I have talked about a possible rights issuance for REITs in my last article here. However, with the recent new measures rolled out by the Ministry of Finance (MOF) and Inland Revenue Authority of Singapore (IRAS), a lifeline has been thrown to REITs in general.
- MOF and IRAS will extend the timeline for REITs to distribute at least 90% of their taxable income from 3 months to 12 months (after the end of FY2020) to qualify for tax transparency, allowing for more flexibility in managing their cashflows.
- MAS will raise the leverage limit for REITs from 45% to 50% with immediate effect, allowing for flexibility in managing their capital structure.
- MAS will defer the implementation of a new minimum interest coverage ratio (ICR) requirement to Jan 1, 2022. In a public consultation last year, it had proposed to require REITs to have a minimum ICR of 2.5x before they are allowed to increase their leverage from the prevailing 45% limit up to 50%.
Since the release of these new measures as mentioned in summary above, REITs have rallied on average 11% across the board as this alleviated fears of REITs being able to refinance their debt, potential decline in asset values and a need to raise capital and lower gearing through a rights issuance as discussed in our previous article.
These measures will definitely alleviate the pressure on retail/commercial REITs in the near term, however, one has to bear in mind that measures such as the 6-month deferment of rents it is simply a DEFERRAL and not a waiver. Furthermore, with the new extended Circuit Breaker of an additional 1 month, this would mean a further loss of revenue for these retail stores.
While there are risks for industrial rents as well, I have the view that it would be not as significant as industrial rents have not moved up much in the first place. Furthermore, looking at supply numbers and WALEs, this would further show how industrial REITs may weather this crisis much better.
New supply is going to be coming online lesser than the past especially in the warehousing sector. Looking at the 3 charts below, one would notice how supply is coming off. I have talked about the capital cycles in previous articles, on how it is much easier forecasting supply numbers than demand numbers here.
WALEs otherwise known as weighted average lease to expiry, measures the likelihood of REITs’ properties portfolio being vacant. The higher the WALE, the longer the duration of the average tenancy agreement. Industrial REITs such as Keppel DC REIT has a WALE of approximately 7.5 years, greater exposure to e-commerce/data centre tenants who would find it harder to be asking for a rental waiver since they have not really been affected during this COVID crisis.
While I understand that REIT share prices have moved affecting dividend yields, I will be once again sending out the list of REITs and their current debt levels & dividend yields to my subscribers this Sunday. Investors interested in getting their hands on this list would just need to fill up their details in the google sheet below! For those who have already signed up before, you will automatically be on the list already!