We invest in Singapore REITs for the steady dividends they supposedly offer. After all, SREITs are required to distribute at least 90% of its income in the same year in which the income is derived to qualify for tax transparency status.
So, when a REIT announces that it will substantially reduce or suspend dividends, it feels almost like a doomsday scenario for REIT investors, short of a trading suspension and bankruptcy.
To help you avoid REITs that might fall into a similar plight, let’s dive into the issues that plagued the 6 REITs which have either substantially reduced or suspended their dividend distributions.
| REIT | Ticker (SGX) | Gearing ratio | Dividend payout ratio | Withheld by choice? | Interest cover ratio (times) |
|---|---|---|---|---|---|
| Keppel Pacific Oak US REIT | CMOU | 43.2% | 0 | Yes | 3.2 |
| Manulife US REIT | BTOU | 58.3% | 0 | No | 2.4 |
| Prime US REIT | OXMU | 48.8% | 10% | Yes | 3.1 |
| Lippo Malls Indonesia Retail Trust | D5IU | 44.3% | 0 | No | 1.9 |
| EC World REIT | BWCU | 58.3% | 0 | No | 2.1 |
| Dasin Retail Trust | CEDU | 46.5% | 0 | No | 1.2 |
1) Cashflows from assets diminished due to lower occupancies and weak rental reversions
| REIT | Occupancy (%) | Rental reversion (%) |
| Keppel Pacific Oak US REIT | 90.3 | -1.8 |
| Manulife US REIT | 84.4 | 8.2 |
| Prime US REIT | 85.4 | 5.8 |
| Lippo Malls Indonesia Retail Trust | 79.0 | 1.9 |
| EC World REIT | 79.9 | Negative** |
| Dasin Retail Trust | 84.5* | Negative** |
| *As at 30 June 23. **Exact rental reversion rate not disclosed | ||
A REIT is levered and therefore depends heavily on operating leverage. When occupancies or revenue decrease by 10%, distribution may decrease by as much as 50%. This is because many of the property expenses such as utilities, maintenance and taxes still remain.
Financing costs also do not reduce just because revenue decreases and may in fact rise because the credit profile of the REIT has weakened.
US REITs
Despite a post covid recovery in Class A office rents in cities such as New York, Boston and Chicago, none of the US office S-REITs have many assets or any at all in those cities. Occupancies have also decreased for all 3 REITs and occupancy levels are being kept high by providing competitive rental rates to tenants.
Manulife US REIT (MUST) recorded a strong rental reversion of +8.2% for the entire FY23 but it is worth noting that rental reversions in 4Q23 was merely +1%.
Keppel Pacific Oak US REIT (KORE) recorded a -1.8% rental reversion, which is terrible considering the inflationary costs pressures in the US. Prime was the only REIT with a somewhat strong positive rental reversion at +5.8%, albeit still inadequate.
China REITs
The Chinese real estate industry credit crisis brought down many real estate companies. At home, we saw EC World REIT and Dasin Retail Trust take a major hit.
EC World’s (ECW) Sponsor continue to be unable to pay its overdue rent receivables under the relevant master leases. As a result, ECW had to suspend distribution for 2H2023 due to insufficient funds. During 2023, more than 80% of the revenue of ECW came from rental income pursuant to related party leases with the Sponsor.
Dasin faced general weaker economic and market environment, lower passing rent, negative reversion in rental rate and lower occupancy rate.
Lippo Malls Indonesia Retail Trust
Lippo Mall’s (LMIRT) operational performance has been gradually recovering from the effects of the pandemic. Indonesia’s muted economic recovery, fluctuating inflation rates, changing lifestyle trends, and increased competition from newer malls continue to dampen the performance of some malls and tenants in certain trade sectors.
Occupancy improved QoQ to 79.0% as of December 2023 compared to 76.8% as of September 2023 despite early termination or downsizing of anchor leases in some malls. LMIRT has begun to reconfigure the vacated spaces to optimise value and actively sought new tenants while renewing expiring leases.
2) Conflicts and resignations
Usually when conflicts start occurring, it is a sign to get out quick before the worst happens. Sometimes, the conflict or resignations only surfaces to the public or occur when it’s too late.
Four of these REITs had such issues:
- Dasin’s substantial shareholders and former key management have been embroiled in various lawsuits against the manager of Dasin.
- ECW is in conflict with its Sponsor, not only because of the unpaid rental but also because 3 of its properties were mortgaged by the Sponsor without consent of the REIT.
- Most of MUST’s key management team resigned in one fell swoop and was quickly replaced.
- Prime’s CEO resigned just after a year in the hot seat although he was with Prime for 3 years before.
3) Gearing ratio breached
Investors get worried when gearing ratios get close to the 50% regulatory limit. Breaching of the gearing ratio has several implications from a regulatory and financing perspective. Banks will also be unwilling to continue providing financing in such a situation.
a) MAS regulatory gearing ratio
The total borrowings and deferred payments should not exceed 50% of the value of the deposited property.
The aggregate leverage limit is not considered to be breached if due to circumstances beyond the control of the manager the following occurs: a depreciation in the asset value of the property fund; or any redemption of units or payments made from the REIT.
Refinancing of existing borrowings is not construed as incurring additional borrowings. A REIT may raise debt for refinancing purposes provided that the funds are set aside solely for the purpose of repaying the maturing borrowing.
Only 2 of the 6 REITs, Manulife US REIT (MUST) & EC World REIT (ECW) actually exceeded the regulatory gearing ratio. However, neither of them breached the aggregate leverage limit as the breach occurred beyond their control due to a depreciation (impairment) in the property value.
Accordingly, none of the 6 REITs actually breached the MAS regulatory ratio.
b) Bank gearing ratio
A few years ago, MAS removed the requirements of a minimum interest coverage ratio (ICR) of 2.5 times before allowing gearing ratio to exceed 45%.
Even though MAS removed this requirement, many banks still place an ICR covenant on the borrowings by the REIT. As such, when either the ICR or the gearing limit exceeds the threshold, the REIT would breach its covenant, face a default and all its borrowings would immediately come due.
4 of the 6 REITs, namely MUST, LMIRT, ECW and Dasin have an ICR of less than 2.5 times. KORE and Prime are at 3.2 times and 3.1 times respectively, relatively low by most comparisons.
How can you tell if your S-REIT could be at risk of suspending distributions?
These 6 REITs have seen weakened occupancy levels and inadequate or even negative rental reversions. Interest costs have acted as a double whammy, further impacting their ICRs. 4 of these REITs also have internal conflicts of some sort.
Only 2 of these 6 REITs have a gearing limit of more than 50% but the remaining 4 REITs are likely at risk of exceeding the gearing limit from valuation losses.
A negative or poor rental reversion points to potentially more valuation losses. These REITs are facing a negative macro environment and struggle to maintain the value of their assets.
Such REITs would try to carry out some form of equity fund raising, but if market sentiments are not positive, they would instead consider halting dividends to ensure gearing remains within regulatory limits and retain cash for essential capital expenditure to upkeep their assets and maintain its competitiveness, otherwise which it may lead to a negative domino effect of even lower rentals when the assets further loses its edge. This is especially if the REIT is unable to execute a deleveraging strategy to divest assets to pay off some loans.
In this regard, if a REIT is operating in a weak macro market and has high gearing, if the REIT does not communicate its plans to the market to either deleverage or carry out some form of equity fund raising, perhaps they have limited cards to play and may only be left with the option to reduce dividends.
P.S. if you’re invested in REITs but are not sure how to determine if your REITS are safe, join Chris at his next webinar and learn what you must do to protect and maintain your dividend portfolio : Learn More