Dividend retention policies are undermining the case for Reit investment
DIVIDEND retention policies among SA’s real estate investment trusts (Reits) may be undermining their equity investment case, GCR Ratings said in a credit research report on Friday.
This was despite the fact that GCR believed retaining dividends was supportive of their credit profile, the credit rating agency said in a research note on Friday. By law Reits have to pay 75 percent of the distributable income as dividends, subject to directors ensuring that the Reit passes a solvency and liquidity test.
Many Reits have chosen to retain dividends to bolster their balance sheets during the uncertainties of the Covid-19 pandemic and after many tenants were forced to close their doors through the lockdowns last year. SA Reits provided more than R3 billion of relief to tenants.
“Liquidity and funding risks remain. GCR believes that, with a few exceptions, leverage headroom is limited, whilst covenant risk remains elevated,” the credit rating agency said.
The majority of GCR’s Reit rating downgrades and Negative Outlooks over the past 12 months were of predominantly South African based property portfolios with large exposures to vulnerable asset sub-classes, or very high leverage levels and weak liquidity.
On the other hand, Reits with moderate to strong geographic diversification to international markets, which were likely to rebound more quickly from the 2020 global recession, had typically shown stronger credit profiles.
“The rating differences reinforces GCR’s view that an entity’s creditworthiness is strongly underpinned by the operating climate(s) of the territories it operates in, balanced against the Reit’s underlying asset and financial management,” GCR said.
John Jack, chief executive of Galetti Corporate Real Estate, said Reits needed to maintain relatively conservative debt levels to be an attractive investment, a factor that had become increasingly challenging in the midst of the Covid-19 pandemic.
“The pressure on Reits has created an interesting dynamic in the sector, with various new strategies coming to the fore as a response to the disruption,” said Jack. The asset disposal route was the most prevalent, but some funds were also collaring their cross holdings and borrowing against it, depending on their level of debt in the business, he said.
He said locally, there was strong demand for South African Reits from Dubai and European Investors looking for prime yielding assets.
“These properties typically need to have a strong lease covenant in place with as close to a AAA credit rating as possible, and moreover a long-term lease agreement over the property to reduce and risk of vacancy.
These lease agreements range between 10-15 years with rental reversions only seen after the 10-year period,” he said.
GCR said short term operating risks for South Africa’s Reits should ease, allowing greater stability for the companies, if the less restrictive Covid-19 lockdown levels remained in place, but in general, SA Reit performance fundamentals would remain under pressure.