Singapore Retail REITs - CGS-CIMB Research 2020-04-14: Sailing Against The Tide 


Singapore Retail REITs - Sailing Against The Tide 

  • We believe the market has priced in near-term disruptions from Covid-19.
  • We do not foresee a near-term shortfall in cash or debt refinancing issues.
  • We prefer CapitaLand Mall Trust (SGX:C38U), given its strong balance sheet and minimal forex exposure.

Performance during the GFC was relatively solid

CapitaLand Mall Trust remained resilient during SARS.

  • CapitaLand Mall Trust (SGX:C38U) was the only retail REIT listed during the SARS period in 2003. A check on its financials then showed that the SARS outbreak had minimal impact on CapitaLand Mall Trust as its same-store revenue and NPI increased by 5.7% and 3.1% y-o-y, respectively in FY2003. Rental reversion also ended 2003 at a decent +6.2%.

Top and bottomline continued to grow during the GFC.

Occupancy rate remained high during the GFC.

  • Retail REITs’ occupancy rates remained high during the GFC, at mostly 99-100%. Frasers Centrepoint Trust — the only REIT that reported its actual occupancy rate (others reported only committed occupancy) — saw a slight occupancy decline in 3Q-4Q2008 before rebounding back to 93% in 1Q2009.

Rental reversions remained positive during the GFC.

  • While CapitaLand Mall Trust’s rental reversion slowed substantially, from an average of +9.7% in 2008 to an average of +0.8% in 2009, Frasers Centrepoint Trust, which had only suburban malls, continued to post a solid double-digit rental reversion of 12.5% in 2009.

However, retail REITs are expected to be harder hit by the Covid-19 outbreak vs. SARS and GFC

  • Covid-19 has now infected ~1.9m people, with some 114k deaths globally, and many countries have closed their borders in a bid to contain the spread of the virus. These measures are way more drastic compared with the SARS period, when measures imposed were mostly confined to quarantines and body temperature checks. The weak shopper traffic and the recent measures from the government would place significant pressure on the retail REITs’ cashflow. The deferment of rental payment will also increase default risk.
  • During the SARS period, Singapore tourist arrivals declined by a high of -70% y-o-y in May 2003, with a 20% y-o-y full-year decline in 2003. The GFC had a much lesser impact on tourist arrivals, which declined by a high of only -15% y-o-y in Feb 2009; full-year arrivals were down by 4.3% y-o-y in 2009.

Revising forecasts downwards

  • Given the weak shopper traffic and tightening measures from the government, we reduce our FY20-21 DPU forecast for retail REITs by -3% to -22%. This factored in:
    1. 3 months of rental rebates (including 100% property tax rebate) to 90% of its tenants in 2020, which is higher than the announced 1-2 months of rental rebate by the REITs so far. In view of the rising Covid-19 cases, we believe that more support may be needed.
    2. 90% of its variable income to be wiped out for the rest of the year (9 months’ impact) and 50% reduction in carpark income in 2020.
    3. -2% to -3% rental growth in 2020 and flat rental growth in 2021, as we believe it is difficult to push for higher rent under the current environment as tenants will be reluctant to pay higher rent next year.
    4. 0-3% pts reduction in retail occupancy rate in 2020 as some tenants opt to cease business.
    5. Lower marketing and maintenance expenses as REITs cut down on non-essential expenses in 2020.
  • For REITs with office exposure, we have imputed a -2% to -5% rental growth and reduced occupancy rate by 2-5% pts as we expect the operating environment to get tougher in 2021. While our base case is 3 months of rental rebates, we do not discount that the REITs will be giving more than 3 months of rebates. Based on our sensitivity analysis, every 1 month addition/reduction in free rental will impact our FY20F DPU forecast by +/-3% to 16%.

Valuations have likely priced in fundamental downside

  • Over the past 1 month, the REITs’ share prices were beaten down more than the general market due to a combination of outperformance in the past before the selldown and an unwinding of leveraged positions in the REITs. See S-REITs Share Price Performance.
  • The FTSE Straits Times Index (STI) was down 22% YTD, while the FTSE ST Real Estate Investment Trusts Index (FTSREIT) dropped 25% YTD. The retail REITs’ share prices declined by 31% to 43% YTD, underperforming the two indexes as the sector bore the direct impact from the Covid-19 outbreak.
  • As of 7 Apr, the retail REIT sector is trading at close to a 5.6% DPU yield spread, 1.5 s.d. below its long-term mean, and 0.8x P/BV, 1.5 s.d. below the long-term mean. Assuming the REITs’ valuations decline by 10%, all retail REITs under our coverage (except Mapletree Commercial Trust) will still be priced at below 1x P/BV, which indicates that the market may have already priced in the potential fundamental downside risk.
  • Of the retail REITs listed during the GFC under our coverage, CapitaLand Mall Trust is trading nearest to its GFC trough. It is also one of the stocks that declined the most from its long-term average P/BV.

Impact of deferred rental payment is manageable if limited to 6 months

  • The REITs are currently giving 1-2 months of rental rebates to their tenants. This includes about 1 month of property tax rebate given by the government. In addition to the 2 months of rental rebate, which will mostly be disbursed out in Apr and May, some REITs are also offering cash security deposits to tenants to offset 1 month’s worth of rental payment.
  • Depending on whether or not the deposit is used to offset rental payment, the number of months of rental rebates, as well as when the rebates be given out, the government’s new law on rental payment deferment will only have a potential cashflow impact of 1-2 months on the REITs, after accounting for about 2-3 months of deposit in the hands of landlords. However, if the new law is extended beyond 6 months, we foresee more default risks from the tenants, which will, in turn, affect the landlords’ cashflow.

Credit metrics improved since GFC; debt-servicing ability is strong

  • Since the GFC, the REITs have been conservative when it comes to gearing, with most REITs under our coverage having a gearing level of < 37%. Current interest coverage has also improved vs. the GFC.
  • The REITs generally have debt covenants of 60-90% LTV ratio, 1.5x interest coverage and gearing limit of 45%. Based on our estimates, the REITs’ asset values need to be written down by 10-40% and 20-34%, before hitting the assumed LTV ratio of 65% and regulatory gearing limit of 45%, respectively.
  • The REITs can also sustain 8-10 months of rental-free period (to 90% of their tenants) before hitting the 1.5x interest coverage debt covenants, although we think this risk would be higher in the event that most of their tenants opt to defer rental payments for > 6 months.
  • Most of the REITs under our coverage already have bank facilities in place for the refinancing of debts due in 2020. With all of the REITs having unencumbered assets, we believe refinancing should not be a concern.

REITs are likely to conserve cash

  • We believe that REITs are likely to conserve cash this year. We think that the REITs are likely to lower their dividend payout ratio in the next 1-2 quarters, with more dividends to be paid out at the end of the financial year when there are more certainties.
  • The REITs could also opt to pay a higher portion of their REIT management fees in units vs. cash. The REITs generally have not been paying much of their REIT management fees in units; this gives them more room to manoeuvre when they need more cash.

Any equity fundraising would be more of a cautionary move

  • During the GFC, many REITs entered into equity fundraising in 2009 due to the credit crunch and deterioration of asset value. CapitaLand Mall Trust’s gearing shot up from 35% in 1Q2008 to 44% in 2Q2008 due to acquisitions. In 2Q2009, the REIT saw its property value written off by 2.5% (vs. end-2008) while at the same time it has 31% debt due in 2009. To bring its gearing lower, CapitaLand Mall Trust did equity fundraising in 2Q2009, which lowered its gearing from 43% in 1Q2009 to 33.4% in 2Q2009. Starhill Global REIT also did equity raising in 1QCY09, which enabled the REIT to maintain its gearing at below 33%, despite the fast devaluation of its assets due to the large valuation gain in 2007 (+18% y-o-y).
  • However, this time round, we believe any near-term equity fundraising would be a pre-emptive move to avoid hitting debt covenants and in anticipation of asset value write-off, rather than an immediate need. A prolonged impact from Covid- 19 would increase the probability of equity fundraising calls.
  • In addition to the stronger balance sheet (as compared with during the GFC), we estimate that the REITs’ cash and cash equivalents are sufficient to fund at least 3 months of operating expenses, assuming a 20-30% y-o-y reduction in maintenance and marketing expenses.
  • The REITs also have revolving credit facilities in place, and we believe they have been drawing down aggressively. We analysed that the REITs have sufficient room to draw down more from their revolving credit facilities. Assuming a drawdown limit based on 40% gearing and 10% property devaluation, the REITs still can draw down enough to fund 0.4x to 5.7x of their FY20F operating expenses, including interest expense.

Prefer REITs with strong balance sheet and less forex exposure —CapitaLand Mall Trust

  • Following our DPU revisions, we
  • Mapletree Commercial Trust's share price has been supported better than the other REITs. Starhill Global REIT is currently trading at 0.52x P/BV (vs. its long-term average of 0.8x); our Target Price implies 0.80x P/BV, which may have already priced in the potential risk of asset devaluation. The situation remains fluid, and it is difficult to predict income with certainty. In this situation, we prefer REITs with a strong balance sheet and less forex exposure. Based on these criteria, CapitaLand Mall Trust stands out among its peers.
  • None of CapitaLand Mall Trust’s assets are secured, vs. its peers (ex. Mapletree Commercial Trust, which is also 100% unencumbered), which have 16-76% of their total property values unencumbered. With 100% unencumbered assets, CapitaLand Mall Trust is tied to fewer debt covenants and has a lesser risk of refinancing its debt, compared with its peers, we believe.
  • 82% of CapitaLand Mall Trust’s debt is on a fixed rate vs. its peers’ fixed-rate debt proportion of 53% to 89%. Starhill Global REIT has the highest portion of fixed rate debt at 89%. CapitaLand Commercial Trust (SGX:C61U) has also refinanced its debts due in FY20, while most of its peers are still discussing with their bankers, although they have no concerns of non-refinancing.
  • Based on our estimates, CapitaLand Mall Trust’s cash balances could finance about 10 months of operating and interest expense obligations. In conserving more cash, aside from reducing the non-essential operating expenses, CapitaLand Mall Trust can also opt to pay out its REIT manager’s management fee in units (the REIT has been paying the fee fully in cash). The REIT also has room to draw down on its credit lines to cover its operating expenses. Based on our analysis, CapitaLand Mall Trust could draw down additional debt to cover 3.9x of its FY20 operating expenses at 40% gearing and assuming a 10% decline in property valuation.
  • CapitaLand Mall Trust is currently trading at 0.8x P/BV, which has priced in a > 10% of asset devaluation, based on our estimates. We reiterate ADD on CapitaLand Mall Trust, based on a lower DDM Target Price of S$2.24. With its strong balance sheet, we believe the REIT could sail through the tough times and emerge stronger later. Its potential merger with CapitaLand Commercial Trust (SGX:C61U) would further enhance the stability of the group and put it in a better position to grow via acquisitions and asset enhancement initiatives (AEIs).
  • See S-REITs Share Price Performance.

EING Kar Mei CFA CGS-CIMB Research | LOCK Mun Yee CGS-CIMB Research | https://www.cgs-cimb.com 2020-04-14
SGX Stock Analyst Report ADD MAINTAIN ADD 2.24 DOWN 2.750