A Review of the Earnings of the REITs I Own
Last week marks the end of the earnings period of all the REITs I owned, namely Capitaland Integrated Commercial Trust (CICT), Frasers Logistics and Commercial Trust (FLCT), Mapletree Industrial Trust (MIT), Mapletree Logistics Trust (MLT), Mapletree Pan-Asia Commercial Trust (MPACT) and Parkway Life REIT (PWLR).
As such, I think now is a good time for me to do a short review of their performance for the quarter/ year, to have a more wholesome perspective of how the rising interest rate and the current macro-economic environment impacts the REITs' performances.
As seen above, the earnings of most of the REITs have improved. Despite the good improvement in gross revenue (by more than 10%), the increase in operating expenses caused their net income to improve by a smaller percentage. Do note that the earnings of MPACT jumped by more than 80% due to the merger of Mapletree Commercial Trust and Mapletree North Asia Commercial Trust, and hence this quarter calculates the combined earnings compared to a year ago. Thus a more accurate comparison should be done based on quarter on quarter.
However, not all REITs are showing improvement in earnings. My top holding, PWLR, and also FLCT, showed a drop in gross revenue and net income. For PWLR, this is due to lower contribution by nursing homes in Japan due to divestment, and the massive depreciation of the Japanese Yen against the Singapore dollar. This definitely caused the earnings (calculated in Singapore dollars) to be under pressure as revenue from Japan accounts for slightly more than 40% of the total revenue of the REIT. How long this depreciation will last, depends on the policies of the Japanese government and it is beyond my control. What I can do is to continue to keep a close look out on their future earnings report to see how the situation pans out in future. For FLCT, the drop in revenue and income is due to divestment of CSE, and weaker exchange rates of the Euro and Australian dollar against the Singapore dollar. As such, this is less of a concern, as divestment means the manager is proactively managing and recycling the properties in the portfolio, and constantly in search for better yielding properties for replacement in future.
With regards to debt, it seems that CICT's debt profile is the least preferred amongst all the REITs. Probably the least preferred debt metric is their interest coverage ratio, which is only at 3.9x, the lowest compared to others (interest coverage ratio is used to measure how well a company can pay the interest due on outstanding debt:- generally the higher the coverage ratio, the better). On the other hand, the huge increase in percentage aggregate leverage for MPACT is understandably due to the merger. Hopefully with time, the management can reduce the leverage.
In my personal opinion, the REITs with better debt profile are PWLR and FLCT. For PWLR, it's cost of debt is the lowest, while its interest coverage ratio is the highest (due to its low cost of debt). Nonetheless it is important to keep a close look on the cost of debt, in case the Japanese government suddenly decides to raise interest rates, which will be a double edged sword for PWLR as that means rising cost of debt, but also possible strengthening of Japanese Yen which may support their earnings. For FLCT, it's aggregate leverage percentage improve the most as a large amount received from the CSE divestment is used to pay down debt, making their leverage percentage the lowest among the REITs. Their interest coverage ratio also improve by the largest percentage. This shows that the management of FLCT is prudent in current macroeconomic climate, which is definitely good for the REIT.
Comparing the distribution per unit (DPU) year-on-year, CICT and FLCT have a slight decline in the trailing twelve-month DPU, while all other REITs have slight improvements in their DPU. I do not think the slight decline in DPU for these 2 REITs are of concern. In fact it is within expectations due to the rapid rise in interest rate, negatively impacting DPU at the meantime. The important cause for concern here could probably lie with the yield spread, which is the difference between the dividend yield of the REIT and the 10-year bond yield. As seen above, the yield spread has declined by a large extent, which may mean there's more room for the price of REITs to fall as the yield that REITs can provide prove to be less attractive to investors (especially for PWLR, whose yield is now actually below the 10-year yield which is deemed risk-free). Hopefully things will stabilize soon, and even if interest rates remain high, at least it doesn't increase any further.
Uncertainty in the final long term rate remains to be one of the biggest pressure for REITs' prices. This quarter's results have given us a peek to how the increase in interest rate and the current macroeconomic environment has impacted and affected the various REITs' performance, in terms of earnings and yield. Let's continue to follow closely how the REITs will perform in upcoming quarters. I believe if the REITs' management have interests that are in line with the interests of shareholders, shareholders will not have to worry too much, and just stay the course (Do note that the above numbers were tabulated in early November, and by mid-November, the 10-year yield has fallen to about 3.7%, which helps to explain the recent rebound in the prices of the REITs in the past week, due to falling inflation numbers). Regardless, I believe quality REITS with quality sponsors and management will be able to ride through the current turbulence, as in the long run, the interest rates will normalize, and the REITs' performances will stabilize at the normalized rates. At the meantime, Barista FIRE, here I come...!