Do Reit managers have as much stake as unitholders?

ALTHOUGH many of the most highly geared S-Reits perked up last Friday after new rules were introduced to give them more debt headroom and the option to defer 2020 dividends by a whole year, some market watchers chose to fade the rally.

One bemused analyst summed up the situation like this: "It's like you know the passing mark for your exam is 50/100 but because you are doing poorly they lower it to 40/100. And then your parents buy you a Playstation."

Indeed, raising the leverage limit for Reits from 45 per cent to 50 per cent has removed a key overhang for smaller Reits that have a debt-to-asset ratio of close to 40 per cent. Gearing concerns resulted in a major derating of S-Reits during the 2008 liquidity crunch, and some undertook dilutive rights issues which resulted in DPU (distribution per unit) declines.

But unlike the 2008-2009 downturn, during which S-Reits continued to pay dividends on time based on whatever income they continued to collect, this crisis is shaping up to be quite different.

On April 1, many investors were caught off-guard when SPH Reit decided to pay out only 20 per cent of distributable income in its second quarter ended Feb 29, citing uncertainty amid the Covid-19 outbreak. Later, emergency legislation passed on April 7 required Singapore landlords to suspend rent collections by up to six months for tenants who can prove that Covid-19 made them unable to pay.

Investors have become so used to the idea of Reits paying out almost all of their distributable income as dividends that many didn't even know that Reits are allowed to cut dividends to retain cash.

But the precedent had been set and last Thursday, the tax authority and the Monetary Authority of Singapore (MAS) gave in to the Reit lobby's appeals by enacting a temporary rule change to help them cope with cashflow stress.

All S-Reits now have the option to defer dividends by 12 months after their financial year-end for FY2020, instead of three months normally. This means that Reits with a FY2020 ending Dec 31, 2020 will have up to Dec 31, 2021 to distribute 90 per cent of their taxable income derived in 2020 to qualify for tax transparency.

Analysts say that retail and hospitality trusts are the most likely to make use of the rule change, and could cut back on dividends for two quarters at least.

For most landlords, the government's 100 per cent property tax rebate covers only one month of gross rent forgone. Which means that any tenant relief that Reits extend beyond that will have to come from tenants' security deposits or be subsidised by unitholders in terms of dividends withheld.

It could be months before malls and hotels in Singapore return to normalcy, and investors are not being paid to wait.

Win-win?

With the flexibility that MAS has given them, it's up to each of the Reit managers to decide how they'll reset their dividend guidance for this year.

Some say the new measures are a "win-win" for all, but it looks like investors don't win as much as Reit managers do.

To be sure, there is nothing unfair about Reit investors subsidising rent for tenants. The reason why Reits don't have retained earnings that they can draw on in times of crisis in the first place is that their past earnings have mostly been redistributed to investors as dividends.

However, some have also questioned if S-Reit managers might have been more proactive in blunting the pain for unitholders had they been bigger stakeholders in the Reits themselves, rather than external managers working for fees based largely on the Reit's total property value or assets under management (AUM).

Since February, many companies have come out to say that their senior staff and board members will take pay cuts or lower director fees, in solidarity with other stakeholders who have been impacted by Covid-19.

SPH Reit, OUE Commercial Reit and Starhill Global Reit (SGReit) were among the Reits that filed similar disclosures to the Singapore Exchange.

But only YTL Starhill Global, the manager of SGReit, mentioned that the savings from the pay cuts would be passed to unitholders as part of a 10 per cent reduction in base management fees payable by SGReit over the next three months, effective from April. For S-Reits, it is this line that truly matters.

One former analyst pointed out: "Unless the manager is reducing its fees, this has no impact to unitholders, and consequently no impact to the unit price. And unless the manager is going to take the remuneration foregone and channel it to the tenants, it will have no impact to the survivability of the tenants either."

More transparency from S-Reits here would be helpful. A crisis is also a good opportunity for external Reit managers, which dominate the S-Reit scene, to show more ownership.

As Singapore's Reit sector matures, with Reit mergers putting managers in charge of swelling AUMs, investors are no doubt watching the cost leakages more closely too.

Last year, CapitaLand's fund management business, which manages seven listed trusts and 25 private funds, enjoyed an operating margin of 75.6 per cent, comparable to the margins that another asset manager, ARA Asset Management, used to report when it was listed too.

Calls for S-Reit managers to be internalised, which is the predominant model in the US, have grown stronger here over time.

Reit managers might want to think harder about what they can do to prove that they are worth their salt. The credibility of the sector depends upon it.