Proposed MAS changes offer relief to S-Reits nearing regulatory gearing limits

SINGAPORE-LISTED Real estate investment trusts (S-Reits) nearing existing regulatory gearing limits stand to benefit the most from the Monetary Authority of Singapore’s (MAS) recently proposed changes as they will have more breathing room to manage their leverage requirements in the sector.

Analysts highlight that the potential beneficiaries include Suntec Reit , Mapletree Pan Asia Commercial Trust , Lendlease Global Commercial Reit and Keppel Reit.

MAS proposed on Wednesday (Jul 24) to raise the aggregate leverage limit and lower the interest coverage ratio (ICR) floor across the sector to “foster prudent borrowing” by S-Reits. Under the proposed changes, all S-Reits will be subject to a lower minimum interest coverage ratio (ICR) of 1.5 times, and a higher gearing ratio of 50 per cent.

These changes simplify the current requirements. Currently, Reits that intend to increase their aggregate leverage from 45 per cent to 50 per cent must first meet a minimum ICR requirement of 2.5 times. In the proposals, this requirement will be removed.

While the proposed changes will provide S-Reits with greater flexibility to assume higher levels of debt in the future, they are unlikely to alter their capital management strategies, according to analysts.

‘Breathing space’ for some S-Reits

S-Reits that stand to gain the most from the newly proposed limits are those close to the existing regulatory thresholds of 2.5 times ICR and 45 per cent aggregate leverage ratio.

The ICR is a measure of how well a company can repay the interest on its debt. A higher ratio suggests that a company is better able to service its debt.

Some S-Reits with significant overseas operations will also have more “breathing space” with the changes, said Carmen Lee, head of investment research at OCBC.

This is especially so for those that have faced a spike in borrowing costs in US dollars and suffered declines in their income due to operational headwinds.

Derek Tan, the head of regional property research at DBS Bank, said that healthcare and industrial sectors will be “the most sheltered” against a 1.5 times ICR scenario.

This is because their fixed interest rate hedge ratio is above average compared to other sectors and they have a lower amount of loans expiring for the rest of 2024. He added that these two sectors tend to recycle and divest their assets more frequently to keep overall gearing low.

No change to capital management plans

Analysts do not expect S-Reits to change their capital management strategies in the short term.

DBS’ Tan said that since the US Federal Reserve started hiking interest rates from March 2022, S-Reits have seen their average ICRs fall from a high of more than 5.5 times during the first quarter of 2023, to 3.9 times as at March 2024.

His view is that the risk of Reits’ ICRs dipping towards 2.0 times is “remote for now”. For the sector to dip to an ICR of 1.5 times, companies will have to refinance their loans at interest rates of more than 6 per cent – a “highly unlikely” scenario, said Tan.

Analysts have noted that most Reits have been able to maintain their aggregate leverage ratios under 45 per cent.

“In the current (high interest rate) environment, Reits are still focusing on de-leveraging to manage working capital, pay off higher-cost debt, or recycle capital into better assets,” said Darren Chan, a senior research analyst at Phillip Securities Research.

Two S-Reit managers told The Business Times that they have no plans to change their financing strategies even if the regulator’s proposals are implemented.

“It is unlikely we will test the (proposed ICR limit) of 1.5 times. Even if we leverage further, we will ensure our ICR is definitely much north of 1.5 times,” said Chong Kee Hiong, chief executive officer of the manager of Suntec Reit , at its financial results briefing on Jul 26.

He added: “It’s a case of financial discipline. We will also look at our ICR coverage to see what is a comfortable gearing.”

Serena Teo, the chief executive officer of the managers of CapitaLand Ascott Trust (Clas) , said at the trust’s financial results brief on Jul 26 that while the proposed change will expand financing options for more Reits, it will not have a very major impact on Clas and its operations going forward.