to its global peers.

“While rent growth has slowed to more flattish levels, we expect Singapore office Reits to continue to post positive reversions (in the low-single digits) for the quarter, along with stable occupancy,” he said.

Eyes on valuations

The earnings season for S-Reits kicks off on Monday (Oct 16), with Keppel DC Reit announcing its Q3 business update after the markets close.

This will be followed by Keppel Reit and Keppel Pacific Oak US Reit, which will release their business updates on Oct 17 and Oct 18, respectively.

Sabana Industrial Reit will also issue its Q3 update after markets close on Oct 18; Suntec Reit will release its update on Oct 20.

S-Reits scheduled to release their results for the half-year ending September include the three Mapletree Reits. Mapletree Logistics Trust, Mapletree Industrial Trust and Mapletree Pan Asia Commercial Trust (MPACT) will release their results on Oct 24, Oct 25 and Oct 26, respectively

The trio of Frasers Reits are also set to release their full-year earnings. Frasers Centrepoint Trust will release its results on Oct 25, followed by Frasers Logistics & Commercial Trust (FLCT) on Nov 2, and Frasers Hospitality Trust on Nov 7.

Natarajan believes that investors would be keeping a close eye on MPACT’s performance as they seek cues on the recovery in China and Hong Kong, as well as a potential re-entry into the counter, which is currently trading at more attractive valuations.

“We will also be closely watching FLCT for potential valuation impact from likely capitalisation rate expansions across its assets in Australia and Europe, as well as the strategy and plans of its new CEO,” he added.

DBS’ Tan noted that the year-end valuations will provide investors with a good sense on where fair values are, and whether balance sheets are overly stretched.

With the risk of gearing rising in the face of possible asset devaluations and interest coverage ratio pressure over the next year, the research house believes that Reit managers will continue to pursue deleveraging strategies through asset sales; they could also pursue equity raising if market conditions allow.

Chan from Phillip Securities added that investors should look out for the movements in property valuations and capitalisation rates to see how much they have moved.

“Investors are also worried that declines in property valuations could bring gearing levels to above 45 per cent or even 50 per cent,” he noted.

“Reits could therefore look to divest some non-core assets and use the funds to pay off existing debt,” he added. “In the current market, it is unlikely that Reits will want to raise equity, as many of them are trading below book value. Raising equity will thus be dilutive to existing shareholders.”