The government’s new measures for S-REITs are predicted to benefit those trusts in numerous ways, which will enable them weather the COVID-19 storm at case its effect will linger longer than anticipated, according to several analysts’ notes.
The worst-hit would be the seven retail-focussed S-REITs since they averaged a 29.2% crash YTD.
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Over precisely the exact same time, the FTSE ST REIT Index fell 19.8%, in accordance with the typical 22.2% decrease among global REIT indices.
“[The] extended deadline should permit REITs to control cash flow doubts arising from temporary aid supplied to tenants (from Singapore Government’s Budget 2020) to reevaluate their rental fee for a period of around six weeks,” stated Vijay Natarajan, analyst in RHB.
Additionally, Derek Tan, analyst at DBS Group Research, stated that while some S-REITs have implemented or might be contemplating waits in their own quarterly dividend payouts, the expansion of this deadline to satisfy tax transparency requirements will probably provide them greater flexibility and less urgency to increase funds in a more conducive equity or debt market atmosphere.
“We notice that this is very likely to be one-off given the extraordinary conditions,” Tan added.
However, analysts cautioned that this will produce a near-term money flow mismatch concerning dividend payments, no thanks to this uncertainty in the percentage of renters who may opt to defer their lease payments.
The other danger is that the transfer is at the cost of S-REIT unitholders at the long run with a greater chance of delayed or lower dividend payouts in FY2020.
No desire for acquisitions
The increasing of this aggregate limitation (gearing) to 50% from 45% is unlikely to prompt S-REITs’ acquisition desire since they’re anticipated to concentrate on procuring their portfolios’ returns. These movements are also not expected to be encouraged by banks and investors.
“The increase in gearing ceiling limitation to 50% and deferral of ICR ratio is more of a preemptive move to prevent REITs in the sudden violation in gearing brink (from decrease in asset value) instead of the usual sign to borrow cheaply for additional acquisitions in our perspective,” RHB’s Natarajan said.
He added S-REITs generally are prudent with their borrowings throughout the present market cycle with a mean industry gearing at 35.7% and interest of 5.9x. Just 3 REITs now have standing of 40%. “Together with the enhanced gearing threshold limitation, REITs’ strength values need to decrease by 17-44% in front of a possible gearing limit violation, which we think is a sensible buffer,” he said.
In terms of the delay in executing the new ICR necessity to 1 Jan 2022, DBS’ Tan expects it to offer safeguards against poor overleveraging and will reap unitholders, even as some assert that greater gearing might reap S-REITS with too high of a cost of equity funding.
“We discovered that ICR rates of 2.5x are generally greater than average lender covenants of 1.5x-2.0x but that comprises the calculation of endless coupons (or interest) from the calculation. Therefore, this removes the probability of S-REITs”double-dipping” to the high standing headroom as perpetual securities are counted as equity instead of debt, according to accounting principles,” he explained.
Therefore, tighter ICR ratios can shield S-REITs against over leverage, along with the low interest environment might not be representative of a”normalised” ICR ratio if interest levels normalise at the longer term.
“We notice that many REITs have a fantastic buffer in fulfilling the projected gearing limit and minimal ICR after earnings reductions,” Tan commented.