COVID 19 - My Thoughts on SREITs Selection

Now, all of us should aware that government had announced for a lot workplaces to be closed on Tuesday and school to closed on Wednesday until 4th May. There are quite some numbers of companies are exempted though. From what I see, this closure is more on retail and office instead of industry and logistics.

Extracted from Ministry of Trade & Industry Facebook Page

Due to this COVID-19, hospitality REITs get the first impact, people couldn't travel due to travel restrictions imposed by different countries. This followed by retail REITs which affected due to tourism, social distancing and now closure of non-essential services. Office REIT would be affected too, though some can be mitigate with "work from home" practice. If this situation continue, eventually industrial and logistics would be impacted more than now as well. With this, I would like to share my thoughts on what I will focus more and less for SREITs for selection.

Items More Focus

1) Fiscal Year End

SREITs are required to re-value their properties at least once a year, generally they would do it at last fiscal quarter. Given the current situation, if SREITs are to re-value their properties at this time, its valuation would definitely take a hit. This is the main reason that would cause gearing ratio to shoot up. Hopefully, this situation can be improved on 3Q 2020, but no one could know it now. Below is the list of SREITs that have their fiscal year end at March, June & September 2020, which have risk of gearing increase in near term.

i) March - Result announcement soon

- AIMS APAC REIT - Gearing 35.2%

- Mapletree Commercial Trust - Gearing 33.4%

- Mapletree Industrial Trust - Gearing 34.1%
- Mapletree Logistics Trust - Gearing 37.5%

- Mapletree North Asia Commercial Trust - Gearing 37.1%

ii) June 

- Lendlease Global Commercial REIT - Gearing 34.9%

- Starhill Global REIT - Gearing 36.3%

iii) September

- Frasers Centerpoint Trust - Gearing 33.2%

- Frasers Hospitality Trust - Gearing 35.5%

- Frasers Logistics & Industrial Trust - Gearing 35.5%  

- SPH REIT - Gearing 29.3%

For SREITs which fiscal year ended at March, their result should be announced within these 2 months. If you are worry about equity fund raising due to re-valuation loss, then you could wait for result announcement before making any decision.

2)  Distribution over Gross Income (Distribution Margin)

I have previously share this in Uncommon Financial Metrics of REITs, I use the formula of Distribution to Unitholders / (Gross Revenue from Properties + Distributions from Associate/Joint Venture + Interest Income + Any Recurring Gain). This measure the capability of REIT in managing its income and expense. A low figure indicates that either the REIT expenses is high or income is low. This figure would be slightly affected if the REIT retain earning for capital use or choose to receive management fees in units instead of cash. 

At this moment, REITs expenses would be more or less fixed but income would be reduced. So a REIT with high margin has higher probability to survive at the time of less income received. Below is the list of SREITs with distribution margin > 55% based on past 5 years weighted average value (where applicable):

Name	Approx. %
Parkway Life REIT	70
Lendlease Global Commercial REIT	70
IREIT Global	66
Far East Hospitality Trust	66
Capitaland Commercial Trust	65.5
Frasers Logistics & Industrial Trust	62
Soilbuild Business Space REIT	61
Mapletree Industrial Trust	60.5
Keppel REIT	59.5
Mapletree Commercial Trust	59.5
Mapletree North Asia Commercial Trust	58.5
First REIT	58.5
Eagle Hospitality Trust*	58
Suntec REIT	58
Frasers Centrepoint Trust	57.5
Mapletree Logistics Trust	57.5
Frasers Hospitality Trust	57.5
SPH REIT	57
Sasseur REIT	57
Keppel DC REIT	56.5

* Eagle Hospitality Trust has suspended its maiden distribution.

3) Reputable Sponsor

This could be subjective based on individual, but I believe no one would disagree on Capitaland (which acquired Ascendas), Mapletree, Keppel as strong sponsors. In my opinion, I would also consider CDL, Frasers, Lendlease, Manulife, SPH as reputable sponsors. Now is the time that these sponsors provide support to their REITs. 

Items Less Focus

1) Weighted Average Debt Expiry, WADE

While banks offering loan deferment for individual and SME, I am not sure whether this offer applicable to SREITs. So far I never seen any news regarding this yet. At debt maturity or lender discretion, if SREITs can't refinance, then they would have to pay back. Eagle Hospitality is an example where they are at risk of default. These loans are supposed to be matured in batch on 2022, 2023 and 2024, but lender exercised its right to accelerate the entirety of the loan. So I feel it is less meaningful to focus on long WADE as of now.

2) Occupancy & Weighted Average Lease Expiry, WALE

I wouldn't consider SREITs' occupancy and WALE at this time as well. Tenants can have long WALE contract with SREITs, but they could have default on their rent or even close down their businesses. Soilbuild Business Space REIT had experienced previously for 3 tenants default which served as a very good example.

Conclusion

From above, we can shortlist the SREITs below, sorted from highest distribution margin: 

i) Lendlease Global Commercial REIT

ii) Capitaland Commercial Trust

iii) Frasers Logistics and Industrial Trust

iv) Mapletree Industrial Trust

v) Keppel REIT

vi) Mapletree Commercial Trust

vii) Mapletree North Asia Commercial Trust

viii) Frasers Centrepoint Trust

ix) Mapletree Logistics Trust

x) Frasers Hospitality Trust

xi) SPH REIT

xii) Keppel DC REIT

My view remain the same as per my previous post Coronavirus Outbreak - Buy, Hold or Sell SREITs? To me, now is not the time to panic sell, instead, now is the good time to accumulate quality SREITs. This COVID-19 would eventually end, if we are investing for long term with holding power, then this is a very good opportunity. Do not overstretch your investment until there is little left for emergency fund. As we wouldn't know when is the bottom, what we can do is buy in phases. I would not borrow to invest, as this is a double edged sword that can destroy my wealth easily. 

Do take note on your portfolio SREITs sector diversification as well, do not over invest in any single sector. Try to spread your investment throughout the 6 SREITs sector as evenly as possible. As there are many SREITs with multiple sector contribution, you could refer to my previous post Sector Contribution Weightage of REITs for template to do calculation.

Lately, I've been hearing that top priority now is to keep our job, not asking for pay rise or bonus. Even with pay cut, less income is still better than no income. I couldn't agree with it more, the same should apply to REITs and its tenants. Now is not the time to squeeze income from tenants, now should be the time to support tenants so their businesses can survive, less income is better than no income. I hope the above helps, all the best to my readers.