Singapore’s Real Estate Investment Trusts (REITs) seemed like a very vulnerable sector during the worst phase of the credit crisis, yet it weathered the storm and held fast.
At the peak of the credit crisis, some sectors faltered miserably. However, most REITs in Singapore managed to roll with the punches and even turned in solid results for the second quarter of 2009.
CapitaCommercial Trust (CCT) performed way better than what the analysts had expected. Thanks to better operating margins and more rental income, CCT’s second quarter distribution per (DPU) unit and distributable income each increased by around 33 percent from last year.
Analysts have identified other challenges that lie ahead in trying to maintain distributions in a somewhat dampened economy. Experts forecast that rents will likely continue to drop and acquisitions might still be hard to carry out.
CCT implements a “triple-A strategy” during such times, notes Lynette Leong, Chief Executive Officer at CapitaCommercial Trust Management. “We anticipate, accelerate and accentuate,” she said.
Debt refinancing
Some REITs borrowed to procure assets in the past few years, and funding became a significant concern when credit markets froze. Based on a DBS Vickers report released last December, the REITs sector had about $4.9 billion in outstanding payables for 2009 alone. Leong explained that CCT realized credit illiquidity was coming and braced for impact.
"We looked at our debt maturity profile and saw there were large chunks of debt due for refinancing. Anticipating the credit weakness ahead, we refinanced the debt well ahead of maturity and at relatively attractive terms.”
Leong added that CCT had a big debt amounting to about $740 million maturing this year, but had totally refinanced it as early as June.
Lease renewals
Anticipating that rents would soften, CCT engaged their tenants to renew leases early on. “The intent was to lock in rental income in advance and maintain a high occupancy rate. This in turn helps to maintain a well-spread lease expiry profile so there is no lumpiness in any given year,” Leong explained.
For example, as of June, CCT had renewed more than 50 percent of the leases that was due to expire this year.
Also, CCT had been working to reduce its costs. The result showed better operating margins for the first half of 2009, and net property income increased by 42, percent year-on-year as gross revenue rose by 36 percent.
Reduced costs were vital to offset any decrease in revenue coming from weaker rents “While rents – the top line – may decline, if we’re able to save on operating expenses and interest costs, then we are able to deliver on the stability and DPU,” Leong said.
Tenant retention
Customer service played a significant role in tenant retention and “should not be compromised, especially in weak market conditions,” Leong explained. As part of CCT’s customer service focus, its property manager had S-Class and ISO 14000 service certifications.