It has been a very tough two months for the retail sector.
Reality hit home today when SPH REIT (SGX: SK6U) announced a reduction in distribution per unit (DPU) by almost 80%.
The REIT might not be the last one to cut its DPU.
Most malls have seen a drastic drop in footfall because of increasingly tough measures being implemented to reduce the spread of the Covid-19 virus.
As a result, tenants are witnessing sharply lower sales as fewer people are coming to shop.
In response, the Singapore Government has announced a Resilience Budget last month to support businesses through these tough times.
Retail REITs, on the other hand, have also announced tenant relief measures to defray costs for tenants and help them stay afloat.
SPH REIT slashes its dividend
In late February, SPH REIT announced that it will roll out a tenants’ assistance package to mitigate the impact of Covid-19.
The package, along with other measures such as complimentary parking and reduced operating hours, is meant to mitigate the financial stress on its tenants.
However, when SPH REIT reported its first-half fiscal year 2020 (FY 2020) earnings, it announced that the DPU would be just S$0.003, a shocking decline of 78.7% from S$0.0141 in the same period last year.
The REIT justified its action based on challenging conditions in both their Singapore and Australian malls.
In addition, SPH REIT will also extend the Tenants’ Assistance Scheme for April and May. For the most affected tenants, rental rebates of up to 50% will be offered.
Management is also considering a tenant support package for its two Australian assets — Figtree Grove Shopping Centre and Westfield Marion Shopping Centre.
REITs with tenant support measures
Other retail REITs have also recently announced tenant support measures that include rental reliefs, rebates and waivers.
On 6 March 2020, Starhill Global REIT (SGX: P40U) announced the handing out of rental rebates to qualifying retail tenants in its Singapore properties. Its main assets in Singapore comprise Wisma Atria and Ngee Ann City.
Suntec REIT (SGX: T82U) announced last week that it would be rolling out the second tranche of rental assistance that will benefit more than 97% of the tenants in Suntec City Mall. The new measures come on top of rental rebates given out earlier in March 2020.
Similarly, Mapletree Commercial Trust (SGX: N2IU) had also announced the second round of rental relief assistance worth around S$18 million to retail tenants impacted by Covid-19. Deferment of payment for the fixed rent of April 2020 will also be offered.
Finally, OUE Commercial REIT (SGX: TS0U) announced a slew of rental relief measures for its tenants at Downtown Gallery, Mandarin Gallery, OUE Bayfront, OUE Link and OUE Tower.
These include a waiver of gross rental for April 2020, flexible payment schemes and rental reductions of between 15% to 25%.
A symbiotic relationship
Investors need to realise that landlords and tenants share a symbiotic relationship.
When times are bad and tenants need help, the REITs have to step in to support their tenants.
That’s because if the tenants go bust, this fallout will also adversely impact the REIT’s rental income.
This fact explains why the REITs are going all out to support their tenants during these challenging times.
Get Smart: Brace for dividend cuts
SPH REIT has set the tone for the market by slashing its DPU.
The expectation is that many other retail REITs may follow its example by also drastically reducing their dividends.
Let’s lay it on the table now — a dividend cut is all but certain. The question is the magnitude and duration of the cut.
Should Covid-19 not subside quickly, tenants may require much more support in the coming months from their landlords.
If that happens, retail REITs may see reduced dividends until such time the Covid-19 situation is resolved.
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Disclaimer: Royston Yang owns shares in Suntec REIT.