Among S-REITs, Suntec REIT will be the biggest beneficiary from the Monetary Authority of Singapore’s (MAS) rationalised leverage requirements, says OCBC Investment Research, which provide “more buffer and financial flexibility”.
Suntec REIT’s aggregate leverage ratio of 42.3% as at Sept 30 is close to the previous limit of 45%. MAS announced on Nov 28 that S-REITs are now subject to a single aggregate leverage limit of 50% and a minimum interest coverage ratio (ICR) of 1.5 times.
“The looser leverage requirement provides operational flexibility and simplifies the previous framework, which allowed an aggregate leverage ratio of 45% that could be extended to 50% with a minimum ICR of 2.5 times, “ says OCBC. “The addition of the mandatory ICR of 1.5 times ensures that the REITs can adequately service their debt obligations.”
As at Sept 30, Suntec REIT had an ICR of 1.9 times. ICR is calculated by using the trailing 12 months’ ebitda as the numerator, excluding effects of any fair value changes of derivatives, investment properties and foreign exchange translation. This is divided by the trailing 12 months’ interest expense, borrowing-related fees and distributions on hybrid securities as the denominator.
MAS says it will not allow breaches owing to circumstances such as volatility in foreign exchange and interest rates, as well as tenant defaults. MAS expects REIT managers to take these factors into account when managing the aggregate leverage and ICR levels of their REITs.
See also: Changes in ICR, leverage to come into effect immediately, with additional disclosures in March
OCBC says the move is a “marginal positive” for the sector, even though the majority of the S-REITs already have aggregate leverage ratios below 45% and ICRs “comfortably above” 2.5 times, even in the face of rising borrowing costs.
There will also be more breathing space for some S-REITs with significant overseas operations, especially those that have faced a spike in borrowing costs in US dollars and suffered declines in their income due to operational headwinds, says OCBC. The three US office S-REITs are Manulife US REIT, Keppel Pacific Oak US REIT and Prime US REIT OXMU .
MAS also announced additional disclosure requirements for financial periods ending on or after March 31, 2025.
See also: Analysts remain neutral on Suntec REIT after results met expectations despite 3QFY2024 DPU slip
REIT managers should generally disclose how they intend to manage the REIT’s leverage and ICR levels. They should also perform and disclose sensitivity analyses on the impact of changes in ebitda and interest rates on their ICRs.
The sensitivity analyses should minimally include two separate scenarios: one based on a 10% decrease in ebitda and another based on a 100 basis point increase in interest rates.
If the ICR of a REIT falls below 1.8 times, the REIT manager should take steps and/or have plans in place to improve the REIT’s ICR and disclose this additional information, according to MAS.
OCBC continues to recommend investors to stick with “quality S-REITs” backed by strong sponsors, that are in healthy financial positions with room for capital recycling and have at least some Singapore asset exposure.
OCBC has a $1.19 target price on Suntec REIT. As at 3.50pm, units in Suntec REIT are trading 1 cent lower, or 0.87% down, at $1.14. Suntec REIT units have fallen 6.5% year to date.
Charts: OCBC
