S-REITs given a lifeline with extension of timeline for distributing 90% income and higher 50% leverage limit

I talked about the potential dividend cut of 48% for S-REITs in the previous article.

And I said that there’s a risk that S-REITs may fail some of the criteria.

First, due to lower income and relief to the tenants, REITs may have to cut their dividends to survive the cash flow crunch. But that may lead to their inability to fulfil the 90% distributable income requirement to qualify for tax transparency.

Second, property valuation may come down and this would increase the gearing ratio even if the REITs do not increase their debt, thereby increasing the risk of breaching the 45% gearing ratio limit.

And I said that rules can be changed:

Rules are set by humans and can be altered if they do not make sense anymore, especially in extreme situations like Covid-19. So I believe the rules for REITs will be relaxed if needed, albeit temporarily.

Truth be told. Monetary Authority of Singapore (MAS) acted faster than I expected, announcing a suite of rule changes for S-REIT on 16 Apr 2020.

#1 – S-REITs have 1 more year to meet the 90% distributable income to qualify for tax transparency

This rule change is necessary to help REITs with their cash flows. SPH REIT was the first to announce dividend cuts to conserve cash. Without this rule, REITs might have to pay taxes for failing to distribute 90% of their income.

REITs now can delay FY2020’s distribution by a year. This means that REITs with their FY ending on 31 Mar 2020, 30 Jun 2020, 30 Sep 2020 and 31 Dec 2020 will only need to meet the 90% distribution by 31 Mar 2021, 30 Jun 2021, 30 Sep 2021 and 31 Dec 2021 respectively.

Here’s a list of their deadlines for 90% income distribution (excluded Lendlease REIT, Elite Com REIT and Utd Hampshire REIT as they are recent IPOs):

#2 – Increase leverage limit from 45% to 50%, and defer the Interest Coverage Ratio requirement

This rule is to create more debt room for REITs in case they need additional funding to boost their cash flows.

There are currently 3 REITs (ESR REIT, Cache Log Trust and SoildbuildBiz REIT) which have gearing ratio of 40% or more. The increase in debt room would help. But if it isn’t sufficient, they can also issue rights as SGX Regco has increased the limit of equity issues up to 100% of the share capital.

MAS’s original intention was to couple the increased leverage limit with a minimum Interest Coverage Ratio (ICR) of 2.5. This is to ensure the REITs can generate sufficient income to pay interest.

MAS decided to delay implementing the ICR. Most of the REITs have been able to cross the minimum ICR of 2.5, some more comfortable than the others.

Dasin Retail Trust and Sabana REIT failed the ICR at 1.1 and 2.3 respectively. Mapletree NAC Trust and Suntec REIT just barely passed the ICR at 2.5 and 2.9 respectively.

Here’s the table of REITs and the respective data that are relevant to the announced changes. Some caveats too

• Excluded Lendlease REIT, Elite Com REIT and Utd Hampshire REIT as they are recent IPOs
• ICR was taken from the respective REIT’s presentations. Asterisks indicate that those were taken from Shareinvestor.com as ICRs were unavailable from the REITs themselves.
• ICR was taken from the latest quarter and it can fluctuate in other quarters.

Name	Code	Deadline for 90% distribution	Debt-to-asset	Interest Cover
AIMS APAC REIT	O5RU	31-Mar-21	39%	5.0
ARA H Trust USD	XZL	31-Dec-21	32%	4.5
Ascendas iTrust	CY6U	31-Mar-21	29%	3.6
Ascendas REIT	A17U	31-Mar-21	38%	5.1
Ascott REIT	HMN	31-Dec-21	36%	5.6
BHG Retail REIT	BMGU	31-Dec-21	29%	6.6*
Cache Log Trust	K2LU	31-Dec-21	43%	3.8
CapitaCom Trust	C61U	31-Dec-21	28%	5.6
CapitaMall Trust	C38U	31-Dec-21	30%	4.7
CapitaR China Trust	AU8U	31-Dec-21	37%	5.0
CDL H Trust	J85	31-Dec-21	36%	6.1
Cromwell REIT EUR	CNNU	31-Dec-21	37%	8.6
Cromwell REIT SGD	CSFU	31-Dec-21	37%	8.6
Dasin Retail Trust	CEDU	31-Dec-21	36%	1.1*
Eagle H Trust USD	LIW	31-Dec-21	37%	14.2*
EC World REIT	BWCU	31-Dec-21	38%	3.9*
ESR REIT	J91U	31-Dec-21	44%	3.7
Far East H Trust	Q5T	31-Dec-21	37%	3*
First REIT	AW9U	31-Dec-21	34%	5.0
Frasers Centrepoint Trust	J69U	30-Sep-21	29%	5.9
Frasers Com Trust	ND8U	30-Sep-21	29%	5.7
Frasers H Trust	ACV	30-Sep-21	35%	5.7
Frasers L&I Trust	BUOU	30-Sep-21	38%	9.9
Frasers L&I Trust AUD	BWQU	30-Sep-21	38%	9.9
IREIT Global	UD1U	31-Dec-21	36%	10.4
KepPacOak REIT USD	CMOU	31-Dec-21	37%	4.8
Keppel DC REIT	AJBU	31-Dec-21	31%	13.3
Keppel REIT	K71U	31-Dec-21	29%	3.8
Lippo Malls Trust	D5IU	31-Dec-21	35%	4.1
Manulife REIT	BTOU	31-Dec-21	38%	3.8
Mapletree Com Trust	N2IU	31-Mar-21	33%	4.4
Mapletree Ind Trust	ME8U	31-Mar-21	31%	6.8
Mapletree Log Trust	M44U	31-Mar-21	37%	5.2
Mapletree NAC Trust	RW0U	31-Mar-21	37%	2.5
OUE Com REIT	TS0U	31-Dec-21	39%	3.3
ParkwayLife REIT	C2PU	31-Dec-21	37%	14.1
Prime US REIT	OXMU	31-Dec-21	33%	5.5
Sabana REIT	M1GU	31-Dec-21	37%	2.3*
Sasseur REIT	CRPU	31-Dec-21	27%	4.8
SoilbuildBiz REIT	SV3U	31-Dec-21	40%	3.5
SPH REIT	SK6U	31-Aug-21	30%	6.2*
Starhill Global REIT	P40U	30-Jun-21	36%	3.6
Suntec REIT	T82U	31-Dec-21	36%	2.9

Conclusion

REITs have been given a lifeline and surviving COVID-19 shouldn’t be an issue anymore. They are also in a better position to help tenants and are expected to do so. Unit holders have to be prepared for dividends to be cut in the meantime.

The dividends should come back up in 2021 given that the timeline is being extended rather than lowering the 90% distributable income requirement. That’s the saving grace for unit holders.

Some REITs that are relatively higher geared and have lower interest coverage ratios would benefit less from these changes. However, they can still tap on unit holders through rights issues if required.