As an investor with a very long-term focus, I usually don’t pay much attention to quarter-to-quarter fluctuations in earnings. But these are not normal times. And as someone who invests in Real Estate Investment Trusts (REITs) in Singapore’s stock market, I will be paying close attention to the following elements in their upcoming earnings announcements.
Cash flow
I suspect that REITs will continue to record the usual rental income on the income statement. However, actually collecting the cash from tenants is a different matter.
In the next earnings release, I will be keeping an eye on the cash flow statement. In particular, I’m watching the changes to the cash flow from operation.
The most important thing to look at in the balance sheet is the changes to the “Trade and other receivables” line. If that number increases disproportionately, it could be a sign that some tenants have not been able to hand over their rental payment to the REIT.
Updates on how they will help tenants
The Singapore government has stepped in to support businesses that are impacted by the COVID-19 pandemic. Restaurants, shops, hotels and tourist attractions will pay no property tax for 2020.
Property owners, such as REITs, are expected to pass these cost savings onto their tenants.
In the coming earnings update, I will be keeping my ears peeled on how the REITs will pass on these cost savings to tenants. This could be in the form of rental waivers or simply cash rebates.
SPH REIT was the first REIT to commit to helping its tenants. It said in its latest earnings announcement:
“To assist our tenants, SPH REIT will pass on fully the property tax rebates from IRAS announced by the Singapore Government on 26 March 2020, which will be disbursed in a targeted manner. On top of the Government’s property tax rebates, SPH REIT has provided further assistance to help tenants through this difficult period. In February and March 2020, tenant rebates amounting to approximately S$4.6 million have been granted to those affected tenants. This is part of the Tenants’ Assistance Scheme under which SPH REIT has rolled out to provide tenants with rent relief for February and March.
SPH REIT will extend Tenants’ Assistance Scheme for the months of April and May, for which the rebates will be granted according to the needs of the tenants. For the most affected tenants, they will be granted rental rebates of up to 50% of base rent. In addition, the full property tax rebates will be passed on to these tenants. Effectively, the most affected tenants will have their base rents waived for up to 2 months.
For tenants who are required by the Government to cease operations such as enrichment centres, SPH REIT will grant a full waiver of rental for the period of closure.”
I think this is the right way to go for REITs. Although landlords are not obliged to support their tenants through rent waivers, I think that providing some aid could be beneficial in the long term. Tenants that get support are more likely to remain a going concern and consequently can continue to rent the space in the future.
Distribution per unit
REITs are required to pay out at least 90% of their distributable income to receive special tax treatment. However, I think many of the REITs may opt to distribute much less than that in the first quarter of 2020.
SPH REIT was the first to slash its distribution per unit. It cut its distribution for the quarter ended 28 February 2020 by 78.7% despite a 12.2% increase in income available for distribution.
There are a few reasons I believe more REITs will follow in SPH REIT’s footsteps.
First, they may need the cash to tide them through the rest of the year if they foresee rental defaults or lower occupancy.
Second, as demonstrated by SPH REIT, some REITs are using their own cash to help tenants ride out this challenging period.
And third, the REIT is only required to pay out more than 90% of distributable income within the whole financial year. So REITs may opt to keep the cash first as a precaution. If the REIT doesn’t need the cash in the future, it can always distribute it in future quarters.
Updates on a rights issue
With REIT prices slashed this year, the last thing that investors want is a REIT being forced to raise money through a rights issue.
Unfortunately, this may be the case for REITs that are highly geared and that have trouble paying their interest expenses.
In addition, if a REIT’s rental yield falls, asset prices may decline and gearing levels will rise. REITs with a high debt-to-asset ratio may, in turn, have to pay higher interest rates when they refinance their loans. As such, it is possible that REITs with a high gearing ratio may choose to raise capital through a rights issue to deleverage their balance sheet.
Challenging times for REITs…
REITs are not spared in this challenging period for business.
Investors of REITs should pay close attention to the news the next few months to see which REITs are best positioned to ride out these unprecedented times.
Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.
Thank you for the write-up. Very illuminating.
My pleasure, Gobi. Thanks for stopping by.