Fundraising for acquisitions slashed S-REITs' distribution per unit by 2.6%

Acquisitions have boosted S-REITs' secondary equity offerings to $2.1b.

One of the key trends for S-REITs which emerged late 2017 and is continuing through this year is their penetration into new geographical markets. As a result, all acquisitions made in the first quarter involved some forms of equity fundraising. 

Year to date, secondary equity offerings worth $2.1b has been announced by S-REITs, OCBC Investment Research revealed. Pro forma distribution per unit (DPU) accretion was largely muted for the S-REITs under its coverage. Moreover, average DPU growth came in at -2.6% compared to last year. 

OCBC Investment Research analyst Andy Wong Teck Ching noted some of the key transactions made by S-REITs that highlighted the ongoing trend.

Mapletree Industrial Trust (MIT) completed its maiden overseas acquisition via a 40:60 joint venture with its sponsor for the purchase of a portfolio of 14 data centres in the U.S. on 20 December last year. "The purchase consideration was US$750m and partially funded by a private placement exercise," he said.

Frasers Commercial Trust also deemed it strategic to work with its sponsor by acquiring its first business park property in the UK via a 50:50 joint venture at a property value of £175m (100% basis) in January this year. This was funded mainly by a private placement exercise.

Following Mapletree Industrial Trust and Frasers Commercial Trust’s maiden entries into new markets, other REITs have recently followed suit.

Mapletree Greater China Commercial Trust’s proposed acquisition of a portfolio of six commercial properties in Japan at an initial net property income (NPI) yield of 4.8%, whilst Frasers Logistics & Industrial Trust proposed acquisition of a portfolio of 21 industrial properties from its sponsor in Germany (17) and The Netherlands (4) at an initial mid-5% NPI yield.

CapitaLand Commercial Trust also entered an agreement to acquire a 94.9% stake in a target company which holds the Gallileo property in Frankfurt, Germany, for an agreed property value of €356m (100% basis), which translates into an initial NPI yield of 4%.

Wong said he believes the REIT managers have taken a longer-term view on these acquisitions. "Similar attractive traits underpinning these moves include freehold land, high occupancy rates with long WALEs and lower cost of funding in local currency terms," he added.

Another key sector event was the agreement reached between the REIT managers of ESR-REIT and Viva Industrial Trust on their proposed merger. "Should approvals from both sets of unitholders be obtained, this could potentially create the fourth largest industrial REIT in Singapore in terms of asset size ($3b) and set the stage for further consolidation in the industry in the future," Wong added.

Notwithstanding the DPU decline, OCBC Investment Research thinks the operational outlook appears more positive, especially for the office sub-sector, whereby signing rents have improved firmly in tandem with the robust recovery in market rents. Wong added, "Looking ahead, we are projecting stable DPU growth (market-cap weighted) of 1.9% for the current financial year and 1.6% for the next financial year."

"We continue to believe the office sector would achieve the strongest rental growth this year, whilst RevPARs for hospitality REITs have been encouraging in 1Q2018 and we expect growth to accelerate as the year progresses. Meanwhile, industrial and retail rents have shown signs of bottoming out, but tenants are still largely cautious on their expansion plans," he concluded.