What Is the Outlook for Industrial REITs?

It seems nothing is safe anymore. Not even REITs.

The COVID-19 pandemic has forced us to re-evaluate business models and the way we live our lives.

Aside from industries that have been directly impacted by the dreaded disease, there have also been knock-on effects on other sectors, as well.

Even real estate is not immune as more and more tenants face difficulties in keeping up with rent payments to their landlords.

Several prominent retail REITs have already cut their distributions to conserve money for tenant support measures.

Hospitality REITs are facing an existential threat as people defer travel plans amid a raft of cancelled bookings.

We have covered both sectors previously.

We turn our attention now to industrial REITs to find out if this sub-segment of the REIT universe has also been negatively impacted.

Financial stress building up for SME

REITs such as Mapletree Industrial Trust (SGX: ME8U), or MIT, reported flat gross revenue and stable distributable income for the most recent quarter.

However, investors should not rejoice yet.

MIT has announced that it will roll out a COVID-19 assistance and relief programme of up to S$13.7 million. These measures include property tax rebates and rental rebates.

Also, the REIT has confirmed that small and medium enterprises (SME) will suffer more compared to larger businesses.

Around 45% of MIT’s overall portfolio consists of SME tenants, so this is the proportion of gross revenue that may be under pressure in the months to come.

More assistance to be doled out

For ARA Logos Logistics Trust (SGX: K2LU), formerly known as “Cache Logistics Trust”, the REIT manager acknowledged that specific logistics tenants may not be as well-supported as tenants in other, directly-impacted industries.

As a result, the REIT will roll out a S$2.2 million tenant relief for its Singapore tenants and implement a plan over the next 6 months to assess COVID-19’s impact on its tenants’ revenue stream.

For the REIT’s Australian tenants, the manager will work with affected tenants suffering more than 30% revenue loss to implement a rental rebate programme.

ESR-REIT (SGX: J91U) has already pre-emptively retained around S$7 million out of its S$24.5 million distributable income for the first quarter of 2020.

The REIT’s portfolio consists of 57 industrial properties located across Singapore for a total property value of around S$3.2 billion as of 31 March 2020.

The manager intends to proactively engage with and work closely with tenants to overcome this difficult period.

The REIT will seek to pay out the retained distribution amount as soon as the pandemic situation subsides.

An unaffected outlier

Although it seems like industrial REITs will not be spared from the pandemic’s adverse effects, there is an outlier that has been unaffected thus far.

Keppel DC REIT (SGX: AJBU) is an owner and operator of 17 data centre assets across ten cities in eight countries (as of 31 March 2020).

The REIT reported a 25.5% year on year jump in gross revenue, while distributable income soared by 32% year on year. Due to an enlarged base of units from a rights issue last year, distribution per unit (DPU) increased by a smaller 8.6% year on year to S$0.02085.

Demand for data centres is expected to hold up during the pandemic as such assets support mission-critical operations.

Get Smart: Assess the REIT’s tenants

Truth be told, industrial REITs will also get hit by the downturn caused by the pandemic.

The question here is the extent and duration.

Investors should assess the type of tenants the REIT has to gain a better understanding of how badly the REIT may be impacted.

For instance, as highlighted above, SMEs are more vulnerable to cash flow issues.

If a REIT has a large proportion of its tenants who are SME, then it may have to dole out more support measures and rental rebates, thus retaining more distributable income.

DPU will, therefore, decline more for such REITs in the near-term.

But, for REITs that are in sectors that are still functioning normally, such as data centres, it will be able to report stable or even growing distributable income and DPU.

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Disclaimer: Royston Yang owns shares in Keppel DC REIT.

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