S-Reits’ operating performance robust in Q1 but some macroeconomic headwinds remain 

SINGAPORE-LISTED real estate investment trusts (S-Reits) mostly delivered robust operating performance for the first quarter of 2023, with stable occupancy rates and positive rental reversions.

Even though the sector continued to face headwinds from higher borrowing costs and adverse foreign exchange movements, analysts remain optimistic that S-Reits are in a better position for recovery given the potential pause in interest rate hikes.

Of the 32 S-Reits that provided gross revenue figures in the latest reporting period, 23 reported an improvement while nine saw their top line decline.

Hospitality S-Reits were among the outperformers as the sector benefited from the recovery in travel with strong growth in revenue per available room (RevPAR)

“Hospitality S-Reits continue to impress with sustained RevPAR growth and levels that exceed pre-Covid levels with more strength anticipated on the back of China’s travel reopening,” DBS Group Research analysts Derek Tan, Rachel Tan, Dale Lai and Geraldine Wong said in a note.

Frasers Hospitality Trust (FHT) posted a 41 .1 per cent year-on-year increase in gross revenue for the first half ended Mar 31, while distribution per stapled security also rose nearly 80 per cent on year.

Other hospitality players, including CDL Hospitality Trusts and Far East Hospitality Trust, also reported stronger gross revenue in Q1, rising 31.5 per cent and 20.1 per cent, respectively, as RevPar rose across most of their portfolios.

Meanwhile, CapitaLand Ascott Trust said in a business update that its gross profit was up 59 per cent on year, while revenue per available unit (RevPau) also improved 90 per cent on year.

“While Q1 2023 is generally seen as a ‘shoulder season’ before the peak travel (corporate and leisure) season kicks in in Q2-Q3, forward guidances were generally optimistic with signs that average daily rates can hold above pre-Covid levels,” the DBS analysts said.

They also noted that industrial Reits were showing strength, with robust operational numbers, including high portfolio occupancy and an acceleration in rental reversion growth.

CGS-CIMB analysts Lock Mun Yee and Natalie Ong observed that industrial S-Reits reported robust portfolio occupancy in the first quarter of 2023, ranging from 92.1 per cent to 98 per cent.

However, they added that most industrial Reits have a geographically diversified portfolio, with negative forex impact on earnings and asset valuations one of the near-term risks.

The larger industrial S-Reits – which are also Straits Times Index (STI) constituents – mostly reported weaker topline numbers in the latest period.

Mapletree Logistics Trust’s gross revenue for its fourth quarter ended March fell 2.2 per cent on year to S$178.9 million. This was largely due to the impact from depreciation of foreign currencies against the Singapore dollar, and the trust’s manager also warned of more uncertainty ahead as higher interest rates and foreign exchange fluctuations could continue to impact performance.

Meanwhile, Mapletree Industrial Trust reported a 4.3 per cent year-on-year increase in gross revenue for Q4, but said DPU fell 4.6 per cent. Its manager cited the “challenging” macroeconomic environment and higher borrowing costs as factors affecting financial performance.

Frasers Logistics & Commercial Trust reported lower gross revenue and distributions for its first half following the divestment of Cross Street Exchange, and weaker exchange rates from foreign currencies.

CapitaLand Ascendas Reit did not disclose its revenue or net property income in its quarterly business update, but the manager said aggregate leverage increased slightly from 36.3 per cent to 38.2 per cent. Its portfolio booked a positive rental reversion of 11.1 per cent in the quarter.

The CGS-CIMB analysts noted that industrial Reits have been resilient for the year to date, and they believe that industrial and retail Reits may rally further. “Rent reversions for both these segments are expected to remain positive, albeit at a more moderate pace going forward,” they said.

Frasers Centrepoint Trust’s retail portfolio committed occupancy hit a high of 99.2 per cent, with improved gross revenue and net property income in its fiscal first half.

CapitaLand Integrated Commercial Trust also reported in its business update an improvement in portfolio committed occupancy and an 11.3 per cent year-on-year improvement in net property income for the first quarter.

The DBS analysts noted that retail-focused S-Reits were showing strength as rental reversions were supported by a general recovery in tenant sales above pre-Covid levels. However, they added that the prospect of a slower economic outlook in the second half of this year may be an overhang to the sustainability of rental reversion growth for retail and industrial S-Reits.

The analysts, however, took a more muted view on office S-Reits.

Most of the office S-Reits and business trusts that provided updates on distributable income in the first quarter reported declines.

Prime US Reit, Keppel Pacific Oak US Reit and Elite Commercial Trust all reported over 20 per cent declines in income available for distribution during the quarter amid higher financing costs.

“We remain cautious on the office sector as the high interest rate environment weighs in on its capital structure and balance sheets,” the DBS analysts said. “With a more cautious economic environment, we believe that investors should be looking to position in sectors that can deliver earnings resilience in a low growth environment.”

DBS prefers logistics and retail Reits “for their ability to grow revenues and, at the same time, having more resilient capital structure metrics in the face of a prolonged high interest rate environment”.

Meanwhile, the CGS-CIMB analysts said they remain overweight on Reits, with “preference for industrial, retail, hospitality and office sub-sectors, in this order”.

“We prefer S-Reits that we believe can deliver organic growth in excess of rising funding cost, leading to DPU and yield improvement,” they said.

“While rates may stay high in the near term, an end to the rate hike cycle should allay refinancing and asset value concerns, thus leading to a positive knock-on impact on S-Reits’ cost of capital and spur inorganic growth prospects going forward.”