Despite cash calls, Reits are doing well

Source : Business Times – 29 Aug 2009

Out of the 18 Reits that have announced their results, 12 reported revenue growth

YET another real estate investment trust (Reit) went cap-in-hand to its shareholders this week. Fortune Reit said that it was raising HK$1.9 billion (S$354.4 million) from a one-for-one rights issue to buy three malls in Hong Kong and pay down debt.

The news was not surprising. Reits have been raising cash by the billion. In June, Starhill Global Reit raised $337.3 million through its rights issue. Unitholders of CapitaMall Trust, CapitaCommercial Trust, Ascendas Reit and Saizen Reit have together dug out $2.16 billion from their piggy banks. Frasers Commercial Trust is raising $214 million in a three-for-one issue. Owning a Reit is not cheap.

It has not been rewarding either. The Straits Times Reit Index has underperformed the benchmark Straits Times Index almost every day in the past 12 months. Despite some recovery since March, Reit returns are still some 15 per cent behind the equity index. Unit prices have been driven down by concerns over refinancing and worries that commercial or industrial rentals will not get sprightly, and that hospitality rates will remain depressed.

Yet they have not been doing all that badly, even if the market has not realised it yet. A Phillip Securities research report found that on a year-on-year basis, out of the 18 Reits that have announced their results, 12 reported revenue growth, one reported flat revenue growth while five reported negative revenue growth. Nine Reits saw an increase in distribution per unit (DPU); the other nine saw a decrease. A DBS Vickers report noted that Singapore Reits saw revenue, net property income and distribution income grow 9.2 per cent, 11.7 per cent and 8.2 per cent in the second quarter from last year. Average distribution yield of the Reits in the Singapore Reit index is around 8.8 per cent as at yesterday, according to Bloomberg data, although price to book value is still below par.

What that means is that even though Fortune Reit and Frasers Commercial Trust (FCOT) have said that their cash calls were to fund new acquisitions – three Hong Kong malls worth HK$2.04 billion and Alexandra Technopark respectively – it will be difficult to find yield accretive acquisitions. The Hong Kong malls are expected to yield about 5 per cent, while FCOT’s buy comes with a rental guarantee.

‘Most S-Reits are unlikely to make many new acquisitions in 2009 as dividend yields have increased significantly and it would be extremely challenging to make purchases that are yield-enhancing,’ said a CB Richard Ellis (CBRE) report this week.

Still that’s not too bad, considering that total half-year earnings of 402 listed companies fell 50 per cent from last year, according to a BT study of the most recent quarterly results. While profitable companies outnumbered loss-makers 227 to 67 for Q2, 44 companies slipped from black to red, while only 14 companies managed it the other way around.

The outlook for Reits is reasonably bright too. Reits in Singapore and Australia will be the first in Asia-Pacific to recover from the economic slowdown on their ability to secure funding from banks, according to an April survey by Sydney-based Trust Company.

Financing issues have faded and gearings have largely dropped, said CBRE. DBS Vickers noted that ‘at this point, we believe any further capital raising exercises would be opportunistic or to fund new acquisitions, given the current much lower cost of capital’.

‘We believe that S-Reits that are likely to be better placed to benefit from acquisition growth as driver, would be those with sponsor backing as well as S-Reits in the industrial segment,’ the house said.