Date: April 17, 2020
The effects of the Covid-19 pandemic is affecting all businesses including REITs. The current Circuit Breaker implemented on 7th April 2020 in order to pre-empt escalating COVID-19 infections, except for providers of essential services, all work and schooling is now done at home. Because of the sharp decline in customers and travellers and the circuit breaker implemented by the government, revenue generation is an on-going challenge for almost all sectors of the economy. This is severely impacting the revenues of tenants of REITs. As REITs depend on the rental income from its tenants, any cash flow issues experienced by its tenants may negatively impact the revenue of the REIT.
Impact of Covid-19 measures on REITs
In addition, a new Bill introduced recently to help businesses during this unprecedented time, gives businesses a reprieve from contractual obligations, including rent payments can put significant strain on landlords’ finances. The suspension of rent under the Bill potentially could deprive a REIT of rental of income for up to six months.
As part of the stimulus package, the Singapore government has increased the property tax rebates for 2020 to 100% for qualifying commercial properties including hotels. Landlords are required to pass through the property tax savings to tenants. Landlords, including REITs, are required to immediately off-set their tenants rents with the property tax savings announced in the budget to combat the effects of the Covid-19 pandemic. Some REITs, especially the retail REITs, have also rebated back to tenants partial deposits to off-set their immediate rentals. The effect of all these will mean that cash flows of REITs will be impacted coupled with a mis-match of the timing of cash flows. Some REITs will find that they would be hard pressed to pay out dividends at the usual periods due to the cash flows mis-match.
REITAS has also cautioned that the low rental cash flow would in turn affect the REIT’s ability to service its own financial and operational obligations, and the stress is made more acute by REITs having to pay out 90 per cent of their annual distributable income in order to qualify for tax exemption.
In addition, the interruption of revenue may lower a REITs’ financial standings in terms of metrics such as leverage, capital adequacy and valuation, leading to financial problems for the REIT, such as higher borrowing costs and difficulty in obtaining both debt and equity capital, at precisely the time when it may be critically needed. Some REITs had experienced significant challenges in servicing their debt during the Great Financial Crisis.
Typically REITs have no reserve as they have to distribute a minimum of 90% of their income in dividends in order to enjoy the tax benefits. This means that during a crisis like this, where cash flows are impacted, they do not have the reserves to tie them through. They will have to resort to other means like borrowings and rights issues to shore up their cash.
Extension of Permissible Period for Distribution of Taxable Income
MAS announced yesterday providing extension to 12 months after the end of a REIT’s financial year 2020 for it to distribute at least 90% of its taxable income to qualify for tax exemption. This is up from the previous 3 months and provides more flexibility for REITs to manage their cash flows. While this move will help provide flexibility to REIT managers to manage their cash flow, however, many retail investors invest in REITs for the certainty of income they provide. Many retirees depend on these dividends for their income.
In addition, many retail investors have already suffered, with the fall in REIT share prices, and some have also had to contend with margin calls on their position(s). Therefore, in delaying the distribution of taxable income to the end of the qualifying period would greatly affect the income of some of these investors, who depend entirely on the dividends of REITs to meet their living expenses. Therefore, SIAS calls on REIT managers to help these shareholders by continuing to distribute dividend, if their cash flow position allows them to do so and not wait till the end of the 12 months, after taking into account the measures the government has in place.
Higher Leverage Limit and Deferral of Interest Coverage Requirement
It is timely that MAS has reviewed the leverage limits for REITs and increased it to 50%. This will provide REITs with the flexibility to manage their needs during these unprecedented time. However, REITs should be prudent in their borrowings despite the low interest environment.
Caution for retail investors
As the share price of Singapore REITs have fallen, given the current pandemic, the calculated distribution per unit (DPU) of investing in a REIT right now has improved significantly and would attract some investors to invest in them. However, since 1Q results have not been released and the effects of the pandemic may linger for months, there is very little information to know how DPU may be affected given the impact of the measures taken to fight Covid-19.
Each REIT would face this current COVID-19 situation differently. SIAS calls on all REIT Managers to actively engage their shareholders to explain how the current situation is impacting their cash flow, and how each REIT manager is managing the situation, so that shareholders can understand the situation adequately.
Founder, President & CEO
Securities Investors Association (Singapore)