REIT portfolios fortified by higher fixed debt levels; focus turns to operating costs

Goola Warden
Goola Warden4/21/2022 08:13 PM GMT+08  • 6 min read
REIT portfolios fortified by higher fixed debt  levels; focus turns to operating costs
REITs have proactively raised their portion of fixed debt to stabilise DPUs as interest rates rise
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If there was one standout from the REITs that announced results in the week of April 18-22, it was their focus on capital management. REIT managers are moving to limit the impact of interest rate hikes on their distributable incomes and distributions per unit (DPU). Interest expense is often locally listed REITs’ highest cost, higher than their management fees. Increasingly, as oil and gas prices rise, analysts and investors are also enquiring about the impact of higher electricity prices on DPU.

The REIT managers of Keppel Pacific Oak US REIT (KORE), Keppel DC REIT (KDC), Keppel REIT, Mapletree Commercial Trust (MCT) and Sabana Industrial REIT announced higher fixed-rate debt for the three months to March 31, compared to the October–December quarter in 2021. MCT has a March year-end, while KORE, KDC, Keppel REIT and Sabana REIT have December year-ends.

First, the backdrop. At the start of the year, before the Russia-Ukraine war, the US Federal Reserve had communicated the need to raise the Federal Funds Rate (FFR) around six to seven times, to get the FFR to higher levels of as much as 2% from the 0%-0.25% as at end-2021, to fight inflation. Inflationary pressures have become worse following the war because of various sanctions on Russian oil and gas, and food inflation could also be a serious problem as Ukraine is viewed as the breadbasket of Europe.

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