The past week has been kind to S-REITs which registered a 10.9% increase according to the FTSE ST REIT Index vs the 5.9% increase in the STI over the same period.
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| STI Index rose 5.9% from Monday opening (Source: Yahoo Finance) |
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| FTSE ST REIT Index increased 10.9% from Monday opening (Source: Yahoo Finance) |
While the market tends to move ahead of actual data, I believe that it also tends to be very sentiment-driven. It appears that investors took a sell-first think-later approach and are starting to find value and resilience in some of the oversold REITs. There could also have been more positive sentiment coming out of Europe regarding slowing growth in new cases and death tolls.
On the whole, REITs have gotten the reputation of being stocks with stable income-producing instruments. However, during this period we find that this may not always hold, as evidenced by SPH REIT cutting its distributions by ~80% despite having an increase in distributable income. That has set the precedence for other REITs (especially retail and hospitality) to follow. We will find out whether this is true in the coming weeks as a number of REITs announce their results. Key bell-weathers of the retail (Frasers Centrepoint Trust) and industrial (2x Mapletree REITs) subsectors could provide updated guidance on how the Covid-19 situation has impacted business. My guess is that there will be cuts in payout ratios but it may not be to the extent of 80% that SPHREIT did.
Firstly, SPHREIT heavily relies on Paragon, which is in the prime shopping district, for its income. About 70% of SPHREIT's net property income is derived from Paragon. As a result of the circuit breaker and dearth of tourists, Orchard Road has become a ghost town. Therefore, it is likely that their tenants would require greater support (ie. rent abatements, rent deferments, waiver of certain A&P or service charges).
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| SPH REIT 1HFY20 NPI breakdown (Source: SPH REIT) |
For other retail REITs, they are less reliant on the prime shopping district and have more tenants classified as 'essential services' that can remain open during this period. For example, FCT's portfolio is made up of suburban malls like Causeway Point and Northpoint which tend to have a greater proportion of 'essential services'. Hence the amount of support required could be less vis-a-vis SPHREIT.
Secondly, the industrial and office REITs are not as negatively impacted by the closures in the short-term. The 3 Mapletree REITs (MCT, MLT, MINT) tend to rely on longer leases on their properties. Furthermore, their tenants' business are not directly impacted by a decline in shopper traffic or hotel stays as a result of the closures. MCT and MLT do also have a larger number of MNC tenants which would have greater financial ability to pay rents and also more far-reaching implications (ie. technical breach of debt covenants) if they do default on rents.
To sum up, the payout ratio cut by SPHREIT came as a surprise as they had higher distributable income. Looking ahead, I expect other REITs to follow suit albeit with a smaller cut due to lower exposure to the prime shopping district (for retail) and different subsector (industrial/office). Hospitality trusts are likely to have similar levels of cut or even more as tourism has been decimated during this period.
