Do you recall back in March 2022, when inflation in the US surged to 8.5% (later peaking at 9.1% in June)? This triggered a series of aggressive interest rate hikes, lifting rates from a low of 0-0.25% to 5.25-5.5% by July 2023.

While these rate increases benefitted Singapore banks, driving double-digit year-on-year growth in net interest income, they posed significant challenges for REITs in the country, particularly those with less than 70% of borrowings hedged at fixed rates. Most Singapore REITs saw year-on-year declines in their distribution payouts due to the sharp rise in borrowing costs. Additionally, growth through new property acquisitions slowed considerably.

Now, with inflation edging closer to the U.S. Federal Reserve's target of 2%, the US Federal Reserve have announced its first rate cut in 4 years last Wednesday (18 September 2024), by 0.5%, as well as signalling a series of rate cuts in the coming Fed meetings. That is definitely positive news for REITs, especially those with lower percentages of borrowings hedged at fixed rates, which stand to benefit first.

In this post, we'll explore 5 Singapore REITs with the lowest percentage of borrowings hedged at fixed rates:

1. Far East Hospitality Trust (SGX: Q5T)

Far East Hospitality Trust (FEHT) invests in real estate assets used for hotels and serviced residences, with all of its 12 properties located in Singapore, valued at S$2.51 billion as of 31 December 2023.

As of 30 June 2024, it only has 35.9% of total debt secured at fixed rates, with 64% of borrowings at floating rates – in fact, the REIT has the highest percentage of borrowings at floating rates.

While it does not have any borrowings due for refinancing in the 2nd half of the financial year 2024, 22% (or S$157 million) of borrowings are due for refinancing in FY2025, with another 23% (or S$164 million) of borrowings due for refinancing in FY2026 ahead.

In terms of its financial performance for the first half of FY2024 ended 30 June (i.e., 1H FY2024), gross revenue and net property income inched up by 3.4% and 1.4% year on year to S$53.8m and S$49.5m respectively, driven by high master lease rental from the hotels and serviced residences, as well as higher revenue from the retail and office spaces.

Distribution to stapled security holders for 1H FY2024 also inched up by 2.7% on a year on year basis to S$39.5 million, mainly due to a distribution of S$2.2 million to cushion the impact of higher interest expenses, as well as a S$4.0 million divestment gain of Central Square. Otherwise, its income available for distribution would have declined by 9.3% on a year on year basis to S$33.9 million, as finance costs jumped by 25.8% in the same time period.

Distribution Per Security for 1H FY2024 saw a slight 2.1% year-on-year improvement to S$0.0196 – FEHT is one of the 6 Singapore REITs that saw an improvement in its distribution payout to unitholders for the period ended 30 June 2024.

2. CDL Hospitality Trusts (SGX: J85)

CDL Hospitality Trusts (CDLHT) invests in real estate assets used for hotels, build-to-suit apartments, and a retail mall. Currently, its portfolio comprises 20 properties located in Singapore, New Zealand, Australia, Japan, Maldives, United Kingdom, Germany, and Italy, valued at S$3.3 billion as of 30 June 2024.

As of 30 June 2024, CDLHT has only 52.0% of borrowings hedged at fixed rates, with the remaining 48.0% of borrowings at floating rates.

Regarding its debt maturity profile, CDLHT has 30.8% (or S$369 million) of borrowings due for refinancing in the second half of FY2024 and another 21.4% (or S$257 million) in FY2025. In FY2026, an additional 18.8% (or S$226 million) of borrowings will require refinancing. Altogether, this amounts to 71% (or S$852 million) of its total borrowings needing refinancing from the second half of FY2024 through to the end of FY2026.

For the first half of FY2024 ended 30 June (i.e., 1H FY2024), CDLHT’s revenue and net property income grew by 6.8% and 5.9% compared to a year ago to S$127.3 million and S$66.5 million respectively.

Total distribution to stapled securityholders after retention for working capital for 1H FY2024 inched up by just 0.7% year on year to S$31.4 million, with total distribution per stapled security after retention the same as last year, at S$0.0251.

3. Suntec REIT (SGX: T82U)

Suntec REIT (SGX: T82U) invests in real estate properties used for retail or office purposes in Singapore, Australia, as well as in the United Kingdom, with a total assets under management of S$12.2 billion as of 30 June 2024.

Looking at its debt profile as of 30 June 2024, it has approximately 61% of borrowings at fixed rates, with the remaining 39% of borrowings at floating rates.

For the second half of FY2024, it does not have any borrowings due for refinancing. However, in FY2025, it has 15% (or S$631 million) due for refinancing, with another 12% (or S$526 million) of borrowings due for refinancing in the year after (i.e., FY2026).

In terms of its financial results for the first half of FY2024 ended 30 June (i.e., 1H FY2024), while its gross revenue inched up by 1.2% on a year on year basis to S$226.9 million contributed by a stronger operating performance from Suntec City Office, Mall, and Suntec Convention, its net property income inched down by 1.5% compared to last year to S$151.0 million.

However, distributable income to unitholders for 1H FY2024 fell by 11.7% on a year on year basis to S$11.8 million, due to the completion of capital distribution, higher financing cost, as well as higher vacancies in 55 Currie Street (Australia) and The Minster Building (United Kingdom), with distribution per unit recording a 12.5% year-on-year decline to S$0.03042.

4. Lendlease Global Commercial REIT (SGX: JYEU)

Lendlease Global Commercial REIT, or LREIT for short, invests in real estate assets located in Singapore and Italy used for retail and office purposes, with an assets under management of S$3.68 billion as of 30 June 2024.

In terms of borrowings hedged at fixed rates, as of 30 June 2024 (which is the financial year end for the REIT), it is at 61%, with the remaining 39% at floating rates.

Looking at debt maturities, in the upcoming FY2025, it has 22% (or S$360 million) of borrowings due for refinancing for the financial year, with another 20% (or S$320 million) of borrowings due for refinancing in FY2026.

For the full year ended 30 June 2024 (i.e., FY2023/24), LREIT’s gross revenue and net property income climbed by 7.8% and 7.4% on a year on year basis to S$220.9 million and S$165.3 million, as a result of a healthy operational performance from the Singapore portfolio, and the upfront recognition of supplementary rent received from the lease restructuring of Sky Complex.

However, as a result of higher borrowing costs (which jumped by close to 33%), along with an enlarged unit base, its distributable income to unitholders for FY2023/24 fell by 15.6% to S$91.4 million, with its distribution per unit tumbling by 17.7% to S$0.0387.

5. OUE REIT (SGX: TS0U)

OUE REIT’s (SGX: TS0U) portfolio comprises 2 hotels (Hilton Singapore and Crowne Plaza Changi Airport), 1 retail mall (Mandarin Gallery), 3 offices (OUE Bayfront, One Raffles Place, and OUE Downtown Office) in Singapore, along with 1 office in Shanghai (Lippo Plaza), valued at a total of S$6.3 billion as of 31 December 2023.

As of 30 June 2024, OUE REIT has 61% of borrowings hedged at fixed rates, with the remaining 39% of borrowings at floating rates.

In terms of debt maturity, it has 1% (or S$14.0 million) of borrowings due for refinancing in the second half of FY2024, 14% (or S$339 million) of borrowings due for refinancing in FY2025, and another 39% (or S$908 million) of borrowings due for refinancing in FY2026.

In the first half of FY2024 ended 30 June 2024 (i.e., 1H FY2024), OUE REIT’s gross revenue and net property income increased by 5.7% and 1.6% year on year to S$146.7 million and S$117.1 million respectively, which can be attributed to the resilience of its properties in Singapore.

However, as a result of a 18.5% jump in finance costs, its amount available for distribution for 1H FY2024 fell by 15.3% on a year on year basis to S$48.8 million, with its distribution per unit also declining by 11.4% compared to last year to S$0.0093.

Closing Thoughts

I noticed the 5 REITs have a big chunk of borrowings (upwards of 30%) due for refinancing from now till the end of the calendar year 2026 – coupled by interest rates going to come down in the months ahead, finance costs could potentially come down, and distribution payout could see an improvement in the quarters to come.

However, for the calendar year 2024, I am of the opinion that the REITs above will continue to post a year-on-year decline in their distribution payouts, with any year-on-year improvements to be seen at the end of calendar year 2025 at the earliest.

With that, I have come to the end of my post where I shared about the 5 REITs with the highest percentage of borrowings at floating rates, and are poised to benefit from the US Federal Reserve’s series of interest rate cuts in the coming months ahead.

Do take note that everything you have just read is for educational purposes only, and they do not imply any buy or sell calls for any of the REITs. You should always do your own due diligence before you make any investment decisions.

Disclaimer: At the time of writing, I am a unitholder of Suntec REIT.

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