S-Reits get lifeline on cash flow, fund-raising

Singapore

REAL estate investment trusts listed on the Singapore Exchange (S-Reits) will soon benefit from new measures that will give them more flexibility to manage their cash flows and raise funds amid the operating environment made challenging by Covid-19.

These measures announced on Thursday comprise an extension of the deadline for distribution of taxable income by the Ministry of Finance (MOF) and the Inland Revenue Authority of Singapore (Iras), as well as a raising of the leverage limit and deferment of new regulatory requirements by the Monetary Authority of Singapore (MAS).

MOF and Iras said they will extend the timeline for S-Reits to distribute at least 90 per cent of their taxable income from three months to 12 months (after the end of FY2020) to qualify for tax transparency.

This extension is applicable only for distributions made from taxable income derived by an S-Reit in FY2020. For example, to get the tax transparency treatment for FY2020 taxable income, S-Reits with FY2020 ending on March 31, 2020 and Dec 31, 2020 will have up to March 31, 2021 and Dec 31, 2021 respectively to distribute to their unitholders at least 90 per cent of their taxable income derived in FY2020.

"The extension will give S-Reits more flexibility to manage their cash flow. As S-Reits typically distribute the bulk of their income to unitholders, they tend to hold lower cash reserves," they said.

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Iras added that it will provide further details of the change by early May 2020.

At the same time, MAS will raise the leverage limit for S-Reits from 45 per cent to 50 per cent with immediate effect. This is to provide S-Reits more flexibility to manage their capital structure.

MAS will also defer the implementation of a new minimum interest coverage ratio (ICR) requirement to Jan 1, 2022.

In its public consultation last year, it had proposed to require S-Reits to have a minimum ICR of 2.5 times before they are allowed to increase their leverage from the prevailing 45 per cent limit up to 50 per cent.

The ICR measures a company's debt-servicing ability.

MAS' aim then was to use a combination of leverage limit and minimum ICR to allow Reits to borrow more so that they can maintain their competitive edge in the region, while still ensuring that they operate within certain safeguards.

"The implementation of the ICR requirement will now be deferred, as S-Reits' ICRs are likely to come under pressure in the near term due to the negative impact of the Covid-19 pandemic on their earnings and cash-flows," the authority said.

The higher leverage limit, together with the enhanced share issue limit announced by Singapore Exchange Regulation (SGX RegCo) last week, will give S-Reits continued access to different funding channels. These include banks, bond issuances and equity raising.

In essence, this will improve S-Reits' access to debt and equity fundraising, enabling them to raise the capital they need.

MAS added that it will also require S-Reits to disclose their leverage ratios and ICRs in annual reports and interim financial results to provide investors with timely information about their financial position and the impact of higher leverage on their risk profiles.

"Notwithstanding the higher leverage limit, MAS expects S-Reit managers to carefully assess their ability to service financial obligations before taking on additional debt," it said.

Earlier this month, the Reit Association of Singapore (Reitas) had cautioned against putting significant strain on landlords' finances with a new Bill that gives businesses a reprieve from contractual obligations, including rent payments.

Reitas had flagged that the suspension of rent under the Bill essentially deprives a Reit of its main source of income for up to six months.

The low rental cash flow would in turn affect the Reit's ability to service its own financial and operational obligations, and the stress is made more acute by Reits having to pay out 90 per cent of their annual distributable income in order to qualify for tax exemption.

In addition, the interruption of revenue may lower Reits' financial standings in terms of metrics such as leverage, capital adequacy and valuation, leading to financial problems for Reits, such as higher borrowing costs and difficulty in obtaining both debt and equity capital, at precisely the time when it may be critically needed.

The authorities' move on Thursday was seen as a response to address the association's concerns.

Chew Sutat, head of global sales and origination at SGX called the announcement a "win-win for all", saying that this collection effort came "very quickly... during a particularly crucial time".

"Perhaps the biggest winners are individual and institutional investors, who can now continue to invest with greater confidence," he said.