S-Reits actively manage impact of rising interest rates

WITH interest rates remaining in the spotlight, investors have continued to focus on real estate investment trusts’ (Reits’) borrowings and balance sheet resilience. Higher interest rates have typically been associated with higher borrowing costs and therefore lower distributions available for unitholders.

A key metric which investors closely monitor is the gearing ratio, commonly calculated by taking the Reit’s total debt divided by total assets.

According to the MAS Code on Collective Investment Schemes (latest revised May 23, 2023), the total borrowings and deferred payments (collectively, the “aggregate leverage”) should not exceed 45 per cent of the fund’s deposited property.

However, the aggregate leverage is permitted to a maximum of 50 per cent of the fund’s deposited property if its adjusted interest coverage ratio (ICR) is at least 2.5 times, after taking into account the interest payment obligations arising from the new borrowings.

ICR measures the ability of a business to pay interest on its outstanding debt. Based on the definition provided by MAS, it is calculated by dividing the trailing 12 months earnings before interest, tax, depreciation and amortisation, by the trailing 12 months interest expense and borrowing-related fees. Adjusted ICR further takes into account distributions on hybrid securities, such as perpetual securities.

Based on latest available filings, the average ICR for the sector stood at 4.6 times (excluding two trusts which did not report ICR). If adjusted ICRs were used where available, the average was lower at 4.3 times.

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While there were five S-Reits with ICR below 2.5 times (adjusted ICR used where available), all five trusts have maintained gearing ratio below the 45 per cent regulatory limit.

The five trusts with the highest ICR (adjusted ICR used where available) were ParkwayLife Reit (15.6x), Daiwa House Logistics Trust (11.4x), Frasers Logistics & Commercial Trust (8.4x), IReit Global (7.6x) and Keppel DC Reit (6.8x). While Paragon Reit reported ICR of 6.8x, its adjusted ICR stood at 4.7x as at Dec 31, 2022.

Frasers Logistics & Commercial Trust (27.8 per cent) and IReit Global (32.3 per cent) were also among the five trusts which had the lowest gearing ratio. The remaining three trusts were Sasseur Reit (25.7 per cent), Paragon Reit (29.8 per cent) and Far East Hospitality Trust (32.0 per cent).

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The average gearing ratio of the S-Reits and property trusts sector was at 38.1 per cent, according to latest available filings.

To hedge the impact of rising rates, S-Reits have been actively managing interest rate exposures.

On average, close to 75 per cent of S-Reits’ current debts were entered directly in fixed rates or hedged through floating-to-fixed interest rate swaps.

Based on latest available filings, the six trusts with the highest proportion of debt pegged to fixed rates were Daiwa House Logistics Trust (100.0 per cent), IReit Global (96.9 per cent), Cromwell European Reit (89.0 per cent), Aims Apac Reit (88.0 per cent) as well as Mapletree Logistics Trust and Paragon Reit (both at 84 per cent). SGX RESEARCH

The writer is a research analyst at SGX. For more research and information on Singapore’s Reit sector, visit sgx.com/research-education/sectors for the monthly S-Reits & Property Trusts Chartbook.

Source: SGX Research S-Reits & Property Trusts Chartbook.