Singapore Retail REITs - CGS-CIMB Research 2020-06-01: Some Light At The End Of The Tunnel


Singapore Retail REITs - Some Light At The End Of The Tunnel

Some light at the end of the tunnel

  • While rental reversion and occupancy rate remain uncertain, we think that the industry now has more visibility as compared to a month ago with the economy reopening plans being announced while the cash grant from the government for qualifying SMEs could help to lessen the REITs’ burden.
  • In a surprise move, the Minister of National Development has also said that Singapore may be able to enter into phase 2 earlier than expected before end-Jun. If this materialises, it would be big positive news for the retail REITs.
  • Our previous survey showed that majority of Singaporeans is looking forward to returning to the malls once they reopen. See Singapore Stock Strategy - CGS-CIMB Research 2020-05-22: Debunking Lockdown Myths.
  • While reopening timeline may be shorter than expected and as the government will be dishing out additional cash grant to the qualifying SMEs, we believe there may be a need for slightly more rental assistance to
    1. support tenants during the recovery phase, and
    2. fulfill the mandatory 2-month rental waiver for qualifying SME tenants.
  • Based on our sensitivity analysis, every additional 0.5 months of rental rebate will reduce our FY20F DPU by 6% to 8%. In addition to three months rental rebates, we have also imputed 2-3% y-o-y occupancy rate decline and rental reversion in FY20 into our models previously. Assuming that retail landscape is worse than our current assumptions with rental reversion declining by 5% in FY20 and FY21 (current assumption: FY20F: -2% to -3%, FY21F: 0%) and occupancy rate to fall by 5% pts in FY20 and flat in FY21 (current assumption: FY20F: -2% to -3%, FY21F: 0 to +2.6%) while providing 3.5 months of rental rebates, our FY20-21F DPU will decline by 3-10%.
  • The REITs have so far only announced less than 2.5 months of out-of-pocket rental rebates. Based on latest actual financial yearend numbers, our analysis showed that retail REITs can survive 6-7 months of rental-free period before dipping into losses. Coupled with the cost-saving initiatives, we believe the REITs could ride through the tough period in FY20.
  • We retain our ADD calls on CapitaLand Mall Trust (SGX:C38U), Frasers Centrepoint Trust (SGX:J69U), SPH REIT (SGX:SK6U), Starhill Global REIT (SGX:P40U) and HOLD on Mapletree Commercial Trust (SGX:N2IU). We like

Impact from the continuous mall closure after circuit breaker has been partially taken care of

  • On 18 May 2020, the government announced that it will be reopening the economy progressively in three phases. During this initial announcement, the government expects phase 1 when the malls will still be largely closed, to last for few weeks. Most shops are only allowed to open in Phase 2 which we had expected to only happen in Aug. However, on 28 May 2020, the minister of National Development said that Singapore may be able to enter phase 2 before end-Jun.
  • If the earlier entry into phase 2 materialises, it would be big positive news to the REITs as tenants can start operating. Hence, the REITs may not need to fork out as much rental rebates as initially planned.
  • However, if this does not materialise and phase 2 only happens in Aug, we do not expect large impact on the REITs as the retail REITs have to-date provided
    • full rental rebates for most of the tenants for the months of Apr and May, and
    • some rebates for the month of Jun and Jul 20.
  • Hence, the potential impact of the closure during phase 1 even until end-Jul has been partially taken care of.

Government’s additional 0.8 month cash grant to SMEs helps to reduce the burden of the REITs

  • The government will be giving out cash grant of 0.8 months of rent to SMEs which will be automatically disbursed to property owners from end-Jul 2020. Landlords are then required to pass on the benefit to their SME tenants. According to Singstats, 99.5% of enterprises in Singapore are classified as SME which is defined as enterprises with operating receipts of not more than S$100m or employment of not more than 200 workers for all sectors.
  • With this, we believe the majority of the tenants in the malls are SMEs. Our back-of-the-envelope calculation which assumes 80% of the malls’ revenue contribution is generated from SME tenants, the cash grant will translate into rental rebate savings of 0.6 months to the REITs.

Mandatory rental waiver bill only has minimum impact on the REITs

  • The Ministry of Law will also be introducing a new bill mandating that landlords grant rental waivers to qualifying SME tenants. If the new bill is passed by parliament, SME tenants of qualifying commercial properties who have suffered a significant drop in revenue will benefit from a total of four months of rental relief shared equally between the government and landlords.
  • In our view, this only has minimal impact on the REITs given that they have offered out-of-pocket rental rebates to their tenants even before the government planned to make it mandatory.
  • Of the retail REITs under our coverage, Mapletree Commercial Trust and SPH REIT have allocated ~2.3-2.4 months of out-of-pocket rental rebates. Hence, they have fulfilled the requirement of two months out-of-pocket rental relief. As for the rest of the retail REITs under our coverage, they have allocated about 0.8 to 1.3 months of out-of-pocket rental rebates. Hence, the mandatory rental waiver if the bill is passed will only have minimal incremental negative impact.

Expect some more rental assistance from the landlords

  • While the government’s assistance has helped to reduce the potential quantum of rental assistance that needs to be provided by the REITs, we believe that more rental assistance may be needed. We believe the REITs would provide further rental support during the recovery phase. They are also expected to fulfill the mandatory rental waiver for SMEs who have experienced substantial decline in revenue if the bill is passed.
  • Tenants which are in need of help in particular are those operating in enclosed spaces such as cinemas, theatres, bars, pubs and nightclubs as they may remain closed even during phase 2. However, the impact on the REITs is minimal as the retail REITs generally have < 3% of revenue exposure to leisure/entertainment services. CapitaLand Mall Trust’s Clarke Quay (~5% of CapitaLand Mall Trust’s revenue in FY19) which mainly consists of entertainment and F&B tenants remains as one of the most affected malls.

Which REITs have the most buffer from retained income?

  • During the last quarter’s updates, all retail REITs under our coverage cut dividend payout to retain cash for uncertainties.
  • Among the retail REITs, SPH REIT has the highest buffer as it retained 80% of the income last quarter. At 80% dividend retained ratio, it has set aside S$33.3m which is equivalent to ~1.8 months of its 2019 gross rental income and four months of its 2019 operating expenses.
  • This is followed by Mapletree Commercial Trust which retained about 60% of its income last quarter. 60% dividend retained ratio translates to ~S$44m which can be used to cover ~1.1 or 3.1 months of its 2019 total revenue and operating expenses respectively. We believe if Mapletree Commercial Trust were to utilise the retained income, most of it will go to its tenants at VivoCity. In this case, S$44m retained income could cover 2.5 months of VivoCity 2019 gross rental income.
  • CapitaLand Mall Trust and Frasers Centrepoint Trust retained 70% and 50% of dividend in the last quarter. The REITs have therefore retained enough to cover 1.1 months of 2019 revenue or 2.2 to 2.3 months of 2019 operating expenses.
  • With the retained income amounting to 1.1 to 1.8 months’ worth of revenue, the REITs have more or less covered the amount of rental rebates announced so far.

See attached PDF report for S-REITs comparison table.

EING Kar Mei CFA CGS-CIMB Research | LOCK Mun Yee CGS-CIMB Research | https://www.cgs-cimb.com 2020-06-01
SGX Stock Analyst Report ADD MAINTAIN ADD 2.240 SAME 2.240