3 Singapore REITs Conducting Asset Enhancements to Grow Their DPU

Forklift in Warehouse
Forklift in Warehouse

The REIT sector has proven to be a godsend for income-focused investors.

With the requirement to pay out at least 90% of their profits as distributions, REITs are often purchased for their reliable dividends.

However, of late, high inflation and a surge in interest rates have crimped many REITs’ distributable income.

Despite these headwinds, REITs can still look for ways to grow their distribution per unit (DPU).

One method is through acquisitions; though higher interest rates make such purchases tougher as REIT managers need to climb a higher hurdle to justify the acquisition.

Another method is to grow rental income organically through either asset enhancement initiatives (AEIs) or rental escalation clauses.

We turn the spotlight to three Singapore REITs that are engaging in AEIs to help grow their DPU.

CapitaLand Ascendas REIT (SGX: A17U)

CapitaLand Ascendas REIT, or CLAR, is Singapore’s oldest industrial REIT and has a portfolio of 230 properties in Singapore, the US, Australia, the UK, and Europe.

As of 30 June 2023, the assets under management (AUM) stood at S$17 billion.

For the first half of 2023 (1H 2023), CLAR reported a 7.7% year on year increase in gross revenue to S$718.1 million.

Net property income (NPI) improved by 6.7% year on year to S$508.8 million.

DPU, however, dipped by 2% year on year to S$0.07719 because of higher interest expense along with a larger unit base because of the industrial REIT’s private placement back in May 2023.

Despite the slight fall in DPU, CLAR reported a healthy occupancy rate of 94.4% and also enjoyed a positive rental reversion of 14.2%.

Moreover, the REIT’s aggregate leverage came in at 36.7%, way below the maximum threshold of 50% set by Singapore’s central bank.

With around three-quarters of its debt hedged to fixed rates, the REIT can mitigate further sharp increases in finance costs.

Meanwhile, CLAR has a list of ongoing projects such as redevelopments and AEIs.

It will spend S$15.5 million for an AEI on The Alpha in Singapore that should be completed by the end of this year.

It also has three redevelopments in progress costing S$543.6 million that will progressively be completed by 2025 to 2026.

These AEIs and redevelopments should help to organically grow the REIT’s rental income and help to boost DPU in future years.

OUE Commercial REIT (SGX: TS0U)

OUE Commercial REIT, or OUECR, is a diversified REIT with seven properties in the commercial and hospitality sectors.

Its AUM stood at around S$6 billion as of 31 December 2022.

For 1H 2023, revenue jumped 19.8% year on year to S$138.8 million while NPI climbed 23.1% year on year to S$115.3 million.

OUECR saw a 74.4% year on year surge in finance costs to S$58.2 million.

This increase, along with the lack of income support for the OUE Downtown Office, led to a 2.8% year-on-year dip in DPU to S$0.0105.

The REIT had just completed the successful rebranding and AEI for Hilton Singapore Orchard at the beginning of this year.

With a full inventory of 1,080 rooms, it is now Hilton’s flagship hotel in Singapore and contributed nearly a quarter of the portfolio’s revenue.

OUECR is embarking on another AEI, this time of Crowne Plaza Singapore, for around S$14 million.

It intends to optimise and repurpose underutilised space into income-generating rooms to enhance value and increase shareholder returns.

This project is targeted to be completed by end-2023 and should help to capture demand from the wave of business cum leisure travellers as borders reopen.

The AEI is expected to improve DPU and will generate a return on investment of around 10%.

Mapletree Logistics Trust (SGX: M44U)

Mapletree Logistics Trust, or MLT, is a logistics REIT with a portfolio of 193 properties in eight countries with an AUM of S$13.5 billion as of 30 June 2023.

The REIT reported a resilient set of earnings for its fiscal 2024 first quarter (1Q FY2024) results ending 30 June 2023.

Gross revenue and NPI fell by 2.9% and 3.1% year-on-year, respectively, to S$182.2 million and S$158.1 million.

DPU managed to inch up by 0.1% year on year to S$0.02271.

MLT has an ongoing AEI at 51 Benoi Road that will increase the gross floor area of the asset by 2.3 times.

With an estimated development cost of S$205 million, this project is slated for completion in the first quarter of 2025.

Once completed, the significant increase in gross floor area should bring in higher rental income for the REIT.

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Disclosure: Royston Yang does not own shares in any of the companies mentioned.

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