Review of 3 Commercial Real Estate Investment Trusts

Commercial Real Estate Investment Trusts (“REITs”) are established with the investment strategy of principally investing, directly or indirectly, in commercial assets and real estate-related assets.

Some of these commercial properties/assets includes retail shopping malls, office buildings and hospitality-related purposes.

Investors who invest in Commercial REITs could potentially expose themselves to different sectors of the economy. Some REITs might be more exposed towards retail assets, while others might incline more towards office assets.

Hence, here are 3 such Commercial REITs that are listed on SGX:

• OUE Commercial REIT (SGX: TS0U)

• Elite Commercial REIT (SGX: MXNU)

• Lendlease Global Commercial REIT (SGX: JYEU)

1) OUE Commercial REIT (SGX: TS0U)

OUE Commercial REIT (“OUE C-REIT") listed on the Main Board of Singapore Exchange since 27 January 2014.

OUE C-REIT completed the merger with OUE Hospitality Trust in September 2019 to become one of the largest diversified REITs with total assets of S$6.8 billion. With seven properties across the commercial and hospitality segments in Singapore and Shanghai, OUE C-REIT’s property portfolio comprises approximately 2.2 million sq ft of prime office and retail space, and 1,640 upscale hotel rooms.

OUE C-REIT's Portfolio

FY2020 Result HIghlights

For FY2020, OUE C-REIT's revenue and net property income grew by 13.5% and 13.1% year-on-year respectively, due to contribution from the merger with OUE Hospitality Trust. However, the increase in net property income was partially offset by rental rebates of approximately S$18.3 million to tenants due to the COVID-19 outbreak.

In view of uncertainties posed by the COVID-19 situation and to preserve financial flexibility, OUE C-REIT has retained S$11.0 million of capital distribution in FY2020, of which S$6.0 million pertains to ongoing working capital requirements relating to the hotel segment.

The total amount of distribution to unitholder came in at S$132.8 million, a year-on-year growth of 7.8%. Despite the higher distribution amount, distribution per unit has fallen by 26.6% year-on-year to 2.43 Singapore cents in view of the enlarged total share issued from the merger.

Capital Management

As at 31st December 2020, OUE C-REIT's aggregate leverage and interest coverage ratio stood at 41.2% and 2.7 times. The aggregate leverage is within the stipulated limit of 50%, which indicates that OUE C-REIT has debt room for further acquisitions. However, its interest coverage ratio is at a low end of the minimum requirement of 2.5 times.

In terms of OUE C-REIT's debt maturity profile, the REIT has managed to obtain S$900 million of facilities in December 2020, of which S$450 million was utilised to refinance debt due in December 2021 ahead of maturity.

For the rest of 2021, there are only 14% of debts (S$51.8 million) that are due for refinancing. The average term of debt increased to 2.3 years as at 31 December 2020. The next refinancing hurdle will occur in 2022, where a S$830 million Secured SGD loan will be due for refinancing.

Latest Development - Divestment of 50% Interest in OUE Bayfront

On 31st March 2021, OUE C-REIT has completed the divestment of 50% of OUE Bayfront, OUE Tower and OUE Link to a Fund Managed by Allianz Real Estate.

The total divestment amounts came in at S$1.26 billion or S$3,170 per square feet. This represents:

• 7.3% premium over book value.

• 26.1% premium over purchase consideration in 2014

The estimated net divestment proceeds will be around S$262.6 million, after considering the estimated divestment fee and other divestment-related expenses.

OUE C-REIT has highlighted that this latest move could allow the REIT to realise the value of capital appreciation while maintaining 50% stake in premium Grade A office building and exposure to Singapore office market.

The net proceeds from the divestment can potentially be redeployed to:

• Pare down debts.

• Accretive acquisitions of higher yielding assets or asset enhancement initiatives.

• Commence DPU accretive Unit buy-back programme to enhance long-term returns to Unitholders.

• Distribution of capital gains.

2) Elite Commercial REIT (SGX: MXNU)

Elite Commercial REIT is listed on Singapore Exchange on 6th February 2020. It is the first and only UK-focused listed REIT in Singapore.

It was established with the investment strategy of principally investing, directly or indirectly, in commercial assets and real estate-related assets in the United Kingdom (“UK”). Elite Commercial REIT’s portfolio comprises 155 predominantly freehold quality commercial buildings located across the UK, with a total net internal area of approximately 3.9 million square feet.

Elite Commercial REIT’s Portfolio

Elite Commercial REIT’s portfolio is primarily occupied by the Department for Work and Pensions (“DWP”), the UK’s largest public service department that is responsible for welfare, pensions and child maintenance for over 20 million claimants.

DWP is a uniquely counter-cyclical occupier and the Portfolio is crucial public infrastructure for the provision of DWP services.

1Q FY20201 Business Update

For 1Q FY2021, Elite Commercial REIT reported an actual revenue of £6.6 million, which is 15.1% higher than the forecasted figure in the IPO prospectus and 87.6% higher year-on-year. This was mainly due to the contributions from its newly acquired portfolio of 58 commercial properties.

However, with the issuance of new units for the above acquisition, this resulted in the slower growth in terms of distribution. The distribution per unit stood at 1.22 pence for 1Q FY2021, 1.8% higher than the forecasted figure in the IPO prospectus and 64.9% higher year-on-year.

Capital Management

Currently, Elite Commercial REIT has a total debt load of £228 million, which translates into a gearing ratio of 42.1%, which is well within the gearing limit of 50%. With an interest coverage ratio of 7.4 times and a low borrowing cost of 1.9%, this indicates that the REIT faces little risk of default on its interest payment, given the healthy interest coverage ratio.

In terms of debt maturity profile, Elite Commercial REIT does not face with any major refinancing requirements for FY2021. In FY2022, a bridge loan that is worth £9 million will be due for repayment.

Most of the maturing debts will be due for refinancing in both FY2023 and FY2024, with term loan facility worth £80 million and £125 million respectively.

Lease Expiry Profile

In terms of the REIT’s weighted average lease expiry (“WALE”) (Light Blue Bar), there are only minimal amount of lease that are due to expire in FY2022 - FY2024 and FY2027. Most of the lease expiry will occur in FY2028, where 93.2% of the leases will expire by then.

On the other hand, the REIT’s weighted average lease to break (“WALB”) (Dark Blue Bar) shows that 64.5% of the leases can be terminated at the tenant’s request in FY2023 and 31.0% in FY2028. WALB can be explained as the next permissible break date at the tenant’s election and pursuant to the clause in the existing lease agreement.

3) Lendlease Global Commercial REIT (SGX: JYEU)

Listed on 2nd October 2019, Lendlease Global Commercial REIT (“Lendlease REIT”) is established with the principal investment strategy of investing, directly or indirectly, in a diversified portfolio of stabilised income-producing real estate assets1 located globally, which are used primarily for retail and/or office purposes.
Its portfolio comprises a leasehold interest in, 313 somerset, a prime retail property located in Singapore and a freehold interest in Sky Complex, which comprises three grade-A office buildings located in Milan. The portfolio has a total NLA of approximately 1.3 million square feet, with an appraised value of S$1.4 billion.

Lendlease REIT’s Portfolio

313 Somerset & Sky Complex

1H FY2021 Result Highlights

For 1H FY2021, the REIT’s gross revenue grew by 3.2% year-on-year to S$41.6 million. This was driven by the strengthening of the Euro against the Singapore Dollar for Sky Complex as well as improved operational efficiency to reduce costs and conserve cash at 313 somerset.

Meanwhile, distributable income grew by 1.4% year-on-year to S$27.5 million. The slower growth in distributable income was mainly due to a higher property expenses, as a result of the provision of doubtful debts amid the impact of COVID-19.

Lastly, total distribution per unit stood at 2.34 Singapore cents, which represents a 0.8% year-on-year increase.

Capital Management

As at 31st December 2020, Lendlease REIT has a total gross borrowing of S$559.5 million, which translates into a gearing ratio of 35.5%. The ratio is well below the limit of 50% and this could provide the REIT with the debt headroom to grow its portfolio.

On the other hand, the low weighted average cost of debt of 0.88% p.a. and the high interest coverage ratio of 8.5 times suggests that there is little possibility for Lendlease REIT to default on its interest expenses.

Debt Maturity Profile

In terms of the REIT’s debt maturity profile, Lendlease REIT does not face with refinancing requirement from now to FY2023.

Meanwhile, there will be a S$99.3 million term loan that is due for refinancing in FY2023. Subsequently, the major refinancing hurdle will be in FY2024, where a €285.0 million term loan will be due for refinancing.

Conclusion

The performance of these 3 Commercial REITs mentioned above has been relatively stable, given their latest financial results and the healthy financial metrics such as the manageable gearing ratio and interest coverage ratio. However, with the ongoing COVID-19 pandemic, investors will have to continue to keep a close watch on their subsequent performance in the next few quarters.

To hear more first-hand updates from these 3 REITs mentioned above, join us at REITs Symposium 2021 on 15th and 22nd May. During this year’s online edition, not only will you get to hear from the REITs’ management but also get to speak with them during the Live Chat sessions and post your questions. Register for free now at https://rebrand.ly/4475d3