It’s earnings season again! Next week a host of real estate investment trusts (REITs) will be releasing results for the quarter just ended. I will be keeping an eye on two REITs in particular; ESR-REIT (SGX: J91U) and Frasers Centrepoint Trust (SGX: J69U).
Lower DPU in the second half of 2019?
ESR-REIT recently announced that it will be acquiring an effective 49.0% stake in a warehouse in Jurong. The REIT has raised S$100 million from a private placement and intends to raise another S$50 million from a preferential offering to fund the acquisition; and also to pay for two asset enhancement initiatives (AEIs) and pay off some of its debt.
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ESR-REIT announced an advanced distribution per unit (DPU) for the period from 1 April to 25 June 2019 of 0.945 Singapore cents (comprising 0.833 Singapore cents of taxable income and 0.112 Singapore cents of other gains). The advanced distribution is to negate the dilutive impact of the new units issued from the private placement.
The REIT also announced the sale of another property (31 Kian Teck Way) for S$5.8 million. However, because of the small size of the property, the impact on net property income is not expected to be material. In the upcoming earnings update scheduled for Monday 22 July, Investors should look for updates on what management has to say on the latest acquisition proposal and AEIs.
Hopefully, management will also give investors an idea on the DPU impact of the new units issued. As the returns from the AEIs should not materialise until they are completed and part of the funds raised from the preferential offering and private placement will be used to pay off debt, investors might have to expect lower DPU in the coming quarters.
Impact of acquisitions and equity fundraising?
In early June, Frasers Centrepoint Trust announced that it would be acquiring a one-third stake in Waterway Point, a retail mall located in the Punggol area. It also acquired an 18.98% stake in PGIM Real Estate AsiaRetail Fund which was completed in April. The three-month period ended 30 June 2019 will give investors a first sense of how these two acquisitions, which was partially funded by an equity fundraising, will impact DPU.
Based on Frasers Centrepoint Trust’s own number-crunching, it said that DPU for FY2018 would have been 0.29% higher under the assumptions that Waterway Point was concluded at the start of the deal and 106.7 million new units were issued to finance the deal.
The REIT announced an advanced DPU of 1.909 cents for the period from 1 April 2019 to 27 May 2019. This was to negate the impact of the larger unit base following the private placement. In the three-month period ended 31 March 2019, Frasers Centrepoint Trust reported a 1.2% increase in DPU, while portfolio rental reversion was a positive 2.0%.
Investors should look out for what management has to say about the DPU impact from Waterway Point and its stake in PGIM Real Estate AsiaRetail Fund. On top of that, investors will have a first look at what impact the acquisitions had on the trust’s gearing level. As of 31 March 2019, Frasers Centrepoint Trust had a low gearing of 28.8%, which should afford it room to make more debt-funded acquisitions in the future.
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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 units of Frasers Centrepoint Trust. Motley Fool Singapore contributor Jeremy Chia does not own shares of any companies mentioned.