S-Reit body warns of lower distributions in near term

But these should subsequently improve, it says in response to new Covid-19 relief moves

The Reit Association of Singapore (Reitas) yesterday cautioned that distributions to unit holders may be lower in the immediate quarters, but should improve over subsequent quarters as Singapore real estate investment trusts (S-Reits) receive the deferred rentals owed to them.

Reitas was responding to new measures announced on Thursday to give S-Reits more flexibility in managing cash flows and raising funds in the challenging environment resulting from the coronavirus pandemic.

These comprise an extension of the deadline for distribution of taxable income by the Ministry of Finance and Inland Revenue Authority of Singapore, as well as a raising of the leverage limit and deferment of new regulatory requirements by the Monetary Authority of Singapore.

Reitas had earlier this month warned that the Covid-19 (Temporary Measures) Bill may put "significant strain" on S-Reits' ability to service their financial and operational obligations, even as it acknowledged the importance of supporting tenants in the crisis. Specifically, it had flagged that the suspension of rent under the Bill will deprive a Reit of its main source of income for up to six months.

The extension of the period for the distribution of financial year 2020 taxable income from three months to 12 months will help many S-Reits by giving them more time to manage their cash flows, and to work with tenants to recover and distribute the deferred rentals granted under the Bill without the impending risk to unit holders of losing tax transparency, Reitas said.

Under the tax transparency treatment, an S-Reit is not taxed on income that is distributed to its unit holders.

However, Reitas noted that this measure offers limited relief to Reits whose FY2020 has already ended on March 31, and asked regulators to review the FY2020 timeframe so as to achieve a more balanced extension period for all S-Reits.

"For unit holders, the extension means that while distributions may be lower in the immediate quarters, these distributions should improve over subsequent quarters as S-Reits receive the deferred rentals owed to them. We underline once again the importance of adopting a spirit of shared responsibility between landlord and tenant, in agreeing both to a schedule of deferred rental and its subsequent repayment," it added.

DBS Equity Research analysts noted that the extension is "welcome relief for landlords, given the revenue-cash flow mismatch in the near term".

"The mismatch is that the calculation of tax transparency was based on accounting profits (rather than cash collected), which may pose a near-term challenge for retail S-Reits if some tenants seek a delay of their rental payments," DBS analysts Derek Tan and Rachel Tan said.

"While this comes at the expense of S-Reit unit holders in the near term, with a higher possibility of lower and/or delayed dividend payouts in FY2020, this is the 'lesser of two evils' if the alternative is a risk of deterioration in balance sheets and cash flows of S-Reits, which may require equity issuance to take place at a wrong time," they added.

Reitas also noted that the increase in the aggregate leverage limit from 45 per cent to 50 per cent is timely as it provides S-Reits with additional funding flexibility. Together with the enhanced share issue limit announced by the Singapore Exchange Regulation last week, S-Reits will be in a better position to access the debt and equity markets to assist in their capital management, it said.

"In the longer term, we believe that this measured increment in the gearing limit is a step towards creating a more level playing field with Reits in other jurisdictions, will help S-Reits compete more effectively for assets globally, as well as sustain Singapore's position as a global Reit listing hub," Reitas said.

It added that the introduction of interest cover ratio as a secondary metric from Jan 1, 2022, will provide investors with greater transparency and assurance on the ability of an S-Reit to service its debt obligations.

A version of this article appeared in the print edition of The Straits Times on April 18, 2020, with the headline 'S-Reit body warns of lower distributions in near term'. Subscribe