Analysts from RHB Bank Singapore and Maybank Securities are keeping their “overweight” and “neutral” calls on Singapore REITs (S-REITs) respectively, following the proposed easing of leverage requirements by the Monetary Authority of Singapore (MAS).
MAS has published a consultation paper proposing a standard minimum interest coverage ratio (ICR) of 1.5 times and an aggregate leverage limit of 50% for all S-REITs going forward, as at July 24.
Currently, S-REITs have a gearing limit of 45% if the ICR is 2.5 times or below and leverage limit of 50% if the ICR is above 2.5 times, effective as at Jan 1 2022.
Additionally, MAS’s consultation paper also proposes to require S-REITs to perform and disclose sensitivity analyses on the impact of changes in earning before interest, tax, depreciation and amortisation (ebitda) and interest rates on ICRs in their interim results and annual reports.
The proposal is currently open to the public for views and suggestions until Aug 23.
To this end, RHB Bank Singapore analyst Vijay Natarajan views this development as a “positive step”, providing S-REITs with greater flexibility and clarity in the current high interest rate environment while ensuring prudence.
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The analyst notes that MAS’ proposed changes are reflective of a higher interest rate environment, with the sharp increase in interest rates over the last two years resulting in a “double-whammy” effect on S-REITs’ capital management.
Following higher financing costs, the REITs’ ICRs have been subsequently lowered while cap rate expansions have risen which has resulted in lower asset value and higher gearing.
“While a breach in MAS’ limits due to sharp asset devaluations or foreign currency changes is not considered a breach – as these are considered as factors beyond a REIT manager’s control – the REIT would not be allowed to make additional borrowings or enter into further deferred payment arrangements unless the situation is remedied,” writes the analyst in his July 25 report.
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That said, the analyst sees the overall sector impact to be limited, mainly benefitting large-cap S-REITs with gearings above 40% and smaller overseas REITs.
Potential beneficiaries include Suntec REIT and Lendlease Global Commercial REIT JYEU , in Natarajan’s view.
As of June, 13 out of 37 S-REITs have aggregate leverages of above 40% and seven have adjusted ICRs below 2.5 times.
He adds: “ The move is more meaningful for smaller overseas S-REITs – particularly all three US office S- REITs, as they have been highly impacted by asset value fluctuations.”
Other beneficiaries identified by the analyst include CapitaLand China Trust AU8U , Elite UK REIT, ARA US Hospitality Trust XZL and Lippo Malls Indonesia Trust.
Similarly, Maybank Securities analyst Krishna Guha also sees this development positively as the new rules are set to simplify leverage requirements and make them uniform across the sector.
She writes: “The relaxation of leverage norms will allow the sector to navigate the higher refinancing cost and/or lower valuations without necessarily resorting to dilutive transactions.”
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That said, the analyst expects REITs with suboptimal capital structure to accelerate capital recycling and increase income resilience.
With the proposal coming on the eve of the reporting season and policy rates are expected to be cut, Guha finds this development “interesting”.
Overall, Guha’s top picks include CapitaLand Integrated Commercial Trust C38U (CICT), Frasers Centrepoint Trust J69U (FCT) and CapitaLand Ascendas REIT A17U (CLAR).
Natarajan shares Guha’s top pick of CLAR in addition to his picks of Keppel REIT, AIMS Apac REIT and CDL Hospitality Trust, with target prices of $3.20, $1.08, $1.46 and $1.20 respectively.
