SINGAPORE (Apr 16): On Apr 16, the Ministry of Finance (MOF), the Inland Revenue Authority of Singapore (IRAS), and the Monetary Authority of Singapore (MAS) announced that MOF and IRAS will extend the timeline for S-REITs to distribute at least 90% of their taxable income from 3 months to 12 months after the end of their FY2020 to qualify for tax transparency.
To avail REITs of their tax transparency treatment for FY2020, REITs with year-end March 31, 2020 and Dec 31, 2020 will have up to March 31, 2021 and Dec 31 2021 respectively, to distribute to their unitholders at least 90% of their taxable income derived in FY2020.
REITs are able to have tax transparency because they pay out 90% of their distributable income. But this leaves them with no retained earnings to weather a crisis.
Already, SPH REIT – which has an August year-end, has withheld some income available for distribution. On Apr 1, in a results announcement, SPH REIT’s distribution per unit for the 3 months to Feb 29, 2020 fell 78% y-o-y to 0.3 cent. This is despite income available for distribution rising 12.2% to $41.5 million for the REIT’s second quarter.
The decline in DPU is mainly due to SPH REIT conserving cash as it expects a worsening operational outlook and uncertainty in cash flow amid Covid-19, and is on the back of an expected need for additional tenant assistance and prudent cash flow management in view of the new legislation that may impact the collectability of rents, the REIT’s manager says.
Other REITs with retail assets have also warned that DPUs could fall. Lendlease Global Commercial REIT announced on Apr 9 that it is unlikely to meet the forecasts in its prospectus. Lendlease REIT listed in Oct last year.
MAS will raise with immediate effect the leverage limit for S-REITs from 45% to 50%. At the same time, MAS will defer the implementation of a minimum interest coverage ratio (ICR) requirement to Jan 1, 2022 which was likely to have been 2.5 times for REITs which wished to have their gearing limit raised to 50%. The higher the gearing, the more likely that ICR will be low so these could be challenging metrics to maintain should REITs opt for higher gearing.
A couple of industrial REITs reported gearing ratios at 40%. Among the retail REITs, although stressed REITs such as Lippo Mall Indonesia Retail Trust had a gearing ratio at around 34.7%, a 7% decline in its valuation would have caused it to breach the original 45% gearing limit. Now with gearing at 50%, valuations at its properties will have a lot more room to fall before LMIRT hits a 50% gearing ceiling.
The deferment of ICR will also come as a relief to many REITs. United Hampshire US REIT which listed in Mar this year has an ICR of 2.3 times, according to a UOB Kay Hian report dated Mar 15. Other REITs with low ICR are Mapletree North Asia Commercial Trust (2.5x) EC-World REIT (2.6x), Far East Hospitality Trust (2.8x) and Suntec REIT (2.9x).
Chew Sutat, Head of Global Sales and Origination, SGX, calls this joint action a "win-win" for all. "These measures are welcome news for all stakeholders, sponsors, issuers and REITs, but also for Singapore as a whole as it demonstrates a responsive, conducive and business-friendly environment. But perhaps the biggest winners are individual and institutional investors, who can now continue to invest with greater confidence," he says.
By increasing the leverage limit from 45% to 50%, S-REITs will be able to better manage their capital structure in the short term. Furthermore, this asset class is set up for long-term success by being more competitive. "This, together with the enhanced share issue limit announced by SGX RegCo last week, make equity fundraising much easier for S-REITs and allow them additional debt headroom," says Chew.
