It’s been a tough year for REITs due to a combination of high inflation and rising interest rates.
Investors are naturally worried about higher expenses that will eat into a REIT’s distributable income and cause distribution per unit (DPU) to decline.
Well-managed REITs, however, have several methods to mitigate this impact.
One is to lock in the bulk of their debt on fixed interest rates to keep their cost of funding low.
Another is to engage in yield-accretive acquisitions that help to boost DPU, thus offsetting any negative impact from both inflation and higher financing costs.
Here are three REITs that recently announced acquisitions that promise to increase their DPU.
Parkway Life REIT (SGX: C2PU)
Parkway Life REIT, or PLife REIT, is a healthcare REIT that owns three hospitals in Singapore and 52 nursing homes in Japan, with portfolio assets under management (AUM) of S$2.29 billion as of 31 December 2021.
Earlier this month, the REIT announced two separate acquisitions of nursing homes in Japan.
The first purchase was that of three nursing homes in the Hokkaido region for a total consideration of around S$26.1 million.
The properties will be purchased at 12.2% below valuation and are expected to generate a net property income (NPI) yield of 6.5%.
This acquisition, which is yield-accretive, will be fully funded by Japanese Yen (JPY) borrowings and will complete by the third quarter of 2022 (3Q2022).
The second acquisition involves the purchase of two nursing homes in the Greater Tokyo region for a sum of S$29.4 million.
This acquisition was made at an 11.1% discount to valuation and is projected to generate an NPI yield of 5.2%.
This second purchase will also conclude by 3Q2022 and both acquisitions will bring PLife REIT’s Japan portfolio to 57 properties, up from the 52 presently.
Daiwa House Logistics Trust (SGX: DHLU)
Daiwa House Logistics Trust, or DHLT, is a Japan-focused logistics REIT with a portfolio of 14 modern logistics properties with an AUM of JPY 81 billion as of 30 June 2022.
DHLT, which went public in November last year, announced its maiden acquisition of two freehold logistics properties and a piece of freehold land.
The assets are acquired from its sponsor, Daiwa House Industry Co Ltd (TYO: 1925) at an 11.8% discount to their appraised value.
DHLT will fork out a total of around S$47.7 million for this purchase and it will be financed by a combination of debt and equity financing.
Of the total amount, S$12.8 million will be funded through the issuance of new units of DHLT at the higher of S$0.77 per unit or the volume-weighted average price per unit in the last 10 days before the issuance of the new units.
These purchases are expected to raise the portfolio’s valuation by 6.5% to JPY 86.4 billion and increase the logistics REIT’s DPU by 1.3% to S$0.0313 for the period from 26 November 2021 to 30 June 2022.
Aggregate leverage post-transaction will rise from 34% to 36.4%.
Ascendas REIT (SGX: A17U)
Ascendas REIT, or A-REIT, is Singapore’s largest industrial REIT with a portfolio of 228 properties valued at S$16.6 billion as of 30 June 2022.
A-REIT announced that it will acquire a cold storage logistics facility for S$191.9 million.
The property is a modern Grade A five-storey ramp-up logistics facility and caters to diverse food and beverage storage requirements.
The acquisition has several merits.
The property is fully occupied with a long weighted average lease expiry of seven years and built-in rental escalations of 2% to 3% every three years.
The estimated NPI yield for the first year, post-acquisition, is around 6.9% after accounting for costs.
The purchase will be funded through internal resources or existing debt facilities and will be completed in 4Q2022.
DPU is expected to improve by S$0.00086 or around 0.56% assuming the acquisition was completed on 1 January 2021.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.