More than two-thirds of S-Reits report DPU decline in H1; analysts see tougher H2

HIGHER financing costs continued to wreak havoc on Singapore-listed real estate investment trusts (S-Reits) in the first half of 2023. Market watchers believe the worst is yet to be.

Of the 37 S-Reits and property trusts that reported distribution per unit (DPU) figures for the period ended June, only 11 managed to eke out a year-on-year improvement.

The remaining 26 posted declines in DPU. Three Reits – Dasin Retail Trust , Lippo Malls Indonesia Retail Trust , and Manulife US Reit – stopped distributions in the latest period.

Gabriel Yap, a veteran Reits investor and chairman of GCP Global, noted that some Reits made acquisitions and completed asset-enhancement initiatives that boosted revenue and net property income (NPI).

“But at the bottom line – the DPU, which is most critical for investors and the share price – they failed to deliver,” he said.

Looking just at toplines, though, most of the S-Reits did not fare badly.

Out of the 37 S-Reits that posted revenue figures for the period ended June, 26 saw an improvement from the same period in the year before. And 24 of the S-Reits logged a year-on-year increase in NPI.

“Our biggest positive takeaway would be the operational performance of Singapore assets,” RHB analyst Vijay Natarajan said.

“Robust operational numbers were seen across all asset classes in Singapore, with occupancy and rental growth slightly exceeding expectations. This has resulted in largely stable valuations,” he added.

Maybank analyst Krishna Guha highlighted several other key operational metrics that were in good shape: “(Rental) reversions continue to stay positive, with strong numbers reported by some of the industrial Reits.

“Committed occupancy also continues to be high across listed Reits under various subsectors, especially in Singapore.”

Distributions were largely impacted by higher financing costs. Most of the S-Reits with overseas-based assets also suffered from foreign currency exchange losses.

“The biggest setback came from the depreciation of the Japanese yen, the Australian dollar and the Chinese yuan, which affected results from S-Reits with a sizeable portion of their portfolio overseas,” said UOB Kay Hian analyst Jonathan Koh.

The troubled trio that have halted distribution payments are all foreign-based S-Reits.

“Manulife’s huge revaluation losses caught many investors by surprise,” added Koh. The US office S-Reit halted distribution for the first half ended Jun 30, after breaching the unencumbered gearing ratio laid out in financial covenants with banks. This caused all its loans to be reclassified as current liabilities.

Other overseas players that were among the big losers were BHG Retail Reit , which saw its DPU tumble 53.9 per cent for H1, as well as Prime US Reit , EC World Reit , Elite Commercial Reit , IReit Global and CapitaLand India Trust , which logged DPU declines of between 21.5 per cent and 30.1 per cent.

By subsector, office Reits were a particularly weak link in H1. Most clocked double-digit declines in DPU.

The relative outperformer was Keppel Reit , which reported a 2.4 per cent drop in DPU on higher property expenses and borrowing costs.

On the other end of the spectrum was the hospitality Reits subsector.

All four hospitality S-Reits that reported their H1 results – Far East Hospitality Trust , CDL Hospitality Trusts , CapitaLand Ascott Trust and ARA US Hospitality Trust – recorded year-on-year improvements across the board on the revenue, NPI, distributable income and DPU fronts.

Frasers Hospitality Trust did not disclose its financial figures for its third quarter ended June.

ARA US Hospitality Trust posted a 5.2 per cent increase in DPU for H1, while the other three hospitality S-Reits saw DPU growth of between 19.3 per cent and 24.7 per cent.

“The Singapore hospitality sector has surpassed expectations with continued buoyancy in hotel room rates driving revenue per available room growth that are currently well above pre-pandemic levels, despite a slow Chinese travel recovery,” RHB’s Natarajan said.

“The near-term outlook for the Singapore hospitality sector remains bright, with a strong event pipeline until mid-2024,” he added.

Market watchers also described the industrial and logistics subsector as a “bright spot”.

“Demand continues to outpace supply on the back of supply-chain shifts, resulting in steady rental growth, especially for high-quality ramp-up logistics and cold-storage logistics facilities,” Natarajan said.

Koh noted that S-Reits which invested in logistics properties, such as Frasers Logistics and Commercial Trust , and CapitaLand Ascendas Reit , also reported “healthy positive rental reversions”.

“Logistics and hospitality still remain the preferred subsectors,” said Maybank’s Guha.

With macroeconomic uncertainties still lurking on the horizon, however, the analysts expect the S-Reits’ disappointing DPU performance to carry on into the second half of 2023.

GCP Global’s Yap noted that S-Reits have been “in the doldrums” for about 18 months.

“In terms of tenure, this is the longest correction after the Global Financial Crisis and pandemic,” he said. “In terms of magnitude of losses, it is the second-largest loss at 21 per cent – second only to the 22.3 per cent loss suffered during the Taper Tantrum of May 2013.”

Guha expects H2 to be “a continuation of H1”; Koh is predicting negative impact from a refinancing of borrowings in H2.

Natarajan nevertheless remains positive on the sector. “We believe sharp sector corrections of between 5 per cent and 10 per cent are opportunities for investors to accumulate high-quality S-Reits with strong capital positions.”