Resilient DPU, stable valuations, faltering ICR

Goola Warden
Goola Warden1/26/2023 05:47 PM GMT+08  • 6 min read
Resilient DPU, stable valuations, faltering ICR
As DPUs inch ahead, and valuations remain stable, ICR appears to be challenged
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Mapletree Logistics Trust and Suntec REIT which announced results on Jan 19 and 20 respectively, and AIMS APAC REIT (AAREIT) which announced on Jan 25, reported rises in their distributions per unit (DPU). Suntec REIT’s DPU was supported by capital distributions. Capital distributions are paid out of profit when REITs divest properties.

Suntec REIT’s DPU from operations for the 12 months to Dec 31, 2022 fell 6.7% y-o-y to 8.084 cents, but DPU from capital of 0.8 cents took full year DPU to 8.884 cents, up 2.5% y-o-y.

In FY2023 however, Suntec REIT is unlikely to distribute from capital given its high aggregate leverage (gearing), the risk of downward revaluations, and interest coverage ratio (ICR) of 2.4x, below the minimum of 2.5x by the Monetary Authority of Singapore for REITs that are allowed an aggregate leverage of 50%.

MLT’s DPU rose by 1.9% y-o-y for the three months to Dec 31, 2022 (the REIT’s 3QFY2023) to 2.227 taking 9MFY2023 DPU to 6.743 cents (+3.4% y-o-y). Of the 3QFY2023 DPU, the amount of income support was of $616,000 was received on January 13 2023. Excluding the income support, 3QFY2023 DPU would be at 2.214 cents. For 9MFY2023, MLT’s DPU rose by 3.4% y-o-y to 6.743 cents.

Valuations hold

According to JP Morgan, MLT’s valuations are expected to remain stable with capitalisation rate expansion in Australia/Korea (20-25bps) offset by strong rental growth with stable cap rates in MLT’s other markets.

Suntec REIT’s valuations – which were a concern pre-results announcement – appear to be holding up. The UK properties did not decline as much as expected, noted RHB Research. The still upbeat valuations led to NAV per unit to remain at $2.11.

While Chong Kee Hiong, CEO of Suntec REIT’s manager acknowledges that valuation is more an art, there was no running away from the decline in the UK office market through 2022.

“Markets have already seen a correction in pricing, particularly during Q3 of 2022, with yields / cap rates moving out by up to 100 basis points. However, some markets are yet to see any price correction, emphasising that the timing of the ‘landing, stabilisation and recovery’ of each market and sector will differ markedly,” says Colliers 2023 Global Investor Outlook report.

See also: Foreign REITs continue to face challenges

As a case in point, the Nova Properties, owned by Suntec REIT experienced a y-o-y valuation decline of 3.5% as at Dec 31, 2022, in local currency terms while The Minster Building’s valuation fell by 9.8%. In Singapore dollars, Suntec REIT’s UK portfolio was almost 16% lower y-o-y, and 10.8% lower from June 30, 2022.

Retail property capital values fell by 8.1% in 2022, while the office sector was down by 12.1%. Both also saw negative returns, of -2.1% and -8.3% respectively, CBRE said.

According to Colliers, inflation and higher interest rates will continue to weigh on investor decision making in 2023 as the market continues on a journey of ‘price discovery’.

Overall, Colliers’ consensus is that the stabilisation of the global real estate market will take hold by mid-2023, as more certainty emerges around the interest rate and economic outlook says Colliers in an update

Since Suntec REIT’s valuations held, its gearing dipped marginally from June 30, 2022, to 42.3% as at Dec 31, 2022.

Investors focus on ICR as rates reach plateau

Although the interest rate cycle is closing in on its peak and rates may well be reaching a plateau in 1Q2023, REITs will continue to battle with higher interest costs as they refinance their debt because rates are higher now than they have been for the past five years.

For more stories about where money flows, click here for Capital Section

While valuation may remain something of an art, the interest coverage ratio is arithmetic. When asked what gearing level he would be comfortable with, Chong replies “Our focus will be ICR. The main issue is interest cover and expectation of interest rates. Under normal stable conditions we are happy with 40% to 42% with a comfortable ICR.”

Under MAS’ guidelines, REITs can have gearing above 45% if their ICR stays above 2.5x. Chong reckons that Suntec REIT could stay below this. As at Dec 31, 2022, Suntec REIT’s ICR stood at 2.4x, lower than the 2.6x as at Dec 31, 2021. He is looking to divest a property, most likely in Australia when interest rates are “more stable”. Recall that Suntec REIT acquired 177 Pacific Highway as a property that was still under development paying the equivalent of $457 million. The property was valued at A$712 million as at Dec 31, 2022. Chong is also looking to divest individual offices at Suntec office towers should there be interest.

MLT’s ICR as at Dec 31, 2022 was 4.3x; including distributions to perpetual securityholders, ICR is 3.6x. MLT has a 3.65% $180 million perpetual securities tranche with a call date in March this year.

“MLT may either opt to refinance its upcoming perp into debt at 4.3%, but this would lead to gearing increasing by 1.4 percentage points (current aggregate leverage of 37.4%), or to reset the perp to around 5%, with the option of calling every six months. MLT is likely to reset. We have assumed reset at 5.3% in our numbers,” JP Morgan says adding that “guidance is for 2.9%-3.0% borrowing costs for FY2024.”

AAREIT announced a 10.2% y-o-y rise in DPU to 2.59 cents for the three months to Dec 31, 2022, its 3QFY2023. However, its ICR has fallen below 2.5x. While its ICR is reported at 4.1x, its adjusted ICR which includes the amount reserved for distribution to perpetual securities holders is 2,3x. Its gearing as at Dec 31, 2022 was 36.4% but that is because two properties, 7 Bulim Street and Woolworth HQ were financed by perpetual securities of $125 million and $250 million respectively.

Elsewhere, for its 1QFY2023 announcement, for the three months to Sept 30, 2023, Lendlease Global REIT’s (LREIT) ICR stood at 6.9x. But its adjusted ICR after accounting for perpetual securityholders’ distributions, is lower at 2.3x.


Given P/NAV discounts, S-REITs will be unlikely to raise equity in the near term. In addition, China reopens, the retail sector in Singapore could benefit with REITs such as Suntec REIT and LREIT profiting from their malls in the tourist belt and this could alleviate stressed ICRs.

Suntec REIT too, is likely to benefit from more MICE events coming to Singapore. As for capital management, Chong says he prefers to sell a building, or withhold capital distributions to equity fund raising (EFR) as P/NAV discount would make an EFR dilutive.

Meanwhile, MLT is unlikely to continue with an acquisition-led growth strategy. Hence, it is targeting $300 million to $400 million worth of divestments of non-core assets and recycling the proceeds into higher yielding assets with an acquisition target of $200 million to $400 million. MLT’s recent divestments were sold at 3%-4% exit yield. “MLT does not have any immediate plan to raise equity to acquire properties,” says the JP Morgan update.

On a positive note, DBS Group Research points out that 50% of MLT’s China leases are up for renewal and could experience positive reversions. “With China re-opening a near term focus, we have seen increased interest in MLT in recent times as investors look for proxies,” DBS says.

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