2 REITS That Have Delivered Weaker Quarterly Earnings Updates Recently
We’re at the start of a new earnings season. As is common with every earnings season, there will be some real estate investment trusts (REITs) posting growth, some REITs posting mixed numbers, and some REITs experiencing declines. So, which are the REITs that have recently reported weaker business numbers? Let’s look at two of them:
1. First up is Keppel REIT (SGX: K71U). As a quick introduction for better context later, Keppel REIT has a focus on commercial properties and its portfolio currently consists of nine office assets located in Singapore and Australia. In Singapore, the REIT’s properties include Ocean Financial Centre, Bugis Junction Tower and more.
In the third quarter of 2018, Keppel REIT’s property income declined by 9.4% year-on-year to S$36.7 million while net property income fell by 10.9% to S$28.2 million. The REIT attributed its lower property and net property income due to declines at Ocean Financial Centre, 275 George Street, and 8 Exhibition Street. Consequently, Keppel REIT’s distribution per unit (DPU) dipped by 2.9% to 1.36 cents.
Moreover, Keppel REIT’s gearing stood at 39.1% as of 30 September 2018, which is only a small distance from the regulatory gearing ceiling of 45%. But, the REIT does have a strong committed occupancy rate of 98.0% at the end of the reporting quarter.
The REIT provided the following outlook in its latest earnings update:
“According to CBRE, office occupancy in Singapore’s core CBD rose quarter-on-quarter from 94.1% as at end June 2018 to 94.6% as at end September 2018. Average Grade A rents also increased from $10.10 psf pm to $10.45 psf pm. The office market outlook remains positive in view of a tapering supply pipeline and continued demand from a wide range of sectors.
In Australia, JLL reported an increase in national CBD office average occupancy from 90.1% as at end March 2018 to 90.6% as at end June 2018. Amidst a positive business outlook, healthy leasing activities were observed from various sectors including the finance, insurance and flexible working space industries, which are expected by JLL to contribute towards tightening vacancy and rental improvement.
Looking ahead, the Manager will remain focused on driving operational excellence to navigate the volatile macro‐economic environment, while capitalising on the improving office market to mitigate the impact of recent years’ declining rentals. A prudent capital management strategy will be maintained to optimise the REIT’s performance amidst rising interest rates.
2. Soilbuild Business Space REIT (SGX: SV3U) is the next in line. The REIT invests primarily in business parks and industrial properties in Singapore, although it also has an office property and poultry processing plant in Australia. The REIT’s portfolio in Singapore includes properties such as Solaris, West Park BizCentral, Eightrium @ Changi Business Park, and more.
Soilbuild Business Space REIT’s gross revenue for the third quarter of 2018 declined by 3.6% year-on-year to S$19.8 million, which led to its net property income and distribution per unit sinking by 8.8% (to S$16.2 million) and 9.4% (to 1.245 cents), respectively. The decrease in the REIT’s revenue was driven by the sale of KTL Offshore in February 2018, and lower contributions from West Park BizCentral and Eightrium; there was revenue growth at Solaris, but it was not enough to overcome the aforementioned downward drags.
In a similar manner to Keppel REIT, Soilbuild Business Space REIT’s gearing stood of 39.2% at the end of 2018’s third quarter is a little too close for comfort to the regulatory gearing ceiling of 45%. Meanwhile, the REIT’s portfolio committed occupancy rate of 87.2% at the end of the quarter is a decline both sequentially (from 87.6%) and from a year ago (from 94.1%).
Here’s a succinct outlook that Soilbuild Business Space REIT shared about its own business in its latest earnings update:
Source: Soilbuild Business Space REIT earnings presentation