Singapore Retail Landlords - DBS Research 2020-03-25: In For A Rough Ride

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CAPITALAND MALL TRUST (SGX:C38U) FRASERS CENTREPOINT TRUST (SGX:J69U) MAPLETREE COMMERCIAL TRUST (SGX:N2IU) STARHILL GLOBAL REIT (SGX:P40U) SPH REIT (SGX:SK6U)

Singapore Retail Landlords - In For A Rough Ride

• Suspension of Entertainment and Leisure businesses till end April-20 will impact overall retail scene.
• Retail landlords face operational uncertainties as malls cope with tighter measures (shorter operating hours and higher social distancing measures) or closures.
• Affected businesses may seek more help and rebates in our view.
• Sensitivity analysis: Our FY20F DPU estimates could drop by 4-13% (vs 2-4% previously) to factor in the impact of above measures.

COVID-19 updates: Stricter measures on retail malls and tenants to enforce social distancing will have a deeper impact on landlords.

• New pre-emptive measures were announced by the government on 24 March following a spike in new COVID-19 cases in the past week.
• There was a record of 54 new cases on Monday (23 March), shortly after Singapore announced the nation’s first two COVID-19 related deaths on 21 March.
• In a bid to ensure social distancing to reduce speed of community spread, the government has imposed stricter operating measures that must be strictly adhered by retail malls and retail tenants.
• Operators and tenants found to be non-compliant will incur penalties, which we suspect could be a revocation of operating licenses and/or fines.

From Thursday (26 March) to 30 April (with the potential for extension), the following measures have been imposed:

• Bars, cinemas and all entertainment outlets to be closed; this includes night clubs, theatres and karaoke outlets,
• All centre-based tuition and enrichment classes to be suspended,
• Malls, museums and restaurants to reduce crowd density to no more than one person per 16 sqm of usable space,
• Open atrium events to be disallowed within retail malls, with the exception of supermarket retailers, to disperse crowds,
• All groups (outside of work) must not exceed 10 persons.

With the closure of Leisure and Entertainment outlets, foot traffic at malls will likely fall in the coming month.

• While not all will be impacted, Leisure and Entertainment tenants will be the most impacted given the complete shutdown for a period of c.1 month. These tenants may seek further help (in terms of rental rebates, rental holiday) to assist in the affected month and beyond.
• Restaurants likely to operate at 25-30% below full capacity following social distancing measures, which includes the zoning out of alternate seats, and inability to host groups above 10 people.
• Museums and malls likely to see an even thinner crowd given the lack of tourist traffic, while subject to crowd density restrictions.
• Centre-based tuition and enrichment classes may continue operations online and conduct e-learning instead of physical classes.
• Retail malls will no longer be allowed to hold events within main atriums of retail malls.

Impact to various retail S-REITs:

• CapitaLand Mall Trust (SGX:C38U) the most impacted with the revised guidelines but landlords generally not spared.
• CapitaLand Mall Trust (4.9% sector exposure by GRI), Frasers Centrepoint Trust (SGX:J69U) (2.9%) and Mapletree Commercial Trust (SGX:N2IU) (2.9%) have the largest exposure to tenants within the leisure and entertainment trade sector with a large percentage in relation to cinemas.
• Food & Beverage tenants have been impacted since the start of the Covid-19 outbreak and will likely to see a further dip in sales with these revised guidelines, and combined with possible shorter operating hours, would face tough operating conditions in the near term.
• Based on our estimates, the Leisure and Entertainment sector represents the single largest trade sector by GRI among the retail S-REITs at 30.9%. This would hit the likes of heartland malls - CapitaLand Mall Trust (31.3%) and Frasers Centrepoint Trust (37.8%) - and also Lendlease’s 313@somerset (39.4%).
• Impact of a suspension among education tenants likely to be relatively low, as retail malls’ exposure is less than 2% (CapitaLand Mall Trust, Frasers Centrepoint Trust, Mapletree Commercial Trust).
• Our concern lies on potential for similar restrictive measures to be expanded to tenants within the beauty services sector, which would likely have an impact on all retail S-REITs across the board. Beauty services sector, which would likely have an impact on all retail S-REITs across the board. Beauty services contributes a surprisingly large percentage of gross rental income within the range of c.5.8-12.0%.

Sensitivity analysis: FY20F DPU projected to dip by 4.2- 12.3%

• Our previous sensitivity analysis estimated a dip of 1.7-5.1% to our FY20F DPU for SG-focused retail REITs assuming:
  1. Loss of GTO rents for 2 months (assumed at 5% of total revenue),
  2. Half-month rental rebate for all tenants, and property tax incentive (Budget 2020).
• After revising for the impact of the latest measures announced yesterday, we now estimate that FY20F DPU could drop by 4.2-12.9% for SG-focused retail REITs assuming:
  1. Loss of GTO rents for 3 months (assumed at 5% of total revenue),
  2. Full month rental rebate for all tenants, and property tax incentive (Budget 2020).
• See attached PDF report for sensitivity analysis details and implied dividend yield of CapitaLand Mall Trust (SGX:C38U), Frasers Centrepoint Trust (SGX:J69U), Mapletree Commercial Trust (SGX:N2IU), Starhill Global REIT (SGX:P40U), Lendlease REIT (SGX:JYEU), SPH REIT (SGX:SK6U).

Derek TAN DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-03-25

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