REIT investors have enjoyed many years of consistent dividends from a wide variety of REITs.
This asset class is ideal for doling out a steady stream of passive income as REITs are mandated to pay out at least 90% of their profits as distributions.
In recent months, REIT investors have started to worry.
Rising interest rates are threatening to throw a spanner in the works.
As REITs are leveraged investment instruments, income-driven investors are worried that finance costs will surge, thus crimping their distribution per unit (DPU).
The good news is that REITs are not sitting ducks.
Many are employing a variety of methods to protect their distributable income.
We feature three REITs that are fighting back against the interest rate tide along with the methods they utilise.
Mapletree Logistics Trust (SGX: M44U)
Mapletree Logistics Trust, or MLT, owns a portfolio of 185 properties spread across eight countries with assets under management (AUM) of S$13 billion as of 30 June 2022.
Out of its total debt of S$5 billion, 80% is hedged to fixed interest rates, thereby mitigating a sharp increase in financing costs.
MLT also enjoys a low weighted average annualised interest rate of 2.3% as it has a strong sponsor in Mapletree Investments Pte Ltd.
It also helps that its debt is well spread out, with maturity extending to as far as fiscal 2030 (ending 31 March 2030) and beyond.
No more than one-fifth of MLT’s total borrowings comes due in any given fiscal year, providing the REIT with a suitable buffer against sharp increases in its average interest rate.
It’s also helpful to see the REIT quantifying the impact of higher interest rates on its DPU.
Every 0.25 percentage point increase in base interest rates will result in a decline of S$0.0001 of DPU per quarter.
Assuming an increase of 2.5 percentage points, MLT will face a fall in DPU to the tune of S$0.004, or around 4.5%.
What’s more, the REIT can buffer against this decline by engaging in acquisitions and/or asset enhancement initiatives (AEI) that will raise DPU.
MLT completed two acquisitions for the first quarter of fiscal 2023 (1Q2023), and also plans to redevelop 51 Benoi Road to more than double its gross floor area.
Frasers Logistics & Commercial Trust (SGX: BUOU)
Frasers Logistics & Commercial Trust, or FLCT, has 105 properties located in five countries – Singapore, the UK, Australia, Germany and the Netherlands.
The REIT has an AUM of S$6.5 billion as of 30 June 2022.
FLCT also has a good spread for its debt maturities, with around 10.7% of its total borrowings maturing beyond fiscal 2026 (ending 30 September 2026).
Around 30% of its debt will mature in FY2025, and the REIT has locked in 80.6% of its loans on fixed rates.
The interest cover ratio remains high at 12.4 times, and FLCT enjoys a very low cost of borrowing at just 1.6%.
Assuming a 2.5 percentage point increase in interest rates, FLCT will see a 3.2% decline for its annualised DPU of S$0.077.
The REIT divested Cross Street Exchange in March at a 28.3% premium to book value and recently entered into a forward funding arrangement for a prime warehouse in the UK, demonstrating its ability to effectively recycle capital.
Parkway Life REIT (SGX: C2PU)
Parkway Life REIT, or PLife REIT, owns a diversified portfolio of 56 properties that includes three hospitals in Singapore, 52 nursing homes in Japan, and strata-titled units in a specialist clinic in Malaysia.
The healthcare REIT has no refinancing needs till June 2023 and has hedged 82% of its loans.
The bulk of its debt (around 30%) only comes due in 2027.
The REIT has a very low cost of debt of 0.61% as of 30 June 2022 and a high interest coverage ratio of close to 20 times.
PLife REIT had just concluded two sets of acquisitions of five nursing homes in Japan last month.
These purchases, amounting to a total of around S$55.5 million, will see the healthcare REIT boost its number of nursing homes in Japan from the current 52, to 57.
Both acquisitions are also yield-accretive and will help to mitigate any decline in DPU arising from rising interest rates.
Not sure which REIT to put your money in? Use our 7-step REIT checklist to find one that fits into your retirement plan. Checklist is inside our latest FREE report “Singapore REITs Retirement Plan”. Click here to download it now.
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Disclaimer: Royston Yang owns shares of Frasers Logistics & Commercial Trust.
