The whispers of a rate cut has slowly turned into a clamour.
After last Friday’s Jackson Hole Symposium, where Fed Chair Jerome Powell finally uttered the magic words, the rate cuts now look imminent.
And that breathes catalyst into the relatively beleaguered REIT sector. Or so, we thought.
While plenty of S-REITs have encountered successive challenging years, there are exceptions. Some REITs have managed to grow their DPU even in challenging times, while some have dropped their DPU disastrously.
So which REITs have weathered through the high interest rates environment, and which have floundered?
1. Sabana REIT (SGX: M1GU): DPU +26.9% YoY
Sabana REIT has had plenty of rough occasions throughout the years. From the failed merger attempt with ESR-REIT (SGX: 9A4U) and the activist staged internalisation saga, unit holders would have been on tenterhooks as unit prices fluctuated wildly.
However over the last 1 year, things seem to have settled, and the REIT posted a YoY DPU growth of +26.9%.Gross revenue increased by +10.6% YoY to $30.2 million, uplifted by positive rental reversions and higher occupancy rates. Prudent operating expenses has expanded the REIT’s NPI and thus DPU.
With interest rates tapering down, there could be more upside ahead for this REIT that finally appears to be emerging from the storm.
2. Keppel DC REIT (SGX: AJBU): DPU +12.8% YoY
Among all REITs, Data Centre REITs have arguably had some tough times. In fact, there was a recurring pattern of tenant risks that have hit both Digital Core REIT (SGX: DCRU) and Keppel DC REIT.
While many might opine that data centre REITs might have peaked, Keppel DC REIT is proving naysayers otherwise. In its latest 1H’25 results, gross revenue skyrocketed +34.4% YoY. Net property income grew in tandem, up +37.8% YoY while DPU grew +12.8% YoY.
KDC continues to be ferocious in shrewd acquisitions, compounded with higher contributions from contract renewals and escalations.
3 of the top 10 clients are Hyperscalers, contributing to a whopping 62% of its total rental income. This can be viewed as a double-edged sword. While these clients are robust and solid, there’s no guarantees that leases renewal are perpetual. But judging from the rationale, REIT investors can assume that KDC would have strong bargaining reasons to maintain these tenants.
3. Elite UK REIT (SGX: MXNU): DPU +10.0% YoY
If hyperscalers as tenants are relatively risky, then having the UK government as a tenant would definitely be relatively safe. Elite UK REIT boasts a portfolio of investment properties.
Forward looking investors might be cautious about the bulk of leases expiring in 2028. And with just another 3 years to go, questions would arise on whether Elite UK is able to negotiate with the Department of Work and Pensions (DWP) for a positive rental reversion and long tenure lease.
While no one can confidently claim that it would be a walk in the park, Elite UK REIT’s past performances, together with its initiatives to enter student housing assets and data centres, shows that the REIT management is both proactive and far-sighted.
With a trailing 9% dividend yield, it makes the forex risk a little more manageable.
4. OUE REIT (SGX: TS0U): DPU +5.4% YoY
OUE REIT has become a pure-play Singapore-centric REIT after its disposal of Lippo Plaza in Shanghai. It’s investment properties include key commercial properties in Singapore’s Central Business District (CBD), Orchard Road and a hotel at Changi Airport.
Even though revenue and net property income was flattish YoY, the REIT eked out a DPU growth, underpinned by reducing financing cost, which improved by -17.3% YoY.
As revenge spending and travel normalises, OUE REIT sees little growth in its current FY, but with rates coming down soon, there could still be more growth in the REIT’s DPU in the coming years.
5. Keppel Pacific Oak US REIT (SGX: CMOU): DPU -100% YoY
While its sister REIT KDC might be flourishing, Keppel Pacific Oak US REIT (KORE) is on the other end of the spectrum. KORE has faced significant challenges in recent years, which have led to a sharp decline in its unit price and its abrupt halt in distributions. These are primarily due to a combination of macroeconomic factors and industry-specific headwinds.
The U.S. office sector has faced unprecedented challenges due to the rise of remote and hybrid work. This has led to lower occupancy rates, slower leasing activity, and declining rental rates in many markets, which has negatively impacted the valuation of KORE’s properties.To preserve capital and maintain financial flexibility in a difficult market, KORE’s management announced a suspension of distributions (dividends) in February 2024.
While the REIT remains healthy, its proactive measure in halting distributions to aid recapitalisation has sent the unit price down to historical low. These valuations are a deep value investor’s favourite, however the waiting game might get extended if the macro sentiments do not improve for KORE.
6. Manulife US REIT (SGX: BTOU): DPU -35% YoY
KORE’s efforts and initiatives, although value-destroying, were seen as proactive measures before the REIT breached financial covenants. MUST on the other hand, breached financial covenants and is now on a recapitalisation plan after a series of failed resuscitation initiatives.
The REIT had to sell some of its key properties to repay debt, with the objective to reduce its leverage.
It would take a few years for MUST to find back its footing. But with the US commercial properties still looking gloomy, I am on the fence when it comes to a revival story for MUST as of now.
7. Prime US REIT (SGX: OXMU): DPU -33.3% YoY
By bringing up yet another underperforming US REIT, it goes to show how low and pessimistic US commercial centric REITs have become. However, there are bright spots and an apparent light at the end of the tunnel.
Prime US REIT is observing more return-to-office momentum, accelerating flight to quality office leasing. This is supported by improving occupancy of Prime US REIT’s properties, better WALE and even a positive rental reversion.
Compared to the above US REITs, Prime’s leverage is well contained below 50%, with a major chunk of its debt maturing only in 2027. It looks to be on track to cruise by this rough challenge. The worst might be over, but whether offices would ever return to their pre-COVID days remains a huge question mark.
8. IREIT Global (SGX: UD1U): DPU -26% YoY
IREIT is a Europe-centric REIT, with a portfolio primarily concentrated in Germany, France, and Spain. Its portfolio composed of office and retail properties with a focus on long-term leases and diversification.
The REIT experienced a huge selloff after its crown jewel property – Berlin Campus experienced a non-renewal. IREIT suffered a drop in gross revenue by -27.5% YoY. Distributable income also got affected, and shrunk by -26% as well.
While Berlin Campus is in the midst of being redeveloped into a hospitality asset, with long-term leases with from hospitality operators, Premier Inn and Stayery secured, it will still only account for approximately 24% of the lettable area.
Verdict
After going through four performing and under-performing REITs, it is clear that there are two sides to the coin. The strong REITs that have grew their DPU can only perform even better when we enter low interest rates, while floating the ailing under-performers.
Some investors prefer piling up on the strong performers, while others opt for deep value play. The performing REITs will have lesser margin of safety and vice versa.
At the end of the day, it all boils down to the risk appetite and investing approach of each respective investor. I do find some of the ex-Singapore REITs interesting from a valuation point of view.
But that’s just me.
What about you? Do the likes of Sabana, KDC, Elite UK REIT and OUE REIT intrigue you?
