• The FTSE S-REIT Index fell 109pts MoM to 853pts, erasing gains accumulated since May19. Correspondingly, the dividend yield and yield spread expanded 19bps (+15.3%) and 63bps (+25.7%) MoM to 4.73% and 3.06%.
• Total returns for hospitality (-19.3% MoM) and retail (-7.7% MoM) sectors most impacted by Covid-19 as funds fled to more the more resilient industrial sector (-3.6%).
• Sector yield spread at in positive territory at 0.6 standard deviation (s.d.) after being in the -1.0 to -2.0 s.d. range throughout 2019.
• Following the emergency Fed rate cut of 50bps to 1.25% on 3 March 2020, the SOR fell to 0.82% on 6 March. The 80bps fall in the 10YSGS was more pronounced, ending at 1.22% while the 10YSGS fell 47bps to 1.2%, surpassing the lows seen in 2012.
• Remain NEUTRAL on S-REITs sector. Sub-sector preferences: Office and Industrial.

SECTOR SNAPSHOT

Fear spread quickly since the first case of Covid-19 hit Singapore’s shores on 23 January.  The weaker consumer sentiment was most pronounced in February when Singapore upgraded the DORSCON level to Orange on 7 February 2020. Not surprising, hospitality counters were the hardest hit with MTD losses ranging from -10.8% to -34.5%. The average decline was -19.3%. The retail sector was the second worst hit with MTD losses averaging -7.7%, weighed down by China-focused REITs, ranging -7.6% to -12.1% for CRCT, Sasseur, Dasin and BHG REIT.

The 50bps Fed rate cut on 3 March 2020 brought on by the Covid-19 epidemic would have been a tailwind for the REITs sector. However, weaker market sentiment prevailed and the rebound from the Covid-19 sell down was short lived. Caution and lower valuations halted the momentum in REIT acquisitions, which will likely resume in late 2020.

United Hampshire US REIT debuted on the SGX on 12 March 2020 with a portfolio of 17 US grocery-anchored shopping centres and self-storage assets. The 80.3mn units available for subscription was 3.2 times subscribed.

Retail

The impact on Singapore’s’ retail malls was varied. At the peak of the panic in the first two weeks of February, footfall at central malls fell by 50%. Sub-urban malls were less impacted, with footfall falling by 10-20% during the same period. Mall operators FCT and CMT have reported footfall recovering to -5% pre-Covid-19 levels in the second half of February 2020. Similarly, we expect the tenant sales at sub-urban malls to show less variance as compared to their central counterparts due to the necessity spending at sub-urban malls. While turnover rent only accounts for 5% of revenues for CMT and FCT, the extent of rental reliefs and rebates, discounted rates on the booking of atrium spaces and extended hours of free parking will have marginal impact on the REITs.

Hospitality

Preliminary industry-wide occupancy figures for hotels for February was estimated between 30% to 70%, averaging 50%. However, hotels which have a higher exposure to longer-staying corporate clientele such as service residence (SRs) experienced stable occupancy of c.70% and will hold up better against their hotel peers. Some hospitality REITs are exploring the possibility of accelerating their AEI and repair and maintenance timelines to coincide with the lull period, thereby future-proofing their portfolios and commanding better room rates in time for the pickup post-Covid-19. It is worth noting that while the hospitality sector would be the most affected, most SG-listed hospitality REITs (except ARA US) have revenue structures with at least 50% of revenue from “stable” sources, either through assets that are leased out on master leases or though leases with minimum base rent provisions.

INVESTMENT ACTIONS

Remain NEUTRAL on the S-REITs sector, with selective sub-sector preferences.

While it is difficult to estimate when the Covid-19 epidemic will blow over, we believe the fundamentals and characteristics of FCT, AREIT, ART and CMT will help them ride our this period of uncertainty better than others.

Sub-urban mall owners FCT and CMT will be protected by necessity spending. Also, the long term (inorganic) growth drivers for FCT remain intact. AREIT diversified tenant base and ART’s 50/50 growth/stable* leases structure and geographical diversification will reduce concentration risk and exposure to any particular industry or geography, providing stable earnings. We are cautious that share prices may continue falling in the near-term – but this presents opportunities for lower entry.

Top-down view (unchanged)

We like the Commercial and Industrial sub-sectors due to tapering commercial supply after the surge in supply in the prior two to three year, and the AEI and redevelopment opportunities for the Industrial sector. We are cautious on the Hospitality and Retail sub-sector due to softer tourism sentiment and retail outlook, exacerbated by the fluid Covid-19 situation.

Tactical bottom-up view (unchanged)

REITs that can better weather through this period of uncertainty would be those with:

1) Higher percentage of guaranteed revenue through “fixed” or “stable*” leases; 2) Low gearing; 3) High-interest coverage; 4) Long weighted average debt to maturity; and

5) A high proportion of debt on fixed interest rates.

*Stable leases are leases under master lease or with minimum base rent provisions