Things haven’t been this bad for REITs since the Global Financial Crisis (GFC) back in 2009.
Yes, I am talking about how the COVID-19 pandemic last year had slammed into the majority of REITs like a tsunami.
The REIT model has always been predicated on two aspects: the demand for scarce real estate and the ability of the REIT to roll over its debt when it comes due.
During the GFC, we saw the latter come under pressure as the financial system seized up.
Some REITs had problems refinancing their loans and had to resort to highly-dilutive rights issues to shore up their balance sheets.
The situation is different today.
The world is slowly finding its feet as it recovers. The demand for real estate may remain tepid as companies adapt their operations to cope in a post-pandemic world..
Faced with this prospect, will 2021 be a great year for REITs?
Or could we see more of the same problems that beset REITs last year reappearing?
Easing of restrictions
A sustained recovery for REITs will depend on the easing of restrictions on movement in badly-affected countries.
Singapore has seen tenant sales at suburban malls return to almost pre-pandemic levels as the country enters Phase III of its reopening, thereby providing some relief to retail REITs such as Frasers Centrepoint Trust (SGX: J69U).
However, the same can’t be said for the US or Europe which are still grappling with record levels of infection as the coronavirus runs rampant.
The closures and lockdowns arising from the rapid spread of the virus have resulted in businesses being continually impacted by drops in demand amid job losses and plunging incomes.
With a wide swath of businesses affected, demand for retail, office and industrial space will continue to be impacted.
Until such restrictions are eased, REITs that have assets in the affected countries should continue to face financial stress.
Investors should note that a few REITs have also announced the restructuring of their leases with tenants to achieve a win-win scenario.
No doubt, this will crimp the REIT’s distribution per unit (DPU) as these leases will result in a lower level of rental income, thus impacting the level of distributable income for the REIT.
For instance, Ascott Residence Trust (SGX: HMN) recently entered into new master lease amendment agreements to revise the rent structure for its properties in France.
First REIT (SGX: AW9U), an Indonesian healthcare REIT, also announced a major restructuring of the master lease agreements of its Indonesian hospitals. This was also followed by a highly-dilutive rights issue.
Even Tony Tan, the CEO of CapitaLand Mall Trust (SGX: C38U), one of the REITs managed by CapitaLand Limited (SGX: C31), had said back in July last year that the REIT was considering flexible lease structures that spread out the risks more fairly between landlord and tenant.
For these and similar REITs, investors need to assess if these revisions in rent have a long-term impact on the ability of the REIT to sustain its DPU.
An acquisition spree
On the flip side, there have been numerous REITs that have gone on an acquisition spree last year.
Fuelled by cheap debt and the raising of the leverage limit to 50% by the Monetary Authority of Singapore, these REITs have tapped on borrowings to acquire quality assets to improve the composition of their portfolios.
Investors can also look forward to an uplift in DPU.
Some recent examples include the acquisition of Keppel Bay Tower by Keppel REIT (SGX: K71U), the purchase of two freehold office buildings in San Francisco by Ascendas REIT (SGX: A17U), and Mapletree Logistics Trust’s (SGX: M44U) billion-dollar acquisition of 25 logistics properties.
Get Smart: Stick with the stronger REITs
The verdict is clear.
As the pandemic is not over yet, investors should stick with the stronger REITs that have managed to hold their own.
Those backed by strong sponsors are prime candidates for consideration, while REITs such as Parkway Life REIT (SGX: C2PU) and Keppel DC REIT (SGX AJBU) have both managed to raise their DPU in a difficult year.
2021 promises to be a good year for REITs that have the characteristics to remain at the top of the league, while investors need to be wary of those that continue to face significant stress.
Choose your REITs wisely, and you will stand to enjoy many years of great dividends from them that can fund your retirement.
As Singapore sees the light at the end of the pandemic’s dark tunnel, we want to be there to capture the opportunities that recovery brings.
Start the year off right, and make 2021 a more profitable year for your investments.
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Disclaimer: Royston Yang owns shares in Keppel DC REIT.