REIT Earnings Season Starts This Week: 4 Aspects Investors Need to Watch for

Earnings season is around the corner again.

The REIT sector is the first to report its earnings or business updates for the quarter ending 31 December 2023.

2023 saw the continued rise in interest rates along with high inflation that pressured the majority of REITs.

Investors were rightfully worried about the impact of these headwinds on distributions.

But with the US Federal Reserve’s announcement that it may cut rates this year, REIT investors could enjoy some relief.

We look at four key aspects that you should watch for if you are looking to park some money in REITs.

Operating expenses

Inflation led to a sharp spike in operating expenses such as staff and utility costs.

This increase resulted in REITs reporting a sharp rise in total operating expenses, resulting in a lower increase in net property income (NPI) compared with revenue.

Mapletree Pan Asia Commercial Trust (SGX: N2IU), or MPACT, saw the full impact of higher utility rates on its latest financial results.

For the second quarter of fiscal 2024 (2Q FY2024) ending 30 September 2023, the retail and commercial REIT saw property operating expenses increase by 14.8% year on year to S$57 million.

This increase was higher than the year-on-year revenue increase of 10.1%.

In particular, utility expenses more than doubled year on year to S$10.6 million.

Investors need to assess if the REIT they are looking at is due for a utility contract renewal and to understand how badly the higher rates could impact it.

You should also watch for other categories of expenses that may experience a sharp rise, such as maintenance and/or salaries.

Finance costs

With interest rates poised to stay higher for longer, investors are naturally concerned about the impact of these higher rates on the REIT’s finance costs.

For the next earnings season, you should carefully scrutinise the year-on-year increase in finance costs to determine if the REIT can manage to mitigate the impact of higher rates.

For instance, Elite Commercial REIT (SGX: MXNU) saw its finance expenses double year on year from £2.9 million to £5.9 million for the first half of 2023.

Data centre REIT Digital Core REIT (SGX: DCRU) also saw a sharp spike in interest expenses for the first nine months of 2023.

The REIT had to cough up US$19.2 million in finance costs, nearly triple the US$6.3 million it paid in the prior year.

An example of a REIT that is seeing its finance expenses moderating is Mapletree Logistics Trust (SGX: M44U).

For 2Q FY2024, borrowing costs increased by 10.2% year on year to S$36.8 million.

This increase was lower than the 13.4% year-on-year rise that the logistics REIT reported for 1Q FY2024.

Gearing level and fixed debt proportion

Yet another important financial metric to watch for is each REIT’s gearing level.

If gearing is too near the maximum threshold of 50%, it will limit the REIT’s ability to take on borrowings for acquisitions.

With rising interest rates, investors should also cast their eye on the REIT’s proportion of fixed-rate debt.

Ideally, a higher proportion of debt on fixed rates should better shield the REIT against any further increases in interest rates.

Mapletree Logistics Trust saw its gearing ratio dip from 39.5% as of 30 June 2023 to 38.9% as of 30 September 2023.

The REIT also had 83% of its debt drawn in fixed rates.

Mapletree Industrial Trust (SGX: ME8U) also saw the same phenomenon – its gearing ratio fell quarter on quarter from 38.2% to 37.9% for 2Q FY2024.

79.2% of the REIT’s debt was on fixed rates.

Daiwa House Logistics Trust (SGX: DHLU) has 100% of its debt on fixed rates but its aggregate leverage rose from 35.7% to 36.2% over the same period.

Plans for acquisitions or AEIs

Finally, investors need to assess if the REIT manager has undertaken acquisitions or asset enhancement initiatives (AEIs).

Such activities help to cushion the REIT by improving distribution per unit (DPU) or increasing the attractiveness of the properties to command higher rentals.

Mapletree Logistics Trust announced the yield-accretive acquisition of eight properties in Japan, South Korea, and Australia for S$904.4 million.

Frasers Centrepoint Trust (SGX: J69U) carried out an AEI on Tampines 1 with the first batch of units to commence operations from December 2023 onwards.

These examples illustrate the efforts undertaken by the REIT manager to enhance the REIT’s portfolio and maintain or increase the DPU.

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Disclosure: Royston Yang owns shares of Mapletree Industrial Trust and Digital Core REIT.

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