Singapore Retail REITs - DBS Research 2020-04-02: In For A Rough Ride

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

Singapore Retail REITs - In For A Rough Ride

• Tougher operating environment anticipated given rising consumer risk aversion on COVID-19 outbreak.
• Tighter government measures to minimise spread will keep crowds and spending away from malls.
• Proposed new COVID-19 (temporary measure) bill to lead to greater uncertainty in an already challenged sector.
• Downgrade Frasers Centrepoint Trust (SGX:J69U), CapitaLand Mall Trust (SGX:C38U), Starhill Global REIT (SGX:P40U) to HOLD,
• Downgrade SPH REIT (SGX:SK6U) to FULLY VALUED.
• Prefer Mapletree Commercial Trust (SGX:N2IU) for its diversified exposure, and Lendlease REIT (SGX:JYEU) for its bombed out valuation.

New proposed COVID-19 (temporary measure) bill to be introduced

• According to media reports, the Ministry of Law is proposing to introduce a COVID-19 (temporary measure) bill in Parliament next week.
• This new bill is targeted at providing temporary relief to individuals and companies who are unable to fulfill their contractual obligations because of the COVID-19 pandemic. These companies/individuals may otherwise risk having their assets or deposits forfeited.
• The law, if passed will broadly cover
  1. non-residential leases,
  2. construction or supply contracts,
  3. event contracts (i.e. weddings),
  4. tourism-related contracts, and
  5. certain secured loan facilities granted by a bank or finance company to SMEs.
• The proposed law will apply retroactively, and cover obligations performed on/or after 1 Feb 2020 when COVID-19 started to have an impact.
• The Ministry said the proposed law will not absolve or remove parties' contractual obligations but suspend them for a prescribed period of six months from the date it becomes law.

Not a free for all

• At this point, thresholds are not clear at this moment for tenants/individuals being able to apply for such a deferment (not waiver) in their rental obligations. To guard against unfair outcomes or applications, the Ministry of Law will employ about 100 assessors to resolve disputes arising from application of measures under the law.
• Quoting a media report, an assessor will be able to decide if the inability to perform contractual obligations was due to COVID-19, and has the power to grant relief that is "just and equitable in the circumstances". An assessor will be a professional such as an accountant or a lawyer.

Our thoughts:

• At first read, the law appears to tilt the balance towards tenants (companies and individuals) whose cashflows are impacted due to the COVID-19 outbreak. For example, if an F&B restaurant is unable to fulfill its rent obligations due to a drastic drop in revenues caused by the COVID-19 outbreak, the landlord will not be able to evict the tenant. Rents will continue to accumulate and be payable six months later.

Negative to landlords on first look

Aiming to keep businesses afloat.

• While the ethos of this bill aims to provide businesses with temporary cashflow relief to ride through the current difficult trading environment, we note that landlords will be getting the shorter end of the stick as this may negatively impact their own cashflows, especially when they have their own obligations to meet (interest costs, supplier contracts etc).

Retail business most likely to use this new bill.

• While most landlords are impacted, we believe that businesses (especially F&B) will seek shelter from this new law, if it comes to pass. We see F&B impacted more significantly especially on the back of the government’s recent advisory to avoid heading to malls to shop, and instead do online grocery shopping. F&B shops within the Central Business District (CBD) have also seen demand falling drastically as more employees (MAS ruling 75% of workers) work from home (WFH).

Minimal impact to industrial landlords, for now.

• At this moment, industrial landlords are not seeing major cracks in their arrears ratio and while there are tenants seeking for some form of rental relief, the impact is small.

Hospitality players – a fair outcome for all.

• The new law will give more leeway for event organisers who have their events (or weddings) impacted by the COVID-19 outbreak and their deposits will not be forfeited. This allows for postponement of the event rather than cancellation which the hotel will then be able to forfeit the deposit (one must still hold your wedding!)

Most landlords are doing their part

• Focusing on the retail industry, based on our discussions and meetings with various retail landlords, we understand that most landlords are already providing their own form of “stimulus package” to help tenants and most are providing additional rebates (around 2 months) to tenants. These rebates imply that most tenants will get a rental rebate for the months of Mar-May 2020.
• Landlords are also using part of the security deposits to cushion rental obligations for now.
• We understand from a landlord that it has suspended rentals for tenants in the entertainment, and tuition centre sectors which have been asked to close till April-20.

Retail landlords are reeling from recent suspension of entertainment outlets and tuition centres

• While the impact is varied on various retail S-REITs, CapitaLand Mall Trust (SGX:C38U) is the most impacted with the revised guidelines but landlords in general are not spared.
• CapitaLand Mall Trust (4.9% of gross revenue), 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 sectors with a large percentage of exposure 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 with possible shorter operating hours, may see tougher operating conditions in the near term.
• Based on our estimates, Food & Beverage represents the single largest trade sector by gross rental income (GRI) for retail S-REITs at 30.9%. This would hit the likes of heartland malls CapitaLand Mall Trust (SGX:C38U) (31.3% of GRI) and Frasers Centrepoint Trust (37.8%), and Lendlease’s 313@somerset (39.4%).
• Impact of suspension on operations of education tenants is likely to be relatively low, as retail malls’ exposure (CapitaLand Mall Trust (SGX:C38U), Frasers Centrepoint Trust & Mapletree Commercial Trust) are all less than 2% of GRI.
• Our concern lies on potential similar restrictive measures being expanded to tenants within the beauty services sector, which would likely affect all retail S-REITs across the board. Beauty services sector contributes a surprisingly large percentage of GRI in the range of c.5.8-12.0%.

Potential Risk to landlords

• Tenants/businesses may fail to recover; more help needed for landlords. The risk is that tenants/businesses may go bankrupt after 6-12 months even after rent deferment, leaving potential bad debts for landlords. This is a factor that we believe has yet to be addressed, to be fair to landlords who have their own obligations to fulfill.

Interest coverage ratio of selected retail S-REITs

• We understand that broad covenants are
  1. to maintain gearing within the MAS property fund guidelines of 45%, and
  2. to ensure that interest coverage ratio (ICR) is above 1.5x-2.0x.
• Based on our sensitivity analysis, a 25-50% drop in EBITDA will keep ICR above covenant limits, which implies that buffers are in place for most retail S-REITs.

Earnings Revisions

• Cash is king, and S-REITs may consider looking at conserving cash through lowering DPUs in the upcoming 2 quarters to be used for a rainy day. Our earnings estimates reflectThis leads us to cut DPU estimates by 18%-27%.
  1. cut in payout ratios to 90%-97% in the current financial year (FY20),
  2. 5% drop in rental reversions and 5ppt drop in occupancy rates, and
  3. rental rebates of up to 2 months (offset by 1 year of property tax rebate).
• Without the impact of a cut in payout ratios, our DPUs will be lowered by 9%-15%.
• We have accordingly revised our target prices down to reflectThis resulted in a 34% - 48% cut to TPs.
  1. higher betas given the current market uncertainty and
  2. lower 10-year yields.
• We have downgraded our calls on Frasers Centrepoint Trust, CapitaLand Mall Trust (SGX:C38U) and Starhill Global REIT (SGX:P40U) to HOLD. We have also changed our call on SPH REIT (SGX:SK6U) to FULLY VALUED.
• See
  • CapitaLand Mall Trust Share Price; CapitaLand Mall Trust Target Price.
  • Frasers Centrepoint Trust Share Price; Frasers Centrepoint Trust Target Price.
  • Starhill Global REIT Share Price; Starhill Global REIT Target Price.
  • SPH REIT Share Price; SPH REIT Target Price.
  • Mapletree Commercial Trust Share Price; Mapletree Commercial Trust Target Price.
  • Lendlease REIT Share Price; Lendlease REIT Target Price.

Read also

• CapitaLand Mall Trust - DBS Research 2020-04-02: Riding The Headwinds Together
• Frasers Centrepoint Trust - DBS Research 2020-04-02: Disruption In The Suburbs
• Starhill Global REIT - DBS Research 2020-04-02: Speedbumps Ahead
• SPH REIT - DBS Research 2020-04-02: A Long Road To Recovery

Derek TAN DBS Group Research | Rachel TAN DBS Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-04-02

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