Kore, Prime US Reit unlikely to hit gearing limit even as US office assets face waning valuations
LEVERAGE ratios should remain below the mid-40 per cent levels at Keppel Pacific Oak US Reit (Kore) and Prime US Reit , according to market watchers. Both are Singapore-listed real estate investment trusts (S-Reits) with office assets in the United States, where occupancy ratios remain below pre-pandemic levels on average.
Peer Manulife US Reit last week raised alarm bells, when it disclosed that its gearing level had hit 49 per cent.
Now just a whisker shy of the 50 per cent regulatory limit, the increase in Manulife US Reit’s aggregate leverage comes after a 10.9 per cent drop in its portfolio valuation.
The Reit manager said the decline in valuation was mainly due to higher discount rates and capitalisation rates for certain properties, as well as continued weakening of occupational performance in submarkets where the properties are located.
According to the Monetary Authority of Singapore (MAS) regulations, S-Reits are required to maintain aggregate leverage at under 50 per cent if the minimum adjusted interest coverage ratio is at 2.5 times.
The maximum allowable aggregate leverage is at 45 per cent if the interest coverage ratio falls below 2.5 times.
MAS has clarified that the aggregate leverage limit is not considered to be breached if circumstances beyond the control of the manager occur, including a depreciation in the asset value of a Reit.
However, it added that the Reit manager should not incur additional borrowings or enter into further deferred payment arrangements under such circumstances.
“Manulife US Reit’s sharp valuation decline indicates that the US office market remains in a state of flux,” said RHB analyst Vijay Natarajan.
“(But) I don’t expect the other two US office Reits to be in the same boat as Manulife US Reit,” he told The Business Times. “Their current gearing levels are much lower, at below 40 per cent.”
As at end-September 2022, Kore’s aggregate leverage stood at 37.5 per cent with an interest coverage ratio of 4.4 times. Prime US Reit’s gearing was at 38.7 per cent with an interest coverage ratio of 4.5 times.
Manulife US Reit had an aggregate leverage of 42.5 per cent and an interest coverage ratio of 3.4 times as at Sep 30.
Its projected interest coverage ratio is expected to fall to 3.1 times as at end-December 2022, the Reit’s manager said last week.
“As interest rates have spiked up sharply since the second half of 2022, we think the interest coverage ratio could drop below 2.5 times by end-2023 – indicating that remedial measures are needed soon,” Natarajan said in a recent report.
Manulife US Reit’s predicament has raised concerns about how asset valuations for the portfolios of the other two US office S-Reits – Kore and Prime US Reit – could affect their respective gearing levels.
The way DBS analyst Derek Tan sees it, however, there will not be a “broad-based approach” to the way the portfolios are appraised. He added that any change in asset valuations “really depends on the cities” where the properties are located.
RHB’s Natarajan, however, sees a lower risk that Kore and Prime US Reit will experience as big a drop in portfolio valuation as Manulife US Reit did. “Their assets are more in the secondary growth cities and thus should be less impacted compared to Manulife US Reit’s,” he said.
