It’s that time of the year again when companies report their financial results.
That practice will be somewhat different this year as SGX has no longer made it a mandatory requirement for companies to report quarterly results.
Because of the change in ruling, numerous companies, including blue-chip ones such as ComfortDelGro Corporation Ltd (SGX: C52), have ceased quarterly reporting.
Now that the frequency of reporting has declined, it’s all the more important for investors to sit up and pay attention to the half-year reports that companies churn out.
REITs are no exception, with many switching to half-year reporting.
But the good news is that many REITs have voluntarily chosen to provide business updates in lieu of quarterly financial statements.
These updates provide great insights into how REITs are coping with the current COVID-19 pandemic.
With the next earnings season starting in mid-July and lasting till mid-August, here are three aspects that investors should watch out for.
More tenant support measures
As Singapore exits from the “circuit breaker” measures that were imposed from 7 April through to 2 June, REITs will breathe a sigh of relief.
These measures called for the closure of all non-essential businesses, leaving malls and public places looking like ghost towns.
Retail REITs such as Frasers Centrepoint Trust (SGX: J69U), or FCT, announced the retention of 50% of its distributable income during the previous quarter to better manage the crisis.
Another popular retail REIT, Mapletree Commercial Trust (SGX: NI6U), or MCT, retained S$43.7 million out of its total fourth-quarter distributable income of S$73.9 million due to COVID-19.
As a result of these retention amounts, distribution per unit (DPU) fell sharply for both REITs.
FCT saw a 48.7% year on year fall in DPU, while MCT’s DPU fell by 60.6% year on year.
Investors should look out for further tenant support measures being announced by REITs, as this could signal lower DPU for the foreseeable future.
To date, FCT has rolled out two rounds of tenant support packages, with new measures being announced by the government on 5 June requiring landlords to co-share rental waivers for eligible tenants.
Lower occupancy rates
Due to forced closures, more tenants will suffer from financial stress.
Even with the successive waves of tenant support measures rolled out by REIT managers, some businesses may still not survive.
Certain types of tenants may be more adversely affected than others.
Retail and hospitality REITs are witnessing the sharpest negative impact as the pandemic shuts down malls and curtails travel and tourism.
Industrial and commercial REITs may face less financial stress, though some may still be somewhat impacted as supply chains are disrupted and offices start to downsize.
Investors should keep a lookout for commentary on whether occupancy rates may fall in coming quarters, and what the REIT is doing to fill the gap.
So far, occupancy rates have remained high in the last quarter for both FCT and MCT. FCT reported occupancy of 96.1% as of 31 March 2020, while MCT’s portfolio maintained 98.7% committed occupancy.
For industrial and commercial REIT Frasers Logistics and Commercial Trust (SGX: BUOU), occupancy rate remained high at 97.6%.
Negative rental reversions
A third aspect to watch out for are rental reversions.
With weaker demand for space and an economy suffering from its worst contraction since independence, tenants are likely to negotiate for lower rental rates to reduce their overall operating costs.
Some REITs may have no choice but to give in to these requests or risk losing their key tenants.
During this protracted downturn, it may be tougher for a REIT to find suitable replacement tenants.
Thus, it may make more sense for the REIT manager to accept a negative reversion rather than expend the time and effort to source for replacement tenants.
Get Smart: More pain expected, but the worst seems to be over
With all that’s been happening with REITs, many investors may question if the REIT model still works well, or whether it may be broken.
We believe that REITs with well-located, quality assets will manage to recover better than those with weaker assets.
More pain is certainly expected in the coming months as the economy convulses from the damage wreaked by the coronavirus.
However, the worst seems to be over as countries around the world start to reopen, albeit at a slow and careful pace as the pandemic is still far from over.
Investors need to remain vigilant and watchful as the economic situation remains uncertain at this point.
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Disclaimer: Royston Yang owns shares in Frasers Logistics and Commercial Trust.
