Reits rally but dividend cuts not fully baked in, analysts say

Singapore

SINGAPORE real estate investment trusts (Reits) staged a relief rally on Friday after new rules were introduced to give them more flexibility to deal with potential cashflow constraints arising from rent collection problems amid the Covid-19 outbreak.

Reits with the biggest refinancing risks rallied the strongest, led by Lippo Malls Indonesia Retail Trust which surged 15.67 per cent or 2.1 Singapore cents to S$0.155. It was also the most actively traded Reit.

One of the new rules gives Reits 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.

Credit Suisse analysts Nicholas Teh, Louis Chua and Terence Lee wrote in a note that this relief will help Reits avoid the risk of equity raising due to short-term liquidity pressures though investors were not pricing in such a scenario anyway, adding: "At current valuations, yields are more than 50 per cent tighter than Great Financial Crisis lows."

CapitaLand Mall Trust and Mapletree Commercial Trust, which both have a large exposure to Singapore retail tenants, climbed 4.52 per cent and 3.39 per cent respectively.

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More highly geared Reits such as Soilbuild Business Space Reit, OUE Commercial Reit, Far East Hospitality Trust, IReit Global, ESR-Reit and Mapletree Logistics Trust also made single-day gains of 2.9 per cent or higher, but Citi analyst Brandon Lee reckoned that the positive reaction may be a knee-jerk one.

He wrote: "The option to defer distributions may now shift investors' focus to the magnitude of FY20 to FY21 DPU (distribution per unit) cuts . . . which we think has not been fully priced in.

"While we do not expect all S-Reits to defer short-term distributions, the available option does 'legally' present an opportunity to do so, particularly given Covid-19's fluidity (so Reits may prefer) to err on the conservative side."

The second rule change is a permanent one. With immediate effect, the Monetary Authority of Singapore (MAS) has raised the leverage limit for Reits from 45 per cent to 50 per cent (debt/total assets).

Credit Suisse's analysts believe that smaller Reits are more likely to make use of the higher debt headroom, saying: "Most of the large-cap Reits had mentioned over the last year that they would still look to keep gearing below 45 per cent, even if gearing limits were raised."

RHB analyst Vijay Natarajan added that the hike in the gearing threshold seems like more of a pre-emptive move to spare Reits from unexpected covenant breaches in the event of another market rout, rather than a signal to borrow cheaply for further acquisitions.

He wrote: "S-Reits in general have been more prudent with their borrowings during the current market cycle with an average sector gearing at 35.7 per cent and interest cover of 5.9 times. Only three Reits currently have gearing of more than 40 per cent. With the increased gearing threshold limit, Reits' asset values have to decline by 17-44 per cent before a potential gearing limit breach, which we believe is a reasonable buffer."

In a statement on Friday, the Reit Association of Singapore thanked the MAS, the Finance Ministry, the Inland Revenue Authority of Singapore and the Singapore Exchange for working quickly to provide timely support to S-Reit managers.

The Reit lobby group said: "The extension of the permissible period for the distribution of FY2020 taxable income from three months to 12 months will help many S-Reits by giving them more time to manage their cash flows, and to work with tenants to recover and distribute the deferred rentals granted under the Covid-19 (Temporary Measures) Act 2020, without the impending risk to unitholders of losing tax transparency.

"For unitholders, the extension means that while distributions may be lower in the immediate quarters, these distributions should improve over subsequent quarters as S-Reits receive the deferred rentals owed to them."