S-Reits’ Q3 DPU decline mostly in line with expectations

SINGAPORE-LISTED real estate investment trusts (S-Reits) mostly reported weaker distributions for the financial period ended September as higher financing costs weighed on performance.

The subdued showing came even as most Reits posted higher gross revenue and positive rental reversions.

Analysts told The Business Times (BT) that the performance in the latest quarter largely met their expectations, even though they remain watchful on further impact from higher rates and operating expenses.

“The results were broadly within our expectations given the high interest rate environment as Reits have to refinance maturing debt at a higher cost of borrowing,” said Morningstar equity analyst Xavier Lee.

He added that distribution per unit (DPU) growth should remain under pressure from the high interest rate environment for a couple more quarters.

Of the 15 S-Reits that provided data on DPU in their latest updates, 12 – or 80 per cent – reported year-on-year declines, data compiled by BT showed.

OCBC Investment Research noted that seven out of eight S-Reits within its coverage that provided DPU data for the latest period declared lower distributions, with the average DPU down 4.7 per cent year on year.

“However, the lacklustre performance did not come as a surprise,” the analysts said. OCBC Investment Research has adjusted its average DPU forecasts down by 0.7 per cent for the current financial year (FY) and down 0.9 per cent for the next FY.

Following the revisions, it now expects the S-Reits under its coverage to register average DPU growth of negative 3.2 per cent this FY. This will be followed by a slight rebound of 1.8 per cent in the next FY.

While DPUs have mostly slipped, many S-Reits continued to post higher gross revenue and net property income (NPI) in the latest period. Rental reversions were also mostly positive.

DBS analysts Derek Tan, Rachel Tan, Dale Lai and Geraldine Wong noted that operational metrics from S-Reits indicate that fundamentals remain firm.

“Recent meetings with corporates highlight that most real estate sectors are exhibiting strong rental reversionary trends – Q3 stats were the strongest in 2023 – supported by firm occupancy rates,” they wrote.

They expect the momentum to continue into the first half of next year, although at a “more modest pace”, amid macroeconomic uncertainties.

Sector performance

The DBS analysts expect “continued strength in retail and hospitality S-Reits”, which have delivered performance higher than pre-Covid levels supported by structural demand drivers.

Frasers Centrepoint Trust’s (FCT) second half DPU fell 1.2 per cent, as finance costs jumped 71.3 per cent on year. Gross revenue rose 1.8 per cent, while its portfolio valuation remained stable. The manager noted that interest rate movements and rising operating expenses will remain key factors in affecting performance.

Hospitality S-Reits were among those that posted year-on-year improvements to their distributions.

Frasers Hospitality Trust posted a 26.4 per cent increase in distribution per stapled security for the second half of FY 2023, on the back of higher gross revenue and net property income.

Similarly, Far East Hospitality Trust reported a 51 per cent increase in income available for distribution for the third quarter, with its hotels segment posting strong growth in gross revenue.

Meanwhile, CapitaLand Ascott Trust posted a 13 per cent year-on-year improvement in gross profit for the third quarter. The manager noted that demand for lodging continued to be healthy, with portfolio revenue per available unit (RevPau) reaching 102 per cent of pre-Covid levels

Elsewhere, industrial S-Reits posted a mixed performance in terms of distributions.

Frasers Logistics and Commercial Trust reported a 6.6 per cent decline in DPU for its second half, on the back of lower revenue. The Reit’s revenue fell 0.8 per cent to S$212.8 million, partly due to the weaker Australian dollar.

Mapletree Logistics Trust (MLT) posted a 0.9 per cent improvement in DPU for the second quarter on the back of higher gross revenue and a divestment gain. Mapletree Industrial Trust’s distribution to unitholders for the second quarter was up 3.5 per cent at S$94.1 million, but DPU slipped 1.2 per cent due to an enlarged unit base

“Industrial S-Reits, as industry bellwethers, are expected to remain resilient,” the DBS analysts said. They added that risks for office S-Reits should dissipate over time if Asia – especially Singapore – exhibits economic strength in the coming quarters.

Suntec Reit’s DPU for the third quarter fell 14 per cent, despite gross revenue climbing 15 per cent. Its gearing also rose slightly to 42.7 per cent.

Meanwhile, Keppel Reit reported a 10.1 per cent year-on-year decline in distributable income from operations for the first nine months of 2023, even though gross revenue was up 5 per cent.

Lee from Morningstar said he was “slightly impressed” with the performance of some office Reits, such as Keppel Reit, which continued to report strong positive rental reversion, despite concerns over a moderation of office demand earlier this year.

But analysts are still watchful over the sector. OCBC Investment Research said they “remain cautious” on the outlook of Suntec Reit and Keppel Reit.

“We reiterate our constructive stance on the S-Reits sector, but on a selective basis,” they said. Among the attributes they favour are S-Reits that have strong sponsors and robust balance sheets.

Looking ahead, analysts are keeping a close eye on S-Reits’ balance sheets heading into the year end.

Maybank analyst Krishna Guha believes there will be heightened interest on property valuations and its impact on leverage ratios, more so than the impact of repricing of borrowing in the December quarter.

“I expect a higher level of operating expenses and hence lower margin through the next cycle on account of higher input costs, sustainability related spend… and elevated working capital needs,” he added.

“If capital markets remain challenging, it remains to be seen if the sector decides to pre-emptively increase the amount of retained DI.”

Morningstar’s Lee added he would be paying attention to Reits that have weak balance sheets and poor credit metrics, as any significant devaluation of its portfolio will put them under further stress.

“While we think that property valuation in Singapore will hold firm, we think that cap rates that are already resetting overseas may present opportunities for Reits to acquire accretively overseas from 2024 onwards when cap rates reset to a level that presents a healthy spread above borrowing cost.”