A Review Of The REITs' Quarterly Performances

Back in January 2023, the interest rates reached 4.25-4.50%.  Since then, interest rates continue to gradually climb till 5.25-5.50% in July 2023, where it held constant till today.  As such, it is a good time to review how the crazy climb in interest rates in 2022 impact the performances of REITs, which are highly leveraged and more sensitive to interest rates compared to other listed companies.  In the comparison below, I only focused on the REITs and Trust I hold in my portfolio.

1)     CapitaLand Ascott Trust (CLAST)  

"CLAST's properties saw strong demand as international travel continued to recover.  CLAST’s revenue per available unit (REVPAU) in 2H 2023 reached 103% of pre-pandemic levels in 2H 2019 on a pro forma basis, increasing by 10% y-o-y to S$157.  REVPAU also rose 23% y-o-y to S$148 for FY 2023.  In 4Q 2023, majority of CLAST’s key markets such as China, Japan, United States of America (USA) and Vietnam also registered y-o-y REVPAU growth.  CLAST’s gross profit for 2H 2023 rose 12% y-o-y to S$183.9 million compared to 2H 2022.  This is 106% of pre-pandemic levels.  Revenue for 2H 2023 also increased by 12% to S$397.6 million compared to 2H 2022.  This was mainly attributed to higher revenue received from CLAST’ existing portfolio and contributions from its new acquisitions.  

On a same-store basis excluding the new acquisitions, gross profit and revenue increased by 5% and 8% respectively compared to 2H 2022.  In 2H 2023, stable income sources contributed about 54% of CLAST’s gross profit, while the remaining 46% was generated from growth income sources. CLAST achieved a fair value gain of S$156 million, about 2% increase in portfolio valuation due to stronger operating performance and outlook for its portfolio despite higher capitalisation rates and discount rates.  Markets with valuation gains include Australia, Europe, Japan, Singapore and United Kingdom."

Personally, I feel that CLAST has done a great job!  I am happy with its performance, despite the high interest rates.  I believe this is mitigated by the revenge travel that is ongoing in 2023, and it should continue into 2024, as I myself have been travelling extensively in 2023, and has made plans for 2024.  Although I am a budget traveler and thus unlikely to stay in hotels and service apartments under the Ascott brand, but I know many people travelling to ASEAN regions who love to stay in mid-tier accommodations under the Ascott brand.  Based on its performance, the 4x interest coverage ratio, with 81% of borrowings on fixed rates, and a double digit 14% increase in distribution per unit are the metrics that I will give it a Grade A+.  As such, I am happy to have added CLAST into my portfolio this year, and will continue to increase my exposure in this trust with time.

2)     ParkwayLife REIT (PWLR)

"Parkway Trust Management Limited, as manager of Parkway Life Real Estate Investment Trust, one of Asia’s largest listed healthcare REITs, is pleased to announce DPU of 7.48 Singapore cents for 2H 2023.  Gross revenue for 2H 2023 increased 4.7% year-on-year to S$73.1 million primarily due to contribution from the properties acquired in 2022 and 2023, higher rent from the Singapore hospitals under the new master lease agreements and partially offset by depreciation of the Japanese Yen.  Correspondingly, the Group achieved a net property income of S$69.0 million for 2H 2023, an increase of 4.8% y-o-y.  During the year, PWLR fortified its presence in Japan’s aged care market with the acquisition of two new nursing homes in Osaka Prefecture.  These yield-accretive acquisitions marked the initiation of a new strategic partnership with K.K. FDS, an established real estate developer in Japan, at the same time, enhances tenant diversification with a new operator and brings the Group’s total Japan portfolio footprint to 59 properties aggregating to S$717.24 million in value.  

Despite the macroeconomic uncertainties and challenges in 2023, the Group successfully secured a total of six committed and long-term new facilities, comprising a mix of SGD and JPY loans.  The proceeds from the New Facilities will be largely used to finance the renewal capex works at Mount Elizabeth Hospital, pre-emptively refinance the maturing loans due in 2024 and 2025, as well as term out the short-term loan drawn down for Japan acquisitions.  With that, the Group has no immediate long-term debt refinancing need till March 2025.  

With close to 90% of its interest rate exposure hedged by end 1Q 2024, PLife REIT remains well-insulated from the interest rate vulnerabilities. To manage foreign currency risk, the Group adopts a natural hedge strategy for its Japanese investments to maintain a stable net asset value and has extended its JPY net income hedges for another 2 years till 1Q 2029 to shield against Japanese Yen currency volatility.  Commenting on the results, Mr. Yong Yean Chau, Chief Executive Officer of the Manager, said: “Despite the increasingly challenging market environment, the Group has managed to sustain and grow our DPU for FY 2023 through strictly adhering to our focused and prudent strategy of targeted investment, proactive capital management and strategic asset recycling and development.  This has allowed us to create even greater value for our unitholders whilst building on the Group’s strength to fortify portfolios.  Amidst the macroeconomic uncertainties and challenges, PWLR remains well positioned and resilient in 2024 with our portfolio of well-diversified high quality and yield accretive properties across Singapore, Japan and Malaysia.” "

Personally, I think this is another set of predictable and stable performance by PWLR.  This report shows management's readiness to proactively manage debt, such that even with a 62.8% increase in cost of borrowing, the net income is sufficient to increase the distribution per unit by 2.1%.  Personally, besides the ramp up in rental income in 2026, I am also looking forward to the day they either disclose their third pillar of growth, or the partial acquisition of the Mount Elizabeth Novena Hospital.  While keeping my fingers crossed, currently I will give it a Grade A for its performance in the current high interest rate environment.

3)     Mapletree Logistics Trust (MLT)

"Mapletree Logistics Trust Management Ltd., as manager of MLT, is pleased to announce MLT’s financial results for 3Q FY23/24.  Gross revenue for 3Q FY23/24 increased by 2.1% year-on-year to S$184.0 million, while net property income rose 1.5% to S$159.5 million.  The increase was largely due to higher contribution from existing properties in Singapore and contributions from the acquisitions in Japan, South Korea and Australia completed in 1Q FY23/24.  Growth was partly offset by weaker performance in China and absence of revenue from properties that were divested or undergoing redevelopment.  The depreciation of various currencies against the Singapore Dollar, primarily Chinese Yuan, Japanese Yen, Hong Kong Dollar, Malaysian Ringgit and Australian Dollar, also continued to weigh on growth.

At the distribution level, the impact of weakening currencies is mitigated through the use of foreign currency forward contracts to hedge the income from overseas assets.  Including S$12.4 million of divestment gain, the amount distributable to Unitholders increased 4.8% year-on-year to S$112.2 million, while distribution per Unit (“DPU”) grew 1.2% to 2.253 cents on an enlarged unit base.

In line with its continued focus on portfolio rejuvenation, MLT deepened its presence in India with the proposed acquisition of a modern Grade A warehouse in Farukhnagar, Delhi NCR.  MLT also completed the divestments of two assets in Malaysia and Singapore during 3Q FY23/24, with another two divestments in Malaysia pending completion1.  Year-to-date, MLT has executed over S$200 million of divestments at an average premium to valuation of almost 13%, freeing up capital to pursue investment opportunities that enhance its portfolio resilience and create long-term sustainable value for Unitholders."

Personally, I think MLT has done well for the quarter.  I am pleased with its performance, especially in the manager's handling on the debt.  With 83% of borrowings on fixed rate, and costs of borrowing at only 2.5%, these allow the interest coverage ratio to be at a comfortable level of 3.7x.  As such, the distribution per unit increased by 1.17%, which is good news for investors.  Another positive thing to note is the active portfolio management by manager.  The active divestments of properties at premium, and acquisitions that are yield-accretive will help boost and enhance the net asset value of the portfolio.  Based on its performance, I will give it a Grade A-.

4)     CapitaLand Integrated Commercial Trust (CICT)

"CapitaLand Integrated Commercial Trust Management Limited (CICTML), the manager of CICT, reported a distributable income of S$362.5 million for the six months ended 2H 2023.  This marks a 2.1% year-on-year increase compared to the S$355.1 million for 2H 2022.  The higher distributable income was underpinned by sound operational performance driven by proactive portfolio management and prudent cost management.  CICT's 2H 2023 distribution per unit (DPU) was 5.45 cents, up 1.7% y-o-y.

In FY 2023, gross revenue rose by 8.2% y-o-y to S$1,559.9 million and net property income grew by 7.0% y-o-y to S$1,115.9 million.  The better performance was largely attributed to higher contribution from Raffles City Singapore and the full-year contribution from acquisitions completed in 2022.  This was offset by higher finance costs from the full-year impact of borrowings taken to fund the acquisitions in 2022 and higher interest rates.

Mr Tony Tan, CEO of CICTML, said: "CICT achieved improvements in operational performance across its retail, office and integrated development portfolios, as evidenced by the higher committed occupancies and positive rent reversions.  We have taken proactive measures to address headwinds in the Australia and Germany markets, by embarking on upgrading and asset enhancement initiatives that will drive stability and growth in our overseas portfolio.  Despite cost challenges, we have maintained resilience in our home ground.  The solid fundamentals of our Singapore portfolio have continued to serve as a strong anchor for CICT's growth, strengthening the overall value of our portfolio.  In 2024, our focus remains on optimising our portfolio for growth through proactive portfolio management, value creation, and prudent cost and capital management.  The limited new supply of retail and office spaces in Singapore over the medium term will contribute to the sustained demand for our properties.""

Personally, I think the performance of CICT for 2H2023 is good.  The positive rental reversions and the active revitalization and value creation through asset enhancement initiatives (AEI) by the management is great for the REIT, which result in the positive DPU.  However, as many other REITs, debt management is a slight concern.  The gearing ratio is very close to 40%, and its cost of borrowing is the highest among the 7 REITs and Trust under comparison.  Interest coverage ratio is also low at only 3.1x.  Another possible overhanging concern is the property at 21 Collyer Quay, which is rented by WeWork.  Whether WeWork Singapore can continue its operations without any problems remain to be seen, as WeWork in US has filed for bankruptcy.  Recently, there is a report in The Business Times sharing that it could be time for CICT to divest 21 Collyer Quay and Bukit Panjang Plaza.  If that materializes, with part of the proceeds used to pare down their borrowings, CICT's rating will definitely improve to an A.  However for now, I give it a Grade B+.

5)     Mapletree Industrial Trust (MIT)

"Mapletree Industrial Trust Management Ltd., as manager of MIT, wishes to announce that the Distribution to Unitholders for the 3QFY23/24 increased by 3.1% year-on-year to S$95.2 million.  DPU for 3QFY23/24 fell by 0.9% year-on-year to 3.36 cents.  Gross revenue and net property income for 3QFY23/24 rose by 2.0% and 0.8% year-on-year to S$173.9 million and S$129.9 million respectively. This was mainly driven by the revenue contributions from the Osaka Data Centre acquired on 28 September 2023 and new leases from the redevelopment project, Mapletree Hi-Tech Park @ Kallang Way.  The Distribution to Unitholders grew by 3.1% to S$95.2 million due to higher net property income coupled with the release of compensation from the compulsory acquisition of part of the land at 2 and 4 Loyang Lane for public use in December 2021 and the net divestment gain from 65 Tech Park Crescent, over two quarters from 2QFY23/24 to 3QFY23/24.  DPU for 3QFY23/24 fell by 0.9% year-on-year to 3.36 cents on an enlarged unit base.  Positive rental revisions for renewal leases were achieved across all property segments in Singapore with a weighted average rental revision rate of about 7.2%. 

Mr Tham Kuo Wei, Chief Executive Officer of the Manager, said, “Our resilient performance is underpinned by our steadfast portfolio rebalancing efforts such as the acquisition of the Osaka Data Centre and the redevelopment project at Kallang Way.  We will continue to build on our strengths through accretive investments and selective divestments of non-core assets while focusing on prudent capital management and proactive tenant retention.”

Numerous risks, such as geopolitical tensions, financial stress related to elevated debt and high borrowing costs, persistent inflation and further trade fragmentation could cause the global growth projection to tilt to the downside.  Rising property operating expenses and increases in borrowing costs.

Personally, I think MIT has performed decently, but with a slight tinge of negativity due to the slight decline in DPU.  To give where credit is due, the increase in borrowing cost is less than 1% year on year, great positive rental reversion of above 7% and comfortable interest coverage ratio of 4.7x are all good efforts by the management, but on the other spectrum, the impact in income by one of its top tenants' bankruptcy issue, the relatively higher cost of borrowing and the decline in DPU may only see light at the end of the tunnel when interest rate cuts begin, whenever that may be.  For that, I will grade it below MLT and CICT, at a Grade B.

6)     Frasers Logistics and Commercial Trust (FLCT)

As FLCT only provided business updates for this 1Q FY2024, there are limited data for comparison to evaluate the overall performance of the REIT.  Based on the limited information, the results looks promising, with double digit positive rental reversions, which will help to boost the revenue and net income.  Debt metrics are healthy, and in fact, it is the best out of all the 7 REITs and Trust under comparison.  However, as per last quarter, such positive numbers may be heavily dampened by the forex losses.  FLCT generates about 50% of its income from Australian properties, and year to date, the Australian Dollar has fallen by 3% against Singapore Dollar, Euro fallen by 1% against Singapore Dollar.  How severely these forex losses will impact the distribution per unit remains to be seen in the next quarter.  For now, I will remain neutral on FLCT's performance and give it a Grade B as well.

7)     Mapletree Pan Asia Commercial Trust (MPACT)

"MPACT Management Ltd., as manager of MPACT, announced year-on-year gains in gross revenue and NPI for 3Q FY23/24 despite broad forex challenges.  This growth was primarily driven by Singapore’s robust performance, which delivered positive contribution after fully offsetting higher utility expenses.  Hong Kong and Japan further showed resilience by delivering steady earnings in local currency terms.  However, MPACT’s overall overseas contributions were dampened by a stronger Singapore dollar. Distribution per Unit was 2.20 Singapore cents for the quarter, tempered by higher interest rates and the absence of a one-off cross-currency interest rate swap gain in 3Q FY23/24.

The Manager has proactively navigated the unpredictable interest rate landscape by swapping more HKD loans into CNH.  This further reduced the HKD component from 27% to 23% and increased the CNH component from 4% to 7% of the total debt.  The continued adjustment this quarter better aligned MPACT’s debt with the asset under management profile, yielding risk management and interest rate benefits.  The fixed rate debt proportion was also raised from 79.9% to 85.0%. To mitigate forex volatilities, approximately 94% of MPACT’s expected distributable income (based on rolling four quarters) was derived from or hedged into SGD."

Personally, I am still displeased with the performance of MPACT, though most metrics were within expectations.  On the positives front, debt metrices have improved year on year, with fixed rate debt increasing to 85%.  However, gearing ratio is a tad too high, being above 40%.  Although the revenue and income has improved year on year, but the performance of Festival Walk in Hong Kong and China Commercial properties are still lack-luster, as they are still experiencing negative rental reversions, though at a smaller margin.  On top of that, the strength of the SGD against other currencies caused the DPU to continue to decline.  It remains to be seen when a turn-around can happen, probably when the FED cuts interest rates later this year, which may cause the USD to decline, possibly propping up the ASIAN currencies at the meantime.  I would say, MPACT remains the worst performer in my portfolio, and I will give it a Grade C (will not fail it for now, since it is still paying dividends and working hard to manage debt).

And so, that's it for now.  Generally I am still happy with the overall performance of the REITs and Trust, despite all the headwinds they are facing.  In fact, the dividends that I am going to receive from the them increases by approximately 17% compared to the same period last year, mainly due to reinvestment of dividends collected for the whole of last year, and capital injected through the year to accumulate more shares.  Looking forward to better days ahead in 2H 2024, when interest rate cuts by the FED commences.  Barista FIRE, here I come...! 


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