Income investors here are lucky to have a wide range of Singapore REITs (S-REITs) to choose from.
REITs are suitable as income instruments as they are required to pay out at least 90% of their profits as distributions to enjoy tax benefits.
The question is – how should you go about filtering out reliable and high-quality REITs?
The answer lies in an important attribute that you should look for in the REITs that you scour – a strong sponsor.
This must-have attribute is the key to selecting REITs that can weather headwinds such as inflation and high interest rates.
The examples below explain the importance of this characteristics and why it should be on the top of your list.
Capital recycling and DPU resilience
Good sponsors regularly engage in capital recycling to help to rejuvenate the REIT’s portfolio of properties.
Capital recycling involves the divestment of properties with older specifications and limited redevelopment potential in exchange for newer properties with higher yields.
These new properties are added to the portfolio through acquisitions.
By doing so, the REIT ensures that its portfolio remains current and has the potential to enjoy organic rental growth through positive rental reversions.
A good example is CapitaLand Integrated Commercial Trust (SGX: C38U), or CICT.
The retail and commercial REIT has a strong sponsor in CapitaLand Investment Limited (SGX: 9CI), or CLI.
Back in October, CICT announced the acquisition of a 50% stake in ION Orchard Mall for S$1.85 billion.
This purchase is accretive to distribution per unit (DPU) and will add 0.9% to the DPU for the first half of 2024 (1H 2024).
CICT is also one of the few REITs that posted a year-on-year DPU increase, with its 1H 2024 DPU inching up 2.5% year on year to S$0.0543.
Just last month, CICT also divested 21 Collyer Quay, a 21-storey office building, for S$688 million as the property had an exit yield of just 3.5%.
Another one of CLI’s REITs, CapitaLand India Trust (SGX: CY6U), also saw its DPU for 1H 2024 rise 8% year on year to S$0.0364.
A ready pipeline of assets for acquisition
Having a strong sponsor also provides the REIT with a ready pipeline of assets that can be injected in at appropriate junctures.
Keppel DC REIT (SGX: AJBU) provides a recent example of this.
The data centre REIT announced the acquisition of two data centres in Singapore from its sponsor, Keppel Ltd (SGX: BN4), for S$1.4 billion.
This purchase was immediately DPU-accretive and is projected to increase the REIT’s 1H 2024 DPU by 8.1% to S$0.0492.
There are also multiple opportunities for the REIT manager to drive further organic rental growth through rental uplifts and capacity expansion.
Meanwhile, Keppel DC REIT also reported a resilient set of earnings for the third quarter of 2024 (3Q 2024).
Gross revenue increased by 8.9% year on year to S$76.9 million while net property income (NPI) dipped by 0.2% year on year to S$64.5 million.
DPU increased by 0.4% year on year to S$0.02501.
Well-executed AEIs
Another aspect to consider when choosing REITs with strong sponsors is their ability to carry out successful asset enhancement initiatives (AEIs).
Take Frasers Centrepoint Trust (SGX: J69U), or FCT, for instance.
FCT has a strong sponsor in Frasers Property Limited (SGX: TQ5), a developer with total assets of approximately S$40.1 billion as of 31 March 2024.
The retail REIT recently completed its AEI for Tampines 1 Mall and achieved full committed occupancy.
The AEI helped create more than 9,000 square feet of net lettable area which was deployed to prime retail floors.
The total return on investment (ROI) for this AEI exceeded 8%.
Looking ahead, FCT will embark on a new AEI for Hougang Mall costing S$51 million.
The REIT manager is targeting an ROI of around 7% from higher rents and the AEI is projected to be completed by the third quarter of 2026.
CICT also announced AEIs for IMM Building and Gallileo in March this year, and had just completed an AEI for CQ @ Clarke Quay in April that was relaunched as a day and night destination.
Get Smart: Strong sponsors are a boon for their REITs
The examples above show the importance of strong sponsors and how they benefit REITs.
REITs with such sponsors can enjoy a ready pipeline of assets for acquisition.
They are also more likely to undergo regular capital recycling and undertake AEIs that can help to boost rental income.
So, remember, the next time you are searching for high-quality REITs to purchase, make sure that a strong sponsor sponsor is on the top of your checklist.
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Disclosure: Royston Yang owns shares of Keppel DC REIT.
