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These 2 REITs Delivered Weaker Quarterly Earnings Recently

Credit: hobvias sudoneighm

A new earnings season has just started.

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 lower numbers? Let’s look at two of them:

1. Last week, Soilbuild Business Space REIT (SGX: SV3U) released its 2017 fourth quarter and full year earnings.

It was not a good quarter. The REIT’s gross revenue declined by 4.3% year-on-year to S$20.75 million, while its net property income fell by 6.0% to S$17.75 million. The bottom-line fared worse, as the distribution per unit (DPU) was down by 11.9% to 1.383 cents. The REIT attributed its weaker performance to lower contributions from its 72 Loyang Way property, and higher expenses.

As a quick introduction, Soilbuild Business Space REIT invests primarily in business parks and industrial properties in Singapore. The REIT’s portfolio has properties such as SolarisWest Park BizCentralEightrium @ Changi Business Park, and more.

Looking ahead, the REIT sees the supply of industrial properties increasing by 5% by end-2018, before easing from 2019 onward. Colliers also expects industrial property rents “to moderate in 2018 and overall rents to recover 1-3% p.a. in 2019-2021F as supply eases.” In another bit of positive news, Soilbuild Business Space REIT has a committed portfolio occupancy rate of 92.7% as of 31 December 2017, which is higher than the industrial-average occupancy of 88.6%.

2. ESR-REIT (SGX: J91U) is another REIT that announced its 2017 fourth quarter and full year earnings last week. As a quick introduction, ESR REIT, which was previously known as Cambridge Industrial Trust, invests in income-producing industrial properties and has a diversified portfolio of 48 properties located across Singapore.

In the reporting quarter, ESR-REIT experienced a 2.2% fall in gross revenue to S$27.2 million, and a 1.2% dip in net property income to S$19.9 million. On the distribution front, the REIT’s DPU slipped by 6.7% to 0.929 cents. The larger decline in the REIT’s DPU as compared to the top-line was due to the REIT having to reserve distributions to holders of its perpetual securities.

ESR-REIT had the following comments to share on the state of its market in its earnings release:

“The overall industrial property market remains soft despite the improved manufacturing outlook. Global uncertainties, rising operating costs and increased supply coming onstream continued to weigh down on rents and occupancy rates.

The Jurong Town Corporation (“JTC”) 3Q 2017 Industrial Property Statistics showed prices and rental of industrial space continued to moderate in tandem with occupancy rates. The overall price and rental indices for the industrial property market fell by 0.9% and 1.1% respectively compared to the previous quarter. With more supply coming on-stream in the coming quarters, downward pressures on the prices and rentals is likely to continue.”

One important development with ESR-REIT is its recently announced plan to issue up to 263.0 million new units of itself to “rebalance its capital structure.” The exact structure and timing of the equity fund raising have not been determined, and it may take the form of a private placement and/or a non-renounceable preferential offering to existing unitholders on a pro rata basis.

But, in its latest earnings presentation, ESR-REIT did share that after its fund raising exercise is completed, around 85% of its “interest rate exposure is expected to be fixed.” Moreover, its Debt to Total Assets ratio is expected to reduce to 32.4% from 39.6% currently. REITs in Singapore are subject to a regulatory gearing ceiling of 45%.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.