There are many aspects to valuing a REIT, in particular an externally managed REIT such as the S-REIT universe. The interest rate parts - interest expense, capital values, discount rates, discounted cash flows and yield spread - are a primary focus during the current interest rate cycle.
Then there are rents which many investors would view as paramount to their investment. After all, without rents, no distributions per unit (DPU) are likely.
It is the rental portion that now concerns the analysts at JP Morgan. “We see vacancy risk as the key focus into 1Q2023 on the back of growth concerns and real estate headwinds,” the JP Morgan analysts state in a report dated April 13.
Separately, DBS Group Research points out that Cyxtera Technologies is a tenant of Keppel DC REIT (KDC REIT), Mapletree Industrial Trust (MIT) and Digital Core REIT (DC REIT). According to DBS, Cyxtera contributed just 2% to 3% of KDC REIT’s and MIT’s revenues, but “made up a sizeable 32% of DC REIT’s revenues and thus would have a significant impact on the latter’s financials”.
In addition, KDC REIT is in litigation with DXC, one of its tenants. On March 21, 2022, KDC REIT announced it had commenced a suit in the High Court of Singapore over a dispute on rent payment to the tune of $14.8 million.
According to JP Morgan, MIT is also impacted by non-renewals or partial renewals from AT&T and Atos. Together, AT&T, Atos and Cyxtera could have contributed 6% to 7% to MIT’s distributable income. JP Morgan estimates.
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Separately, Mapletree Pan Asia Commercial Trust (MPACT) may see vacancies from spaces occupied by Seiko and NTT, which contribute around 5% of its DI, JP Morgan says.
Among the manageable exposures says JP Morgan, is the non-renewal by Commerzbank at Gallileo, which contributed 1.8% to CapitaLand Integrated Commercial Trust’s rental revenue in FY2022. As at Dec 31, 2022, CICT had revalued Gallileo downwards by 22% y-o-y to $370.2 million. CICT had acquired 94.9% of Gallileo (pictured) for the equivalent of approximately $540 million in 2018.
On the other hand, JP Morgan points out that S-REITs with office and hospitality assets are expected to report improved rental reversions.
Nonetheless, JP Morgan prefers to err on the side of caution. “We see downside to street DPUs post results on the back of higher borrowing cost guidance. Our FY2023 DPU estimates are on average 2% below street. We also see a changing narrative on equity raisings, supporting accretive acquisitions,” the April 13 report says. Its top picks are laggards such as CDL Hospitality Trusts, CICT, CapitaLand Ascendas REIT, KDC REIT and Mapletree Logistics Trust.
