As S-Reits leave behind pandemic woes, other headwinds could temper optimism

A QUICK glance of headlines surrounding the latest quarterly business updates of Singapore-listed real estate investment trusts (S-Reits) for the period ended March would likely imbue investors with much confidence.

An overwhelming majority of S-Reits posted improvements in key metrics from distributable income (DI), distribution per unit (DPU), net property income (NPI) and occupancy rates to rental reversion or revenue per available room (RevPAR).

On the back of such rosy data, it may be tempting to declare that the sector has left the residual sting of the Covid-19 pandemic behind.

While real estate investment trusts (Reits) in the healthcare, hospitality and retail sectors reported performance metrics that were mostly positive, there were, however, some minor blemishes.

For example, Far East Hospitality Trust (FEHT) saw its gross revenue dip 1.6 per cent for the first quarter ended March as a result of the early termination and non-renewal of leases due to its divestment of Central Square.

Average occupancy across FEHT’s hotels portfolio also fell 8.4 percentage points to 67.7 per cent in Q1 due to the cessation of the government contract for isolation purposes at 3 of its hotels.

On a positive note, FEHT’s Q1 NPI climbed 4.5 per cent on lower property tax and expenses related to its commercial premises, while its RevPAR rose 15.7 per cent on the back of higher corporate and leisure rates.

The situation, however, was less rosy in the industrial and data centre space, where nearly a third of the Reits reported lower DPUs.

Aims Apac Reit (AA Reit), for example, posted a 4.8 per cent decline in DPU and a 3.8 per cent drop in distributions to unitholders for its second half ended March. This was largely due to the distributions related to the S$250 million perpetual securities issued in September 2021 for the acquisition of Woolworths HQ.

Another industrial Reit, EC World Reit, saw its DPU and distribution to unitholders tumble 9.7 per cent and 9.4 per cent, respectively, for the Q1 ended March. The declines were mainly due to withholding tax expenses and the recognition of 30 per cent of pre-termination compensation.

For some industrial and data centre S-Reits that managed to achieve improved DPU and DI, however, there may be less reason to pop the champagne just yet.

Keppel DC Reit, for example, reported a 0.2 per cent increase in DPU and 5.9 per cent rise in DI for the Q1 ended March, mainly due to recent data centre acquisitions and investment in debt securities. However, the data centre landlord saw its gross revenue dip 0.9 per cent, while NPI was 1.4 per cent lower compared to the year-ago period.

Meanwhile, S-Reits in the office and commercial sectors were mostly bullish – with a couple of exceptions.

Mapletree Commercial Trust (MCT), for example, reported a 3.4 per cent decline in DPU for the second half ended March, while income available for distribution fell 5.2 per cent and amount available for distribution dropped 3.3 per cent.

MCT’s gross revenue was 1.8 per cent lower for H2, partially due to the absence of a net government grant of S$2.7 million recorded in the year-ago period, while NPI fell 3.3 per cent on higher property operating expenses.

OUE Commercial Reit also reported declines across the key metrics, with revenue and NPI down 20.3 per cent and 21.5 per cent respectively for the Q1 ended March, while the amount available for distribution was 15.8 per cent lower.

The declines were mainly due to the deconsolidation of OUE Bayfront’s performance post the divestment of a 50 per cent interest in the property in March 2021.

All in all, it is worth noting that the blots in an otherwise stellar quarter for the S-Reits were mostly led by one-off events.

Still, they should serve as reminders that even as the upbeat reopening narrative dominates the headlines in Singapore’s – and the world’s – recovery prospects, it may be wise to adopt a stance of tempered optimism.

While the iEdge S-Reit Index has recovered significantly from the depths of the crash at the start of the Covid-19 pandemic, it is still trading at some 10.6 per cent lower than at the start of 2020.

Indeed, the S-Reits are mostly reporting better operating performance post-pandemic. But investors will do well to keep a close eye on other threats looming on the horizon, including rising interest rates and a prolonged Russia-Ukraine conflict.