REIT investors bracing for a dire reporting season


Andrew Parsons, the founder and chief investment officer of real estate securities manager Resolution Capital, said any notion or clarity would be appreciated “but I’m not holding out too much hope”.

“Obviously there’s some exceptions, such as most logistics-related real estate, but investors will be trying to ascertain the extent to which rent cashflows are lost, deferred and permanently reset lower,” Mr Parsons said.

Due to COVID-19, the majority of A-REITs have already withdrawn their 2020 financial year guidance, cut distributions and several raised equity. Many in the retail sector have slashed asset values by as much as 11 per cent.

While the macro environment is supportive, fundamentals vary by asset class with retail and office he harder hit.

Sholto Maconochie, the head of real estate research at Jefferies, says he expects a “big divergence” in underlying earnings on a funds-from-operations basis versus cash-flow.

He said investors will be paying “close attention” to the treatment of rent abatement and deferral.

“We also expect many A-REITs may provide only limited or no 2021 financial year guidance,” Mr Maconochie said.

He said while the virus will make it difficult for A-REITs to provide meaningful guidance, he will be seeking updates on rent collection rates; the level of rent abatement/waivers agreed; and the direct and indirect impacts on the results in the year ahead.

SG Hiscock & Co. portfolio manager of Australian real estate investment trusts Grant Berry said for the retail-focused trusts, while it has been in the front line of the lockdown and there has been income implications, “there may be encouraging signs of foot traffic improving from the low levels in March/April”.

“As investors we will be looking for progress and information on Small Medium Enterprise [SMEs] lease negotiations under the National Code of Conduct and any lease negotiations with tenants that reside outside the Code and how these have been structured,” Mr Berry said.

The office sector has also been hard hit with staff working from home and recent surveys indicating that the trend will continue, leaving towers half empty.

Mr Maconochie believes the “death” of the office is overdone, and he remains contrarian on his buy recommendations for landlords Dexus and Centuria Office REIT.

“But I concede negative office sentiment on work from home and structural shifts may see Dexus underperform in the near term,” he said.

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For Mr Berry, rent collection has been better in the office subsector, with a smaller proportion of SMEs and companies less impacted by the shutdown measures, as they have been able to predominantly work remotely.

“Our interest will be in the office sublease environment and changes in tenant preferences and requirements for space,” he said.

“The longer-term implications of [working from home] and how the landlords will adapt to work with this in order to enhance the appeal of the office environment will be another area of interest in the reporting season.”

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Arena REIT taps investors as $4b ploughed into listed property


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Arena’s centres remained open during the coronavirus pandemic and about 23 per cent of its tenants were covered under the national cabinet’s mandatory code of conduct. The company said rent relief agreements had been reached where justified.

Arena managing director Bob de Vos said the sector received government support through the Early Childhood Education and Care Relief Package (ECECRP) and the JobKeeper package, but noted COVID-19 continued to provide an environment of “heightened economic uncertainty”.

“The ELC [early learning centre] sector is expected to benefit from thematic tailwinds such as government support and strong fundamental demand drivers as demonstrated by the record long day care and female workplace participation rates observed prior to the onset of the COVID-19 pandemic,” Mr de Vos said.

Arena has maintained its full-year distribution guidance of up to 14ยข per security.

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Vicinity and Arena have joined other REITs, including Lendlease, Charter Hall’s retail and social infrastructure trusts, Centuria Industrial REIT, convenience mall landlord SCA Property Group, Aspen Property and self storage landlord National Storage, in undertaking successful and swift equity raisings.

JP Morgan’s Richard Jones said other capital raisings could be in the wings in the lead up to the end of the financial year, when the impact of COVID-19 on operations will be revealed.

Mr Jones said Scentre group, the country’s largest shopping centre landlord, could be the next cab off the rank.

Scentre raised $2.3 billion in debt last month giving it breathing space and ample balance sheet liquidity. The retail owner and manager has said it has no plans to raise cash from asset sales or through investors.

But Mr Jones said Vicinity’s decision to tap the market complicates Scentre’s capital decisions.

“Assuming a 10 per cent decline in book values, we estimate Scentre would need to raise about $1.6 billion to $1.7 billion in equity to maintain its December 2019 financial year gearing at 33 per cent,” Mr Jones said.

“We assume a 30 per cent peak-to-trough correction in retail book values over the next 12 to 18 months. We assume Scentre will sell $3 billion of assets in 2021 to absorb part of the impact and this results in about 40 per cent gearing.”

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