Singapore has grown into a haven for real estate investment trusts (REITs).
The low tax rates and clear tax rules have attracted many REITs to list in the Singapore market. As a result of the pandemic, many REITs have experienced a fall in stock prices. Some may turn out to be opportunities, while others could turn out to be value traps.
Today, we will explore 3 REITs which have dipped in recent months. They are Far East Hospitality Trust, First REIT and Lippo Mall Indonesia Retail Trust.
Far East Hospitality Trust (FEHT)
Far East Hospitality Trust is a hospitality REIT that has a portfolio of 13 properties consisting of nine hotels and four serviced residences.
All the REIT’s properties are found in Singapore, most of which are in the core central region.
Year to date, its share price has fallen by around 16 per cent from $0.67 to $0.56.Figure 1: Tourist Arrivals (millions) PHOTO: The Smart Investor
According to the Singapore Tourism Board (STB), visitor arrivals are forecast to drop between 25 per cent to 30 per cent in 2020. This directly affects the hospitality sector, where the majority of guests are from overseas.
From a financial standpoint, the REIT’s net property income (NPI) for the first half of 2020 (1H 2020) is 23.1 per cent less than the previous year. The REIT has, in maintaining prudence, retained a portion of its distributable income.
Distribution per unit (DPU) has taken a plunge to $0.0103 in 2020 compared to $0.0182 in 1H 2019, a 43.4 per cent decrease. As it stands, the REIT’s trailing twelve-month (TTM) dividend yield is at 5.4 per cent.
REIT managers at FEHT have not taken this news lying down. The trying circumstances have brought about clever initiatives. For one, the REIT has managed to reduce total hotel expenditure by 30 per cent through several cost savings and containment strategies.
These include hiring pauses across all departments and a 50 per cent reduction in outsourced cleaning, moving them in-house.
Additionally, the Singapore government has recently announced $320 million in tourism vouchers for Singaporeans.
Coupled with the green light given for hotel staycations by the Ministry of Trade and Industry, the initiatives create suitable opportunities for FEHT’s hotels to regain its footing in this hostile environment.
As implied by its name, First REIT is Singapore’s first healthcare REIT. The REIT has a portfolio of 20 healthcare properties: 16 in Indonesia, 3 in Singapore and 1 in South Korea. It consists of hospitals and nursing homes.
Year to date, its share price has declined to its 52-week low, from $1.00 to $0.42, for a 58 per cent decrease.
On 1 June 2020, Lippo Karawaci, the main tenant of First REIT’s properties in Indonesia, announced plans to renegotiate lease rental downwards.
In an announcement made by First REIT on 31 Aug 2020, the management team is still awaiting the proposal for rental restructuring. This expectation of lower future earnings has negatively impacted investor confidence. Meanwhile, the number of Covid-19 patients is still rising in Indonesia.
The situation has decreased the hospitals’ capacity for elective surgeries. These procedures form the bulk of the income for hospitals. In response, the REIT has offered two months of rental relief to its tenants, including its main tenant, LPKR.
As a result, First REIT’s net income has suffered. NPI for 1H 2020 was 33 per cent lower than in 1H 2019. DPU dropped 46.5 per cent year on year from $0.043 to $0.023, with TTM dividend yield clocking in at 15.8 per cent.
While there is pessimism and uncertainty regarding First REIT’s near-term profits, one cannot deny the lasting importance of Indonesia’s healthcare infrastructure.
Moreover, First REIT has a strong partnership network with LPKR and OUE Lippo Healthcare. The REIT enjoys a perk in the form of the right of first refusal (ROFR), whereby it is given priority when it comes to buying opportunities. This fact assures investors that First REIT will be around for the foreseeable future.
Lippo Mall Indonesia Retail Trust (LMIRT)
LMIRT is a pure-play Indonesian retail REIT. The REIT has a portfolio of 30 properties throughout Indonesia, with a presence in four of their five main islands (Papua not included).
For the year to date, its share price has decreased from $0.23 to $0.11, for a 52.2 per cent decrease.Figure 2: Visitor Traffic to LMIRT malls PHOTO: The Smart Investor
Social distancing and a fall in tourism have cast a dark cloud on the retail sector. Even with the reopening of 27 of its 30 retail properties on 15 June 2020, shorter operating hours and lower footfall continue to plague LMIRT’s tenants.
In an effort to aid its tenants, rental relief programmes have been dished out by the REIT. Due to their focus on healthcare and other affected areas, the Indonesian government has yet to roll out relief measures for the retail industry. Therefore, any rental relief provided comes directly from LMIRT’s pockets.
Unsurprisingly, the REIT’s NPI fell by 37.8 per cent year on year in 1H 2020 while DPU plummeted by 80 per cent year on year.
With its share price at $0.11, not far off from its all-time low of $0.10, LMIRT has a trailing 12-month dividend yield of 11.3 per cent.
In a span of a month, from 31 July to 31 Aug 2020, LMIRT announced two divestments and one acquisition.
The REIT completed the divestment of Pejaten Village and Binjai Supermall on 3 Aug 2020, and the freed-up capital was used for their acquisition of strata title units of Lippo Mall Puri.
LMIRT is a subsidiary of the Lippo Group, an Indonesian multinational conglomerate which specialises in real estate. In its recent acquisition deal, the REIT secured the property at a discount of 9.47 per cent to the final property valuation.
The final valuation was derived from the average valuation of two independent valuers. This beneficial relationship ensures that the REIT is able to secure a steady pipeline of retail properties.
This article was first published in The Smart Investor. Disclaimer: Zachary Lim does not own shares in any of the companies mentioned.