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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Due to COVID-19, the majority of A-REITs have already withdrawn their 2020 financial year guidance, cut distributions and several raised equity.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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