REITs - RHB Invest 2020-04-17: A Timely Relief; Maintain OVERWEIGHT

SUNTEC REAL ESTATE INV TRUST (SGX:T82U) ESR-REIT (SGX:J91U) MANULIFE US REIT (SGX:BTOU)

REITs - A Timely Relief; Maintain OVERWEIGHT

The latest move to raise gearing threshold and deferral of interest coverage requirement is a pre-emptive move that should help REITs from an unanticipated breach of gearing limit. REITs will also have greater flexibility to manage cash flow with the extension of timeline to distribute 90% of taxable income.
Overall, the move is positive for the sector, particularly highly geared REITs. Industrial and Office REITs are our preferred sub-sector.

Maintain OVERWEIGHT, Top Picks: Suntec REIT (SGX:T82U), ESR REIT (SGX:J91U) and Manulife US REIT (SGX:BTOU).

The Ministry of Finance (MOF), Inland Revenue Authority of Singapore (IRAS), and Monetary Authority of Singapore (MAS) announced new measures to help S-REITs. Key changes are:
1. Extend the timeline for S-REITs to distribute at least 90% of taxable income from 3 months to 12 months (after the end of financial year 2020) to qualify for tax transparency. This extension only applies for FY20.
2. Raise the leverage limit for S-REITs from 45% to 50% and defer until 1 Jan 2022 the implementation of a new minimum interest coverage ratio (ICR) requirement. Last year, MAS proposed to have a minimum ICR of 2.5x before allowing to increase leverage to beyond the prevailing 45% limit (up to 50%).

The rise in gearing ceiling limit to 50% and deferral of ICR ratio is more of a pre-emptive move to prevent REITs from the unexpected breach in gearing threshold (from decline in asset value) rather than a signal to borrow cheaply for further acquisitions in our view.
S-REITs in general have been more prudent with their borrowings during the current market cycle with an average sector gearing at 35.7% and interest cover of 5.9x. Only three REITs currently have gearing of > 40% (OUE Commercial REIT (SGX:TS0U), Cache Logistics Trust (SGX:K2LU), ESR REIT (SGX:J91U)). With the increased gearing threshold limit, REITs’ asset values have to decline by 17-44% before a potential gearing limit breach, which we believe is a reasonable buffer.

Extended timeline should allow REITs to manage cash flow uncertainties arising from temporary relief provided to tenants (in Singapore Government’s Budget 2020) to defer their rental payment for a period of up to six months. As there is uncertainty in terms of the proportion of tenants that may choose to defer their rental payments, this creates a near-term cash flow mismatch in-terms of dividend payments (which are typically paid quarterly or semi-annual) for REITs.
With the latest announcement, we expect REITs to cut back on their quarterly dividends (to a more sustainable level) and distribute the remaining at the end of the year so as to meet the minimum 90% distributable income threshold.
See attached PDF report for details of S-REITs debt profiles as at Dec 2019.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-04-17

SGX Stock Analyst Report BUY MAINTAIN BUY 1.780 SAME 1.780

BUY MAINTAIN BUY 0.500 SAME 0.500

BUY MAINTAIN BUY 0.880 SAME 0.880