You will be able to use lease and occupancy figures to judge how stable a REIT's income is.
If you have ever rented a flat in Singapore, you know how the landlord's year can turn on one conversation. A tenant who renews for two years at a higher rent makes it a good year. A tenant who leaves at the end of the lease, followed by three months of viewings and a lower offer, makes it a bad one. A REIT is that landlord, many times over, and its results presentation tells you how those conversations are going.
This lesson covers the three numbers that do: how long the leases have left, how full the buildings are, and what happens to rent when a lease ends.
WALE, weighted average lease expiry, is the average time left on a REIT's leases, weighted by how much each lease matters. Most REITs weight by rental income. Some also report it weighted by space, the net lettable area. Check which one you are reading, because they can differ.
With made-up figures, say a small REIT has three tenants. Tenant A pays 50% of the rent and has four years left on its lease. Tenant B pays 30% and has two years left. Tenant C pays 20% and has one year left. Weighted by rent, the WALE is 50% of 4, plus 30% of 2, plus 20% of 1, which is 2.8 years.
A long WALE gives income visibility. If most leases run for years, the REIT knows roughly what rent it will collect, and you can be more confident about DPU. That is especially useful when the economy turns, because tenants on long leases have to keep paying.
But a long WALE also works the other way. Rents on long leases are set at the start, usually with fixed step-ups. If market rents rise faster than those step-ups, the REIT cannot capture the increase until the leases end. A long WALE swaps upside for stability.
So the WALE number on its own is neither good nor bad. Read it alongside the sector, which module 6 covers, and alongside the lease expiry profile, the chart that shows what share of income comes up for renewal each year. A WALE of three years with a third of income expiring next year is very different from three years spread evenly.
Occupancy is the share of a REIT's space that is let. A REIT at 95% occupancy has 5% of its space empty and earning nothing, while still paying for maintenance, property tax and the other costs of the building.
Results presentations often show two figures. Actual occupancy counts space where the tenant has moved in and the lease has started. Committed occupancy also counts space where a lease has been signed but has not started yet. Committed is usually the higher of the two, and the gap tells you about income that is coming. A REIT whose committed occupancy is rising has signed new leases that will start paying soon.
Look at the trend across several quarters, and look at it property by property where the REIT reports that. Portfolio occupancy can look steady while one large building loses a major tenant and another fills up. Darren's mall REIT reported portfolio occupancy that barely moved, but one of its four malls had dropped several points over a year, which the property-level table showed and the headline did not.
Rental reversion is the change in rent when a lease is renewed or a space is re-let, comparing the new rent with the old rent on the same space. If a lease ending at S$10 per square foot a month is renewed at S$10.50, the reversion is plus 5%. These figures are made up; REITs report reversions as percentages.
This is the most direct read you get on demand for a REIT's space. Positive reversions mean tenants are willing to pay more to stay or to move in. Negative reversions mean the REIT is cutting rents to keep space filled. Because only the leases that came up in the period are included, reversions move faster than total rent and give you an early signal.
REITs calculate reversion in different ways. Some compare the new rent with the last month of the old lease, others with the average over the old lease. Some include only renewals, others include new tenants too. Read the footnote on the slide, and compare a REIT with itself over time before comparing it with another REIT.
The three numbers tell a story when you put them side by side. Rising occupancy with positive reversions means demand is strong. Steady occupancy held up by negative reversions means the REIT is buying occupancy with lower rents. A long WALE with negative reversions may simply mean the leases that came up were the weak ones.
In the activity you will track all three for one S-REIT over four quarters and describe the trend, and you will see quickly which of these stories your REIT is telling.
Record WALE, occupancy and rental reversion for one S-REIT over the last four quarters and describe the trend in two sentences.
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