The REIT sector has delivered steady, dependable dividends for many years.
Income-focused investors that parked money in REITs have received an attractive stream of passive income.
Of late, REITs have been under pressure as the US Federal Reserve has aggressively hiked interest rates.
The latest move by the central bank has taken its benchmark rate to between 4.25% and 4.5%, the highest level since 2007.
Unsurprisingly, investors are fretting over REITs’ ability to maintain their distribution per unit (DPU) as finance costs are projected to surge.
REIT managers are, however, not sitting around.
Some have proactively managed their capital structure to mitigate against higher rates while others are tapping on acquisitions or organic growth to buffer against the negative impact.
Here are four REITs that are well-positioned to protect their DPU in the face of higher interest rates.
CapitaLand Ascendas REIT (SGX: A17U)
CapitaLand Ascendas REIT, or CLAR, owns 226 properties worth S$16.5 billion as of 30 September 2022.
CLAR enjoys a high occupancy rate of 94.5% and also has a well-diversified list of more than 1,690 tenants.
The industrial REIT’s top 10 tenants made up 16.1% of its monthly portfolio gross rental income (GRI), with Singtel (SGX: Z74) taking up 3.2% of GRI.
Aside from tenant diversification, CLAR also saw a positive rental reversion of 5.4% for its fiscal 2022’s third quarter (3Q2022).
Meanwhile, the REIT has announced S$296.7 million worth of acquisitions that will help to boost its DPU.
The REIT manager is also continually improving the portfolio’s quality through ongoing projects such as asset enhancement initiatives (AEIs) and redevelopments.
A total of S$622.4 million of such initiatives are set to complete over the next three years, thus helping to buffer against a DPU decline.
Mapletree Industrial Trust (SGX: ME8U)
Mapletree Industrial Trust, or MIT, is an industrial REIT that owns 141 properties worth S$8.9 billion as of 30 September 2022.
MIT enjoys a high occupancy of 95.6% across its portfolio.
The REIT also has a diversified tenant base with over 2,000 tenants, with the largest making up just 6% of GRI.
MIT has around three-quarters of its debt on fixed rates, thus mitigating a sharp rise in finance costs.
Its redevelopment of the Kolam Ayer cluster of three properties is proceeding smoothly, with expected completion in the first half of 2023.
Once completed, the rental uplift should help to buffer against any fall in the DPU.
Frasers Logistics & Commercial Trust (SGX: BUOU)
Frasers Logistics & Commercial Trust, or FLCT, has a portfolio with 105 industrial and commercial properties worth around S$6.7 billion as of 30 September 2022.
The REIT has a few things going for it that enable it to mitigate the effect of higher interest rates.
First off, its aggregate leverage ratio is just 27.4%, implying that the REIT is not heavily geared.
Its cost of debt also remains very low at just 1.6% with a high interest coverage ratio of 13 times.
Moreover, FLCT has 81.7% of its debt on fixed rates, thus ensuring that the REIT will not experience a sharp jump in borrowing costs.
The REIT’s occupancy rate also stayed high at 96.4% and it has made selective investments of around S$293 million in acquisitions and forward-funding arrangements that will help to smooth out its DPU over time.
OUE Commercial REIT (SGX: TS0U)
OUE Commercial REIT, or OUECR, owns seven properties in Singapore and Shanghai worth S$5.8 billion as of 30 June 2022.
The REIT obtained a S$978 million sustainability-linked loan (SLL) in August 2022 that helped it to refinance the bulk of its debt.
Its debt maturity profile shows that most of the REIT’s debt is due in 2025 and 2026, with only S$283 million out of total borrowings of S$2.4 billion due in 2023.
Close to 70% of OUECR’s debt is also tagged to fixed rates.
Meanwhile, the REIT’s office component continues to see a rise in occupancy levels and all Singapore properties also enjoyed positive rental reversions of between 1.6% to 9.2%.
For its retail segment at Mandarin Gallery, shopper traffic and tenant sales are at around 90% and 85% of pre-COVID levels, respectively.
The REIT’s hospitality segment, with the newly-rebranded Hilton Singapore Orchard, saw revenue per available room (RevPAR) climb 10.2% in 3Q2022, compared with the previous quarter.
The ongoing refurbishment of the hotel’s Orchard Wing, with 446 rooms, is expected to complete by the end of this year.
When reopened, the uplift in rental income should help to boost DPU and further mitigate any decline caused by higher 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 Mapletree Industrial Trust and Frasers Logistics & Industrial Trust.
