REITs are opening their cheque books as interest rates are expected to remain low for a prolonged period of time.
With the COVID-19 pandemic still raging, governments around the world have slashed interest rates to stimulate their respective economies.
Lower rates may be bad news for our local banks, but offer businesses a chance to borrow money at a cheaper cost to fund growth.
One sector that is benefiting from low rates is REITs.
REITs rely on substantial levels of borrowing to fund property purchases and carry out asset enhancement initiatives.
These loans are usually refinanced rather than repaid, so low rates end up being a boon for REITs as it allows them to pay lower levels of finance costs for their debt.
Many REITs have made use of ultra-low rates to gear up to finance acquisitions that are accretive to their distribution per unit (DPU).
Here are three such REITs that recently conducted acquisitions that will allow them to grow their DPU for 2021.
Ascendas REIT is Singapore’s largest industrial and business space REIT.
As of 30 September 2020, its portfolio consists of 198 properties located across Singapore, Australia, the UK and the US. Assets under management (AUM) stood at almost S$13 billion.
Last week, the REIT announced that it was acquiring a suburban office property, 1-5 Thomas Holt Drive, located in Sydney, Australia, for S$284 million.
The property has a freehold tenure, is 100% occupied, with a net lettable area (NLA) of over 39,000 square metres.
This property has undergone substantial refurbishments between 2015 and 2016, therefore it is considered to be a good property.
It has a long weighted average lease expiry (WALE) of 4.5 years and will help to lift Ascendas REIT’s Australian portfolio’s WALE from 4.3 years to 4.4 years.
Net property income (NPI) yield for the first year is expected to be 5.6% post-transaction costs.
The acquisition will boost annualised the fiscal year 2019’s DPU by S$0.00059.
Parkway Life REIT is one of Asia’s largest healthcare REITs by assets.
The REIT’s portfolio comprises 53 properties valued at approximately S$1.96 billion as of 31 December 2020.
These properties consist of private hospitals in Singapore and quality nursing homes in Japan.
Parkway Life REIT recently announced the acquisition of yet another nursing home in Japan for S$21.2 million.
The expected NPI yield is 6.4% and will be immediately yield-accretive for unitholders of the REIT.
The property will allow the REIT to secure a fresh 20-year master lease and lengthen the REIT’s WALE for its Japan portfolio from 11.19 years to 11.44 years.
The acquisition should be completed by year-end, increasing Parkway Life REIT’s total number of properties to 54.
It will be funded by a long-term Japanese Yen loan facility as interest rates on such loans are attractively low.
The REIT’s gearing will increase slightly from 38.6% as of 30 September 2020 to 39.3% after the acquisition but is still comfortably below the maximum limit of 50%.
Cromwell European REIT, or CEREIT, is a Europe-centric REIT with a diversified portfolio of properties that are used for office, light industrial or retail purposes.
Its portfolio consists of 95 properties valued at around EUR 2.1 billion as of 30 September 2020.
CEREIT recently announced the acquisition of a portfolio of 11 logistics and light industrial properties located in the Czech Republic and Slovakia.
The purchase price was EUR 113.2 million and the properties had a net operating yield of 6.7%.
These properties are all freehold, are nearly 100% occupied and have a total WALE of 6.2 years.
Other benefits include an increase in the REIT’s freehold property weightage from 91.7% to 92.1%.
The acquisition will also reduce the tenant concentration risk for CEREIT as the top 10 tenant-customers make up 31.3% of headline rent post-transaction, down from 32.6% before the transaction.
The REIT is expected to enjoy DPU accretion of 4.9%, and the manager will announce the funding structure for the deal soon, as it needs to take into account prevailing market conditions to maximise the DPU accretion to unitholders.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.