SINGAPORE (May 29): The hospitality sector continues to be the worst performing sector. Despite their pedigree, CDL Hospitality Trusts (CDL-HT) and Ascott Residence Trust (ART) ranked among the REITs with the highest yields (see chart 1), based on their historic DPUs. REITs with high yields have a problem in that their cost of capital is high and equity fund raising will be difficult. While the circuit breaker in Singapore will be gradually lifted from June and Europe has started to lift its lockdowns, tourism is unlikely to stage a quick recovery. Hence, the hospitality REITs may continue to trade at high yields this year.
ARA US Hospitality Trust (ARA H-Trust) has a different problem. Unlike CDLHT and ART, which have their sponsors providing master leases and minimum rent guarantees, ARA H-Trust has no master lease. Hence its net property income of US$3.6 million ($5.1 million) in 1QFY2020 ended March was 68.2% lower than its IPO forecast of US$11.3 million. On a brighter note, ARA H-Trust’s manager says it “remained in compliance with all loan covenants as at March 31, 2020, and has not defaulted on any payments under its loan facilities. The Singapore-based relationship banks which provided the financing for ARA H-Trust’s IPO and acquisition of the three Marriott branded hotels, have granted waivers on the financial covenants under both loan facilities for the following 12 months, that is from April 1, 2020, up to March 31, 2021.” Its peer, Eagle Hospitality Trust, defaulted on its loans.
Lippo Mall Indonesia Retail Trust had the highest yield based on a forecast by OCBC Investment Research. Its yield would be more than 20% based on historic DPU. In its 1QFY2020 ended March, the REIT manager indicated that it would only make a distribution of $3.5 million out of income available for distribution of $18.9 million. LMIRT, like its sister REITs First REIT and OUE Commercial REIT, is linked to the Lippo Group of Indonesia. As such, they are tarred with the Lippo discount (see chart 2). All three are trading at significant discounts to net asset values.
Commercial REITs may face a different set of challenges as the “circuit breaker” measures are gradually lifted. After Covid-19, the known unknown is how office space will be used. UBS Asset Management says in a recent report that in the near term at any rate, “it will likely be difficult for all office-based employees to return to work at once as companies enforce social distancing rules to stop the spread of the virus and protect workers. This implies office space per employee will be higher until the virus eventually passes, with homeworking being used for the additional flex-space needed.”
During a results briefing a few weeks ago, the manager of Prime US REIT reflected the same thought. “If social distancing continues to be a requirement and more of a practice, that will require more space. The state of California is considering mandating an increase in psf per employee. If the state mandates 250 sq ft per employee, and 20% of the workforce work from home, companies will still need to double their sq ft per employee,” notes Barbara Cambon, CEO of Prime US REIT’s manager. The increased space may counterbalance any softness on the leasing front, she adds. UBS reckons that companies may re-evaluate their office footprints and may conclude that they can reduce them following the success of mass home-working during the crisis in the medium term. For the time being, the office REITs, which have declined by double digits this year, have stabilised.
