Worst COVID-19 pandemic hit S-REITs and where are they now?

The COVID-19 pandemic in many ways is unprecedented and without a doubt, it has a pronounced effect on the stock market. It has halted the longest-lasting equity bull market.

For REITs, it has also challenged the long-held notion among investors that REITs are safe investment vehicles as they are mandated to pay out at least 90% of their taxable income as dividends to achieve tax transparency.

In May 2020, as all of the retail REITs have provided rental reliefs for the tenants. 4 of the retail REITs consequently cut their Distribution Per Unit (DPU) by 49% to 78%.

5 Retail REITs Cut Dividends By 20% To 78% (read here)

In 2020, for the first time, S-REITs dropped 367.98 points which translates to a huge 37.91% collapse as the FSTE REIT Index crashed from 970.62 on 19 Feb 20 (Wed) to 602.64 on 23 March 20 (Mon), over a period of just 22 market days. This ferocious sell-down was the worst ever in S-REIT history. It broke the previous record on Oct 2008 during the midst of the Global Financial Crisis, where 34.67% in value was wiped off in a single month. Yes, the speed and the depth of the sell-off in 2020 was indeed unprecedented.

Singapore Stock Market and S-REIT Crashed! (read here)

In fact, S-REITs’ 37.91% fall on 23 March 20 is the 2nd largest fall in S-REITs’ 19 years history since the S-REIT market started in 2002. On 17 July 2002, Singapore’s first REIT made its debut. CapitaMall Trust was over four times oversubscribed with SGD 1 billion worth of investment demand, and successfully listed.

For the smart and nibble retail investor, every crisis will present opportunities, depending on how he or she positions his/her portfolio.

“Never let a good crisis go to waste”. Winston Churchill

Worst Hit REITs

Both the hospitality and retail REITs were literally at the epicenter of the pandemic-induced market crisis. The COVID-19 pandemic has led both sectors into uncharted operating territories from mid-March and till today, we are still in the midst of it.

Tourism and the aviation sectors came to a halt, hotels and retail malls were closed. With the global travel restrictions and border closures amid the pandemic, hospitality is arguably the REIT sector to bear the worst of the pandemic.

Indeed, in the Singapore market, hospitality REITs borne the brunt of the sell-off.

All 6 hospitality REITs listed on the SGX (see below) were in the top 9 worst performing REITs in the 1Q2020 list. The worst-hit being Eagle Hospitality Trust which was subsequently suspended on 24 March 2020, and its entities filed for Chapter 11 bankruptcy in the US on Jan 21.

The loss in market prices ranges from 40.60% to 74.86%. This is with reference to their prices in end of 2019. That is a lot of ‘loss’ in a few months.

Hospitality Sector (Slow recovery)

For the hospitality sector, things are still a long way from the 2019 figures (in the US), but are improving in 2021 (as compared to 2020).

Source: Video: U.S. performance results for June 2021 (https://str.com/data-insights-blog/video-us-performance-results-june-2021)

To quote this article: “Real Capital Analytics, a research firm, classified $146bn in commercial real estate assets as being in distress — or soon to be — by the fourth quarter last year. Two-thirds of that was accounted for by retail and hotels. The distressed debt pile bulged in the second quarter last year, but has since accumulated more gradually.”

Where are they now?

How nations are learning to ‘let it go’ and live with Covid (read here)

Eighteen months after the coronavirus first emerged, governments in Asia, Europe, and the Americas are encouraging people to return to their daily rhythms and transition to a new normal in which subways, offices, restaurants, and airports are once again full. Increasingly, the mantra is the same: We have to learn to live with the virus.

For me, I am coming to terms with the WFH (Work from home) arrangement and spending more time with my family. Although I do miss dining out and our weekend trips to the malls (not as often these days).

In Singapore, the city-state has reverted to Phase 2 (Heightened Alert) as restrictions tighten amid a rise in COVID-19 cases in recent days. Dining-in at food and beverage (F&B) outlets will once again be banned for four weeks from July 22, while social gatherings will be limited to no more than two persons, down from five currently.

Nevertheless, as more Singaporeans get fully vaccinated, COVID-19- related curbs will begin to be eased further next month and lift private consumption. Both these factors should encourage businesses – local and foreign – to boost investments and hiring and further power economic growth in the process.

Singapore’s strategy is to move from COVID-19 pandemic to the endemic.

Moving from Covid-19 pandemic to endemic: Singapore’s strategy and how it can unfold (read here)

Anecdotal evidence suggests that while there are ample opportunities in some industries, such as the financial and information, and communications technology sectors, job prospects remain dim in others, such as hospitality.

The stock market is always forward-looking and for the worst-hit S-REITs, their prices have recovered from the lows of March 2020 (see table below, the blue shaded column). All except for Lippo Malls Indonesia Retail Trust.

However, none of the REITs’ prices have recovered to or exceed the price levels at the end of 2019 (see table below, the orange shaded column). Prices shown are as per 23 July 21 prices, at the point of writing this post.

You can check out their stock price charts further down the post.

To many, these are the ‘re-opening / recovery’ plays. As to how risky… I shall leave it to your interpretation.

In a post-pandemic world where normalcy eventually returns, we can possibly expect hospitality and retail REITs to recover as pent-up demand for travel and leisure return. However, we are not there yet.

Ultimately, how good (or bad) a REIT is, is dependent on the property assets it holds. In addition, in the current pandemic, with the rise in vacancies rates and a projected drop in asset values, more than ever, investors are increasingly looking at their balance sheets and financial metrics such as gearing ratio and interest coverage.

The gearing ratio, also known as leverage, is the ratio of a REIT’s debt against total assets. In Singapore, S-Reits have a leverage limit of 50 percent, imposed by the Monetary Authority of Singapore (MAS). This limit was increased from 45 percent in April 2020, to provide S-Reits with greater flexibility to manage their capital structure amid the challenging environment from the Covid-19 pandemic.

MAS will defer to 1 January 2022 the implementation of a new minimum interest coverage ratio (ICR) requirement. In its public consultation in 2019, MAS had proposed to require S-REITs to have a minimum ICR of 2.5 times before they are allowed to increase their leverage to beyond the prevailing 45% limit (up to 50%). The implementation of the ICR requirement will now be deferred as S-REITs’ ICRs are likely to come under pressure in the near term due to the negative impact of the COVID-19 pandemic on their earnings and cash-flows.

Looking at the table above, the gearing ratios of ARA US Hospitality Trust, Lippo Mall Indo Retail Trust, Far East Hospitality Trust, and ESR REIT are among the highest.

In addition, most of the REITs interest coverage ratio is below 2.5 times, except for Lendlease Global Commercial Reit.

Nevertheless, these figures/ratios are ‘backward looking’ base on past data. And as in all crises, the better and stronger REITs would make use of it to emerge stronger.

1) EAGLE HOSPITALITY TRUST

Probably the worst hit for investors who are unlikely to recover their investment.

EHT is a stapled group comprising EH-Reit and the dormant Eagle Hospitality Business Trust. Its stapled securities have been suspended since March 24, 2020, after EH-Reit defaulted on a loan of US$341 million (S$452 million).

On 20 Jan 21, 27 of its entities filed for Chapter 11 bankruptcy in the United States to provide the “necessary protection for the benefit of all stakeholders”.

Eagle Hospitality Trust entities file for bankruptcy protection in the US (read here)

EH-Reit stapled security holders unlikely to see compensation from sales proceeds: trustee (Rea here)

How a Singaporean REIT’s mighty US hotel investment sunk (read here)

2) ARA US HOSPITALITY TRUST

In Feb 2021, ARA US Hospitality Trust posted a net property loss of US$3 million and no distributable income for the second half ended Dec 31, 2020, after considering fixed costs.

This came as the Covid-19 pandemic “adversely impacted” the stapled group’s portfolio performance, with a significant drop in hotel occupancies and temporary hotel closures resulting in significant declines in revenue.

ARA H-Trust had previously projected a net property income of US$31.1 million, a distributable income of US$21.1 million, and distribution per stapled security of 3.72 US cents in its initial public offering (IPO) forecast.

ARA H-Trust posts US$3m net property loss for H2; no distributable income (read here)

3) CDL HOSPITALITY TRUST

CDL Hospitality Trusts (CDLHT) on Thursday posted a 1 percent rise in net property income (NPI) in Q1 2021 ended March 31 2021 to S$19.8 million, from S$19.6 million a year ago.

Gross revenue was marginally higher at S$34 million in the first quarter of 2021, increasing by 2.8 percent year on year (yoy) from the same period last year. The muted increase was attributed to the continued effect of travel restrictions and lockdowns on the hospitality industry.

CDLHT posts 1% rise in Q1 NPI amid tentative recovery in hospitality industry (read here)

4) LIPPO MALL INDO RETAIL TRUST

The distribution per unit (DPU) for Lippo Malls Indonesia Retail Trust (LMIRT) for its first quarter ended March 31 fell 33.3 percent to 0.08 Singapore cent from 0.12 Singapore cents in the year-ago quarter.

Gross revenue similarly fell 32.8 percent year on year from S$64.93 million in Q1 FY20 to S$43.61 million in Q1 FY21. Meanwhile, gross rental income (GRI) fell 27.6 percent year on year to S$26.48 million; net property income (NPI) fell 35.2 percent year on year to S$25.78 million.

In a bourse filing on Tuesday, LMIRT’s manager said that the decrease in GRI was mainly the result of discounts given to tenants as a result of Covid-19. Q1 FY21’s figures also included relief adjustments given to selected key tenants, including both related and non-related party tenants, to support their business recovery.

Additionally, the decrease also came from the loss in income of about S$3 million from Binjai Supermall in North Sumatra and Pejaten Village in Jakarta, which were divested in Q3 2020.

LMIRT Q1 DPU falls 33% year on year to 0.08 Singapore cent (read here)

5) FAR EAST HOSPITALITY TRUST

Far East Hospitality Trust’s (Far East H-Trust) distribution per stapled security (DPS) fell 30.7 percent to 1.38 Singapore cents for the half year ended Dec 31, 2020 compared to 1.99 cents for the year-ago period.

Gross revenue for the half-year period was S$39 million, 34.8 percent lower than a year ago at S$59.8 million. The manager attributed the fall in revenue to lower rentals in its hotel arm, as well as rental rebates and lower occupancy for its offices.

Net property income eased 38 per cent to S$33.6 million for H2 2020 compared to S$54.1 million for H2 2019.

Total distributable income for the half year dipped 29.5 percent year on year to S$27.5 million from S$38.9 million the previous year.

Far East Hospitality Trust DPS drops 30.7% to 1.38 S cents for H2 (read here)

Oxley Hill Properties disposes of 166.4 million units of Far East Hospitality Trust (read here)

6) FRASERS HOSPITALITY TRUST

Uncertainties due to the pandemic hit Frasers Hospitality Trust’s (FHT’s) net property income, which declined by 40.9% to $26.7m in the first half of 2021, ending in March 31.

Its gross revenue and likewise fell by 36.2% for the first half of the year.

As a failsafe to mitigate more risks brought about by COVID-19, FHT has retained S$5.2 million or 60.0% of income available for distribution (DI) to conserve cash.

Frasers Hospitality Trust net property income falls by 40.9% (read here)

7) LENDLEASE GLOBAL COMMERCIAL REIT

On 7 June 21, Lendlease Global Commercial Reit has proposed to raise its stake in Jem mall to up to 31.8 percent for a purchase consideration of between S$204.1 million and S$337.3 million.

On a proforma basis, assuming the acquisition was effective at the end of the first half of fiscal 2021, it would have boosted the Reit’s DPU by 3 percent to 2.41 Singapore cents, from 2.34 cents. If the proposed deal was completed on Dec 31, 2020, net asset value per unit would have slid to 0.84 Singapore cents from 0.85 cents.

8) ESR REIT

ESR-REIT on 23 July 21, reported its distribution per unit (DPU) rose 14.3 per cent to 1.554 Singapore cents for the half year ended June 30, 2021, from 1.359 cents in the year-ago period.

Gross revenue for the industrial properties real estate investment trust was up 5.4 per cent to S$119.8 million, from S$113.8 million a year ago.

The Reit’s manager attributed the revenue improvement to the absence of provisions for Covid-19 rental rebates as well as lower property expenses.

Net property income grew 8.4 per cent on the year to S$87 million for the half-year, from S$80.2 million.

ESR-Reit H1 DPU up 14% to 1.554 Singapore cents (read here)

9) ASCOTT RESIDENCE TRUST

The Ascott has secured over 8,300 units across more than 30 properties in the first seven months of 2021, marking a 40 percent growth compared with the same period a year ago.

With the latest figures in unit growth, the wholly-owned lodging business unit of CapitaLand has achieved its fourth consecutive year of record unit growth despite the Covid-19 pandemic and delivered about 20 percent compound annual growth rate since 2017.

Fee income for the company is expected to increase as the planned units turn operational. Some $20 million to $25 million in fees is expected to be earned for every 10,000 stabilized serviced residence units.

Additionally, Ascott signed more than 2,900 units across 12 properties in China across cities such as Hefei, Ningbo, Shanghai, Shenyang, Shenzhen, Wuhan and Xian.

Ascott will also continue expanding its global portfolio with its first signing in Senegal, together with new developments in Australia, Cambodia, France, Indonesia, Malaysia and Morocco that are slated to open between next year and 2027.

CapitaLand’s Ascott sees over 40% unit growth, boosted by record signings in Vietnam (read here)

In Gist

I am currently vested in Ascott Residence Trust and hence may be biased. However, I can see that among this list, some of the better capitalized REITs (eg with lower gearing ratios), such as Lendlease Global Commercial Reit and Ascott Residence Trust have started to make use of this crisis as an opportunity to expand their portfolio.

In addition, we are starting to see some green shoots (growth) for REITs such as ESR REIT and CDL Hospitality Trusts.

Ultimately as investors and as REIT managers, crises are an inherent part of the markets and businesses. What is perhaps more important is how we handle each situation and pivot forward. Some will be destroyed while others will emerge stronger.

Having said that, for some of these REITs, they are already exhibiting weakness in their share prices before the sell-down in early 2020. Their DPUs have been dipping before the crisis. Eg. CDL Hospitality Trusts, Lippo Malls Indonesia Retail Trust, and Far East Hospitality Trust.

For these REITs, the crisis only hasten their dismal performance. For me, I would avoid them like the plague.

CDL Hospitality Trusts’ historical growth of distribution per stapled security (see below):

Lippo Malls Indonesia Retail Trust’s DPU (see below). Even though Lippo Malls Indonesia Retail Trust’s gross revenue and NPI have grown over the past five years, its DPU has not kept up. Its DPU has fallen from 3.10 Singapore cents in 2015 to 2.23 Singapore cents in 2019.

Far East Hospitality Trust’s distribution per stapled security in FY 2019 was already lower than the distribution per stapled security in FY 2018 (see below).

“The point is that a lousy cheap stock is just as risky as a lousy expensive stock if it goes down. If you’d invested $ 1,000 in a $ 43 stock or a $ 3 stock and each fell to zero, you’d have lost exactly the same amount. No matter where you buy in, the ultimate downside of picking the wrong stock is always the identical 100 percent.

Sometimes it’s always darkest before the dawn, but then again, other times it’s always darkest before pitch black.” Peter Lynch

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