Which S-REIT Could Face a Cashflow Problem?

REITs have fallen hard the last couple of weeks. Here’s a look at some REITs that could face cashflow issues if their tenants defaults.

It has been a nightmarish two weeks for Real Estate Investment Trust (REIT) investors in Singapore’s stock market. 

Almost every S-REIT was massively sold down, with many losing more than 50% of their value. Investors who invested on margin were hit especially hard as their losses were amplified and they were forced into selling off positions at a loss.

Investors of REIT-ETFs also reportedly rushed to the exits, further exacerbating the situation.

It does not help that global economic activity has slowed down significantly because of COVID-19. Although most REITs will likely be able to weather this short-term storm, there are some that could face difficulties.

Last week, I published Which S-REIT Can Survive This Market Meltdown? In it, I said that some REITs may face a cashflow crisis if their tenants default on rent. This can lead to a vicious cycle of REITs struggling to pay their interest and end up having to sell assets or raise capital through rights offerings or private placements.

REITs that have a concentrated tenant base, high-interest expense, and less headroom to take on more debt (the regulatory ceiling is a 45% debt-to-asset ratio) are more at risk of a cashflow problem.

In this article, I will highlight some REITs that sport some of these unwanted characteristics.

High tenant concentration

REITs most at risk are those with tenants that cannot pay up their rent. Having a high tenant concentration means that the loss of revenue will be massive if the major tenant defaults.

Below are some S-REITs that have relatively high tenant concentration. Do note that this is not an exhaustive list, they are just some REITs that I have studied:

  • First REIT (SGX: AW9U): The healthcare REIT derived around 82% of its rental income from PT Lippo Karawaci Tbk and its subsidiaries in 2018.
  • EC World REIT (SGX: BWCU): The E-commerce and specialised logistics REIT owns China assets and is dependent on two major tenants: Hangzhou Fu Gang Supply Chain Co Ltd and Forchn Holdings Group Ltd. Combined, the two tenants contributed 67.4% of the REIT’s total rental income in 2018.
  • Elite Commercial REIT (SGX: MXNU): The UK-focused REIT rents practically its entire portfolio to the UK government.

High tenant concentration is risky but it also depends on the type of tenant that the REIT is renting to. 

In First REIT’s case, its assets are healthcare properties such as hospitals and nursing homes. Business in healthcare properties should continue as usual during the COVID-19 pandemic, so the tenants will most likely have the means to pay its rent.

Elite Commercial REIT’s tenant is the UK government, which will almost certainly have the means to cover its obligations.

So, while it is important to think about tenant concentration, it is equally important to judge the likelihood of the main tenant defaulting.

High gearing

REITs that have high gearing will have little debt headroom to take on more borrowings if the need arises.

Below are some REITs that have gearing ratios that are close to the 45% regulatory ceiling.

  • ESR-REIT (SGX: J91U): With a gearing ratio of 41.5% at end-2019, the industrial REIT is one of the highest geared REITs in Singapore.
  • Cache Logistics Trust (SGX: K2LU): The logistics REIT has a gearing of 40.1% as of 31 December 2019.
  • Ascendas REIT (SGX: A17U): As of December 2019, the largest REIT in Singapore by market cap had a gearing ratio of 35.1%.

Again this is not an exhaustive list and not all REITs with a high gearing ratio will face default. However, REITs that have high gearing have less financial flexibility and may need to tap into the equity markets to raise money in the unlikely situation of a cashflow crisis. Tapping on the equity markets could mean dilution for a REIT’s existing unitholders.

Low interest coverage

For a simple but not exact definition, the interest coverage ratio compares a REIT’s interest expense against its net property income. A high interest coverage ratio means that the REIT is able to service its interest expense easily with its income.

In a time of crisis, it is important that a REIT’s rental income can at least cover its interest expense to tide things over. Defaulting on debt obligations can hurt a REIT’s credit rating and ability to negotiate lower interest rates in the future.

Here are some S-REITs with a low interest coverage ratio (again, it’s not an exhaustive list):

  • ESR-REIT: With its high gearing, ESR-REIT’s interest expense is naturally high compared to its rental income. As of 31 December 2019, it had an interest coverage ratio of 3.7 times.
  • EC World REIT: China-focused REITs traditionally have a higher cost of debt so its no surprise that EC World REIT has a low interest coverage ratio of just 2.5 times:
  • Ascendas India Trust (SGX: CY6U): Technically a business trust, Ascendas India Trust owns IT-related and logistics properties in India. It has an interest coverage ratio of 3.6 times.

The REITs above have low interest cover so a drop in rental income may result in their inability to pay their interest expense. 

Wait and see…

The above-mentioned REITs have some of the unwanted characteristics that make them susceptible to cash flow issues. However, it is not clear whether they will end up facing tenant defaults.

Ultimately, whether the REIT can weather the storm comes down to if their tenants can meet their rental obligations. So far, none of the REITs have made any announcements of tenant defaults, so it is best not to panic yet. As a REIT investor, I have not sold any of my positions and I believe that most of the REITs in my portfolio will be able to weather this storm. 

For the time being, I am taking a wait-and-see approach but will be keeping a close eye for any announcements or earnings updates.

*EDITORS NOTE: The article erroneously stated that Ascendas REIT had a gearing ratio of 39.9%. We have since edited to reflect the correct figure of 35.1%.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.

11 thoughts on “Which S-REIT Could Face a Cashflow Problem?”

  1. Hi, both SREITs articles that you just posted are great. I do have following questions:
    i) Ascendas REIT – 39.9% gearing, I checked the latest result as of 31 December is at 35.1%, can’t find 39%.
    ii) EC World REIT – Interest Cover 2.5 times, are you getting this figure by NPI/interest expenses? Both ESR & Ascendas India Trust are using EBITDA/Interest Expenses. Should we re-calculate EC World interest cover ratio to have apple to apple comparison ?

    Thanks

      1. Hi Vince,

        Thanks for dropping by and adding us to your blog. Love the work you’ve done on your blog btw!

        You brought up two really good points.

        1. I made a mistake with Ascendas REIT. You are right that Ascendas REIT has a gearing ratio of 35.1% as of the last financial update. I’ve since edited the article to reflect the change.

        2. As for EC World REIT’s interest cover, I used net property income divided by financial expense for the fourth quarter of 2019. If I use EBITDA divided by interest expense for FY2019, the interest cover comes up to roughly the same figure of 2.6 for 2019.

  2. I saw from seedly reit screener, Ascendas gearing show 39.9%. I also share my reit screener in my blog, feel free to use it. If you got any idea for my improvement, please let me know.

    Thanks for your compliment on my blog, if you planning to add link section in blog in the future, can consider to link to my blog?

    For interest cover ratio, let hope MAS will standardize the calculation part together with their revised gearing limit plan.

    1. Yes, Seedly Live REIT data is where I screened for the most highly geared REITs.

      We don’t have a link section in our blog yet but if we do we can definitely ping you back then.:)

      I agree with the need to standardise too. Some of the metrics like WALE, interest cover may not be calculated the same way right now. Standardisation would make it much easier for investors.

      1. I just checked through Seedly Live REIT data, there are quite some numbers of gearing mismatch with result presentation. Not sure it is due to they calculate it manually. I have email Seedly support regarding this.

        Besides WALE and interest cover, there others also many things not standardize like rental reversion, tenant trade classification, land lease maturity (some NLA, some GRI, some Valuation), geographical/sector/property contribution (some GRI some NPI some NLA some Valuation). Also certain information like weighted average land lease expiry, geographical/sector/property contribution, top 10 tenants, etc are not mandate in quarter result announcement, some REITs only show on annual report.

        Ops, I just notice I may leave too many comments, this is not a chatgroup right , lol. If interested, maybe we can contact through email ?

        1. Haha, no problem at all! Happy that you reached out to us.

          Yes, and you’re right. REITs are not mandated to inform investors about some key portfolio stats, only some update regularly. Would be great if more REITs commit to communicating all of this information to the investing public.

          More than happy to continue this conversation over email. Probably have a lot more to talk about.

          You can reach Ser Jing and me at thegoodinvestors@gmail.com.

  3. Thanks for this timely article. One issue I have investing in REITs and other equities now is the possibility (probability?) of rights issue, meaning more funds will be needed in due course to avoid dilution. While it seems true that REITs are better prepared to deal with such a crisis now as compared to GFC, do you have any thoughts on what should ideally be the allocation of available funds (maybe in terms of percentage) to provide for this contingency of rights issue?

    SC

    1. Hello SC!

      I’m not Jeremy, but I’ll take a stab at the question. Jeremy may have his own thoughts to share.

      You’re right. Investing in REITs and other equities means you need to be prepared with cash to avoid dilution in the event of rights issues – this risk has always been present, but is significantly higher now in the current environment. I don’t think there’s a one-size fit-all answer for allocation of available funds because it’s really a case-by-case basis depending on the type of stocks held in the portfolio.

      A heavily-leveraged company such as SIA (and we know it just announced a massive rights issue) has a much higher chance of needing a rights issue compared to say, VICOM, which has zero debt on its balance sheet. A REIT with plenty of debt coming due within the next 12 months will have much higher chance of needing a rights issue compared to a REIT with a well-staggered debt-maturity profile.

      One other thing to note that is that central banks around the world have acted *significantly* faster in preventing any freezing of the credit markets this time around compared to during the financial crisis. That should also help lower liquidity risks for companies and REITs.

      So I think the right answer for the cash allocation lies somewhere between a lot (say 50%) to just a little (say 10% or less) depending on how the individual’s portfolio is constructed. There’s nothing specific in my response, but it’s based on my qualitative assessment of the current financial landscape.

      Cheers,
      Ser Jing

      1. Hi SC,

        Totally agree with Ser Jing. REITs with higher leverage are more likely to face cash flow problems and are more likely to need to a rights issue in times like these. If your portfolio consists of such REITs then it is probably safer to hold some cash so you don’t get diluted if that happens.

        Adding to that point, there are also REITs like Keppel DC REIT and Mapletree Commercial Trust that may call for a rights issue in good times to take advantage of the high valuation of their unit price (which they did last year). So should be mindful of that too.

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