Sharing of rent liabilities will hit office, industrial Reits more

Singapore

THE government's mandate for landlords to help small- and medium-sized enterprise (SME) tenants out with rentals is a "slight negative" for retail Reits, most analysts say. This is because most landlords have already dished out a month or more in rental relief to tenants.

A new Bill, to be introduced next week, will require landlords to provide rental waivers to SME tenants that have "suffered a significant revenue drop in the past few months". Until more details on how many tenants will be eligible for this, analysts recommend that investors stick with liquid, large-cap Reits that have strong sponsors and healthy balance sheets. Deeply discounted Reits that have already priced in negative news are also worth a look, they say.

DBS analysts Derek Tan, Rachel Tan and Dale Lai said in a report that the "worst" may be over for retail landlords, as malls will gradually re-open in July. But if the new Bill is passed, there could be a proportionally larger impact on industrial and office Reits, which will now need to offer greater rebates to tenants.

Most of the retail S-Reits have proactively given assistance ranging from 0.4 month to three months of rental rebates to tenants, on top of passing on property tax rebates to the value of about one month of rent.

The office and industrial S-Reits, on the other hand, have taken a more targeted approach with their rental relief programmes.

Several details about the Bill remain unclear, such as whether the computation for the period of rent waivers should be made from March or from April. If the rent rebates are calculated from March, DBS estimates that most retail Reits will have to cough up one to 1.6 months' of rental rebates.

There are also questions on tenants' eligibility criteria for the rental waiver. The DBS analysts said that office and industrial Reits that may have a larger proportion of SME tenants, such as Ascendas Reit, Mapletree Industrial Trust (MIT), Mapletree Logistics Trust (MLT), Suntec Reit and OUE Commercial Trust, will have to do more to help their tenants.

According to data from OCBC Investment Research, 55 per cent of MIT's Singapore portfolio are SME tenants. For ESR-Reit, the proportion of SME tenants is about 30 per cent, and for MLT's Singapore portfolio, the figure is 30 to 35 per cent.

The silver lining in the arrangement is that the new Bill should help to quantify the fixed amount of rental relief landlords need to offer. This presents some form of "closure" to the rental support scheme extended by the landlords, the DBS analysts said. "We hope that this represents the final round of rental waivers as businesses progressively start to reopen from July 2020, and recovery gathers momentum."

OCBC said the news was "potentially negative" for the near-term cash flows of affected S-Reits". But it believes that ensuring the survival of tenants would have far-reaching benefits, as any back-filling of vacancies would likely take a long time amid a global recession.

Its S-Reit picks are Ascendas Reit (fair value of S$3.52), MIT (fair value of S$2.84) and Mapletree North Asia Commercial Trust (fair value of S$1.13).

The office Reits may not have to take as big of a haircut in rents, OCBC said, as the bulk of their tenants in Singapore are multinational corporations.

Retail landlords Mapletree Commercial Trust and SPH Reit also face lower risks of having to cough up more in rental waivers, based on the rental concessions and rebates that they have already announced.

Citi analyst Brandon Lee likewise sees a mildly negative impact to S-Reits, given the already announced rebates. But he worries that additional risk-sharing policies or measures - including an extension of the Covid-19 (Temporary Measures) Act or the implementations of proposals under the Fair Tenancy Framework - may follow if there is a second wave of infections or if businesses fail to recover.

"We prefer industrial Reits and avoid retail Reits," he said. "We think the government's moves are due to the exclusion of most retail businesses under Phase 1's re-opening after June 1."

He added that some severely hit SMEs may have been reluctant to apply for a six-month rent deferral under the Covid-19 (Temporary Measures) Act because they are unfamiliar with legal terms, do not know enough about repayment plans, or are worried about late-payment interest liabilities of 1 per cent per month.

Mr Lee pointed out that there is also some uncertainty about whether or not MNC-type tenants with locally-incorporated entities are eligible for waivers, and what happens with tenants that have already deferred rents under the Covid-19 (Temporary Measures) Act.

On the whole, he estimates that SMEs contribute 20 to 55 per cent of industrial Reits' exposure and 30 to 50 per cent of retail Reits' exposure.

The worst-hit retail Reits under his coverage are Frasers Centrepoint Trust and CapitaLand Mall Trust, which would see estimated distributions per unit (DPUs) fall 11.5 per cent and 9.4 per cent respectively for every month of rent waived.

Among the industrial Reits, the DPUs of ESR-Reit, Ascendas Reit and MIT would fall by 9.9, 8.9, and 8.8 per cent respectively for every month.

CGS-CIMB research head Lim Siew Khee is also slightly negative on retail Reits, saying that the incremental impact of the Bill could be less than two months' of rental rebates on top of what they have already given out.

"It is neutral to slightly negative for office and industrial landlords as tenants in essential services remained in operation during the circuit-breaker period," she added.

The FTSE ST Reit Index added 0.05 per cent to 782.39 on Wednesday. Units of locally listed office, industrial and retail Reits traded in a range of between a 1.5 per cent drop and a 1.5 per cent increase.