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Singapore real estate investment trusts (REITS) rallied on 17 April, following the introduction of new rules that provided them more flexibility to deal with possible cashflow constraints arising from rent collection issues amid the Covid-19 pandemic.
REITs with the largest refinancing risks posted the strongest rally, with Lippo Malls Indonesia Retail Trust at the lead as it surged 15.67% or 2.1 Singapore cents to $0.155. It also emerged as the most actively traded REIT, reported The Business Times.
Under one of the new rules, REITs have the option to defer dividends by 12 months after the end of their financial year for FY2020, instead of the usual three months. This implies that REITs with a FY2020 ending 31 December 2020 will have up to 31 December 2021 to distribute 90% of their 2020 taxable income to qualify for tax transparency.
According to Credit Suisse Analysts Louis Chua, Terence Lee and Nicholas The, the relief would help REITs avoid the risk brought about by equity raising due to short-term liquidity pressures.
CapitaLand Mall Trust climbed 4.52%, while Mapletree Commercial Trust rose 3.39%. Both REITs have large exposure to Singapore retail tenants.
More highly geared Reits like OUE Commercial Reit, Soilbuild Business Space Reit, IReit Global, Far East Hospitality Trust, Mapletree Logistics Trust and ESR-Reit also posted single-digit gains of 2.9% or higher.
Citi Analyst Brandon Lee reckons that the hike could be a knee-jerk reaction only.
“The option to defer distributions may now shift investors’ focus to the magnitude of FY2020 to FY2021 DPU (distribution per unit) cuts . . . which we think has not been fully priced in,” he said.
“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 from the Monetary Authority of Singapore (MAS) is a permanent one. With immediate effect, REITs’ leverage limit is raised from 45% to 50% (debt/total assets).
Credit Suisse expects smaller REITs to make use of the higher debt headroom since most large-cap REITs had said over the last year that they still like to keep gearing below 45%, even if the limits were raised.
RHB Analyst Vijay Natarajan believes that the increase in gearing limit is more of a pre-emptive move to spare REITs from unexpected covenant breaches should there be another market rout, instead of a signal to allow them to borrow cheaply for more acquisitions.
“S-REITs in general have been more prudent with their borrowings during the current market cycle with an average sector gearing at 35.7% and interest cover of 5.9 times. Only three REITs currently have gearing of more than 40%. With the increased gearing threshold limit, REITS’ asset values have to decline by 17-44% before a potential gearing limit breach, which we believe is a reasonable buffer,” he said.
Meanwhile, the REIT Association of Singapore thanked the Singapore Exchange, the Finance Ministry, the MAS and the Inland Revenue Authority of Singapore for the timely support.
“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,” said the REIT lobby group.
“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.”
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Victor Kang, Digital Content Specialist at PropertyGuru, edited this story. To contact him about this or other stories, email victorkang@propertyguru.com.sg