Earnings season is once again upon us. Next week, a host of real estate investment trusts will be releasing their earnings results for the first half of 2019. I will be keeping close tabs on two REITs in particular: CapitaLand Commercial Trust (SGX: C61U) and Keppel DC REIT (SGX: AJBU). Here’s why and what investors should expect.
Riding on Singapore’s office rent rebound
With a 22% share price appreciation, CapitaLand Commercial Trust has been one of the top-performing REITs in the market this year. Market participants are optimistic that Singapore’s largest commercial REIT is well-placed to benefit from the strong rebound in CBD office rental rates.
In the first quarter of 2019, the group recorded a 3.8% increase in distribution per unit (DPU), on the back of contributions from Galileo – acquired in June 2019 – and higher occupancy at Asia Square Tower 2.
With monthly Grade A office rents trending upwards amid limited new supply stream for the next three years, CapitaLand Commercial Trust could also continue to see positive rental reversions in the next few years.
In the first quarter of 2019, Grade A office market rents stood at S$11.15 per square foot. This is well above the average rent of CapitaLand Commercial Trust’s leases expiring in 2019 of S$10.44.
Source: CapitaLand Commercial Trust 2019 Q1 Earnings Presentation
As such, I am expecting rental reversion rates of at least 4% in the reporting quarter ended 30 June 2019.
The contribution of Galileo will help to bolster DPU in the reporting quarter. In addition, the extension of the master lease of the HSBC building for another year at 35% higher rates (from April 2019) should also contribute to a higher DPU over the next four quarters.
Can Keppel DC REIT live up to high expectations?
Like CapitaLand Commercial Trust, Keppel DC REIT has high expectations to live up to. The data centre-focused REIT has seen its unit price rise by 22.8% so far this year. It now sports a rich valuation of 59% above its book value and a distribution yield of just 4.6%.
The optimism surrounding the REIT is seeded in the tailwinds surrounding the data centre industry and Keppel’s low gearing ratio and cost of debt, which should enable it to continue making yield-accretive acquisitions in the future. It also has three ongoing developments that are expected to be DPU-accretive upon completion.
The data centre REIT did not disappoint in the first quarter of 2019 as DPU increased 6.7% on the back of contributions from new acquisitions. I am expecting higher DPU in the reporting quarter ended 30 June 2019 because of higher contributions from KEPPEL DC Singapore 5 in May last year.
Investors should also look out for updates on asset enhancement initiatives (AEIs) at Keppel DC Singapore 3 and Keppel DC Dublin 2, which are expected to be completed by this year.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of CapitaLand Commercial Trust. Motley Fool Singapore contributor Jeremy Chia doesn't own shares in any companies mentioned.