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What's Next for Singapore's Blue-Chip REITs?

profileSudhan P

Singapore real estate investment trusts (REITs) were seen as a go-to investment for yield-hungry investors, up until a black-swan event created havoc.

On April Fools’ Day, SPH REIT (SGX: SK6U) took the Singapore investing community by surprise when it became the first REIT to slash its quarterly distribution per unit (DPU) by 79% amid the challenges brought about by Covid-19.

The DPU cut was despite its gross revenue rising 26% for the quarter.

The retail REIT seems to have set the precedent, with other REITs affected by the coronavirus pandemic following suit, including the REITs belonging to the Straits Times Index (STI).

Those REITs are commonly known as blue-chips and they are Ascendas REIT (SGX: A17U), CapitaLand Commercial Trust (SGX: C61U), CapitaLand Mall Trust (SGX: C38U), Mapletree Commercial Trust (SGX: N2IU), and Mapletree Logistics Trust (SGX: M44U).

Affected blue-chip REITs didn’t cut their DPUs to the extent of what SPH REIT did, but they did slash their distributions.

With that, let’s look further into the latest quarterly performance of the blue-chip REITs, regulatory changes for Singapore REITs to weather through the Covid-19 storm, and finally, the road ahead for Singapore’s blue-chip REITs.

TL;DR: Zooming Into the REITs Belonging to the Straits Times Index 

Discussion points surrounding blue-chip REITs:

  • Most blue-chip REITs slashed their DPUs for their latest quarter even though gross revenue and net property income grew.
  • Singapore authorities have stepped in to ensure the survivability of Singapore REITs amid the Covid-19 outbreak.
  • Singapore’s blue-chip REITs should see through the crisis as they are backed by strong sponsors and have robust balance sheets.
  • Ascendas REIT and Mapletree Logistics Trust seem to be the least affected by Covid-19.
  • Blue-chip REITs with retail assets have been hit badly by the circuit breaker measures put in place.
  • Finally, a comparison of the valuations of the blue-chip REITs.

How Did the Blue-Chip REITs Perform Lately?

Most of the blue-chip REITs slashed their DPUs in their latest financial quarters to conserve cash amid the uncertainty brought about by Covid-19. 

CapitaLand Commercial TrustCapitaLand Mall TrustMapletree Commercial TrustMapletree Logistics TrustAscendas REIT
FigureChange year-on-year (YoY)FigureChange year-on-year (YoY)FigureChange year-on-year (YoY)FigureChange year-on-year (YoY)FigureChange year-on-year (YoY)
Gross revenueS$103.6 million3.8%S$204.3 million 6.0%S$127.3 million 12.8%S$128.1 million5.5%N/AN/A
Net property incomeS$80.3 million 0.7%S$148.3 million5.9%S$98.6 million 12.6%S$114.7 million 9.3%N/AN/A
Distributabe incomeS$63.7 million-23.0%S$31.6 million-70.3%S$30.1 million-55.0%S$77.8 million6.2%N/AN/A
Distribution per unit1.65 Singapore cents -25.0%0.85 Singapore cents-70.5%0.91 Singapore cents-60.6%2.048 Singapore cents1.2%N/AN/A

(Note: Ascendas REIT’s figures are “N/A” as its 2020 first-quarter business update did not state its gross revenue, net property income, and DPU performance.)

As can be seen, the blue-chip REITs (excluding Ascendas REIT) posted higher gross revenue and net property income for the quarter. However, only Mapletree Logistics Trust went on to declare higher DPU.

The rest of the REITs cut their DPUs as a matter of prudence, including Singapore’s largest retail REIT, CapitaLand Mall Trust (CMT).

Chief executive of the REIT’s manager, Tony Tan, shed some light about the shopping mall REIT’s challenges in its 2020 first-quarter earnings release (emphases are mine):

“CMT delivered a modest financial performance in 1Q 2020, despite an increasingly difficult operating environment since 7 February 2020 when Singapore’s DORSCON alert was raised to orange. The impact from COVID-19 is expected to deepen in 2Q 2020 due to the ‘circuit breaker’ period, during which approximately 25% of the portfolio’s tenants are operating. In view of the continuing headwinds, we have exercised prudence by retaining about 69% of CMT’s 1Q 2020 taxable income to maintain our financial capacity and flexibility. As solidarity is key to overcoming the unprecedented challenges from COVID-19, we seek Unitholders’ support while we work closely with our tenants to build greater resilience for our retail ecosystem. This is also in line with the long-term interests of Unitholders.”

It was a similar story from the other affected blue-chip REITs as well.

Regulatory Changes Surrounding Singapore REITs

To help Singapore REITs navigate the challenges posed by Covid-19, the Monetary Authority of Singapore (MAS), together with two other government agencies, have stepped in to relax some regulatory measures.

One such relaxed measure allows Singapore REITs to distribute their taxable income at a later period, instead of within three months from the end of their financial year.

REITs in Singapore have lower cash reserves since are required to distribute at least 90% of their taxable income to unitholders to qualify for tax transparency treatment. Under this treatment, a Singapore REIT is not taxed on income that is distributed to its unitholders.

The extension allows Singapore REITs to manage their cash flows better.

This also means that the taxable distributable income that has been retained by the affected blue-chip REITs could be dished out to unitholders at a later date as the REIT managers deem fit.

The Strong REITs Will Survive

REIT investing might be less-favoured now than before Covid-19 struck, especially with the DPU cuts.

However, the strong REITs will survive the pandemic.

The blue-chip REITs, especially, will be relatively unscathed due to credible sponsors backing them and well-located assets. Those REITs are sponsored by property giants CapitaLand Limited (SGX: C31) and Mapletree.

A rock-solid balance sheet will also help the blue-chip REITs tide through the current troubling conditions.

The following table highlights key balance sheet ratios from the REITs (data as of 31 March 2020):

 Ascendas REITCapitaLand Commercial TrustCapitaLand Mall TrustMapletree Commercial TrustMapletree Logistics Trust
Aggregate leverage (%)36.235.533.333.339.3
Interest coverage ratio (times)5.0
Average debt maturity (years)

All five REITs have gearing ratios of less than 40%, well below the initial regulatory limit of 45%.

Furthermore, their high interest coverage ratios (above 2.5 times that MAS is looking to put in place at a later time) and average debt maturity of more than three years put the REITs in good stead.

Not sure what most of the REIT terms mean? We’ve got you covered!

A Journey Down the Blue-Chip REITs

Among the five blue-chip REITs, the two least affected are Mapletree Logistics Trust and Ascendas REIT due to their diversified tenant base.

In its latest earnings, Mapletree Logistics Trust said that industries that are most affected by Covid-19 account for around 10% of its revenue.

On the other hand, Ascendas REIT said in its 2020 first-quarter business update that hard-hit tenants make up less than 15% of its monthly gross revenue.

One concern I have surrounding the Straits Times Index REITs over the longer term is those with commercial assets.

In what looks like telecommuting to be the new norm for workplaces, there could be lesser demand for office spaces going forward. This is something potential investors in CapitaLand Commercial Trust, especially, should look deeper into.

CapitaLand Commercial Trust’s proposed merger with CapitaLand Mall Trust could help mitigate this risk though.

The retail sector has been hit drastically by Covid-19. CapitaLand Mall Trust and Mapletree Commercial Trust (with its VivoCity asset occupying most of its portfolio) are two such affected REITs.

With social distancing measures put in place, which culminated in a circuit breaker, shopper traffic at Singapore malls has fallen sharply since the start of the year.

Source: CapitaLand Mall Trust 1Q2020 earnings presentation

The circuit breaker in Singapore began on 7 April 2020, so the recently-announced financial results from CapitaLand Mall Trust and Mapletree Commercial Trust do not take into account the heightened safe distancing measures.

We could see further financial impact from the two REITs when they announce their current quarter earnings a few months down the road.

However, things should slowly improve beyond the second quarter of this year.

With a significant decline in the daily number of new community cases and the outbreak in the dormitories brought under control, Singapore will exit the circuit breaker and resume activities in a phased approach.

Most retail outlets will not be allowed to re-open in phase one, but in phase two, retail shops will gradually lift their shutters for patrons.

The final phase, phase three, will be a state at which we will have to deal with until an effective vaccine or treatment for Covid-19 is developed.

When phase two happens, shopper traffic to the malls could claw back up again.

But it could be some time before we see shopper traffic hit the pre-Covid-19 level…

With a strong balance sheet, though, the blue-chip retail REITs are highly likely to see through the pandemic.

Valuing the Blue-Chip REITs

To end off, here’s a table showing the blue-chip REITs’ valuation:

 Ascendas REITCapitaLand Commercial TrustCapitaLand Mall TrustMapletree Commercial TrustMapletree Logistics Trust
Price-to-book ratio1.38x0.87x0.88x1.10x1.51x
Distribution yield5.2%4.1%1.8%1.9%4.4%
Unit priceS$2.99S$1.60S$1.86S$1.92S$1.83

(Note: Figures based on latest available data; distribution yield for the REITs, except for Ascendas REIT and Mapletree Logistics Trust, computed by annualising the latest quarterly DPU.)

The market’s obviously valuing the least affected blue-chip REITs — Mapletree Logistics Trust and Ascendas REIT — highly compared to the rest.

Investors who are looking to invest in them have to discern if it’s worth paying up for their quality.

Or should investors rather go for the other REITs that look less richly-valued?

It’s your pick after weighing the risks and rewards.

Have Burning Questions Surrounding The Stock Market?

Why not check out the Seedly Community and participate in the lively discussion regarding REITs!

Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. ​Readers should always do their own due diligence and consider their financial goals before investing in any stock. The writer may have a vested interest in the REITs mentioned.


About Sudhan P
It isn't fair competition when only one company in the world makes Monopoly. But I love investing in monopolies. Before joining the Seedly hood, I had the chance to co-author a Singapore-themed investment book – "Invest Lah! The Average Joe's Guide To Investing" – and work at The Motley Fool Singapore as an analyst.
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