Reits sold down as investors fret over challenges facing landlords

Singapore

REAL estate investment trusts took a tumble on Thursday, with retail Reits bearing the brunt of the selling after the government announced it will legislate to ensure that landlords pass on in full property tax rebates to their tenants.

Among those badly hit were Frasers Centrepoint Trust (FCT), Mapletree Commercial Trust (MCT), CapitaLand Mall Trust (CMT) and SPH Reit.

The worst was FCT, which slumped 28 cents or 13.3 per cent to S$1.82. MCT fell 13 cents or 7.4 per cent to S$1.62, CMT dropped 11 cents or 6.36 per cent to S$1.62 while SPH Reit lost 4.5 cents or 6 per cent to S$0.705.

In a report on Thursday, DBS Group Research warned that retail landlords have little room to wriggle.

"We turn cautious on the retail S-Reit sector in view of unprecedented tightening measures introduced by the government," DBS analysts Derek Tan and Rachel Tan wrote in a sector report.

"With a focus on conserving cash due to worsening operational outlook, we anticipate potential cuts in payout ratios (from 100 per cent to 90 per cent) for most retail S-Reits and cut our distribution per unit to the tune of 14 per cent to 27 per cent on the back of rental rebates offered by landlords to affected tenants."

Indeed, SPH Reit on Wednesday announced that it would distribute just 0.3 Singapore cent per unit for its second quarter ended Feb 29, despite a 12.2 per cent increase in distributable income to S$41.5 million.

SPH Reit Management, the Reit manager, said the distribution was "modest considering the challenging circumstances arising from the Covid-19 situation for the months ahead".

DBS noted that the potential passing in Parliament of the Covid-19 (Temporary Measures) Bill, which absolves tenants of their rental obligations for up to six months, will introduce further uncertainty to an already challenged retail sector.

"The risk from the Bill is that if tenants/businesses go bust after six to 12 months even with rent deferment, landlords will be faced with a potential spike in bad debts. This is a factor we believe has yet to be addressed, to be fair to landlords who have their own obligations to fulfil," DBS added.

The research house has downgraded its calls on FCT, CMT and Starhill Global Reit to "hold", while its rating for SPH Reit now stands at "fully valued".

Within the industry, its preferred picks include MCT, which it has a "buy" call on, along with a target price of S$1.90, given its diversified exposure.

The research team also has a "buy" rating on Lendlease Global Commercial Reit, with a target price of S$0.94 citing its "bombed out valuation". Lendlease Reit fell 2.5 cents or 4.8 per cent to S$0.495 on Thursday.

On a positive note, DBS has estimated that interest coverage ratios of most retail S-Reits will remain above bank covenant levels of 1.5 to two times. This is even if Ebitda - a measure of operating profit - falls by 50 per cent.