SREIT – OCBC

Credit market freeze raises refinancing concerns

Focusing on refinancing risk for now. Putting aside the defensiveness of S-REITs, we believe the focus is now on their credit health and refinancing risk. Spikes in USD 3M SIBOR rates since mid September signalled continuing stress in the credit market and with the tightness in the credit market not expected to abate any time soon, greater scrutiny has been placed on S-REITs’ gearing and debt refinancing over the next year. Some of the worst-performing REITs over the past month share some similar characteristics- like high proportion of current debt to total debt and relatively higher gearings than their peers.

Greater refinancing risk exposure for retail and industrial REITs. Based on data available, we estimate that S-REITs currently have a combined borrowing S$3.5b due for refinancing within a year. Retail and industrial REITs are the most exposed to refinancing risk. Retail REITs have S$1b of borrowings due for financing within a year, which is about 24.3% of their total borrowings. Industrial REITs have S$1.1b of borrowings due for refinancing within a year, which is about 32.7% of their total borrowings. Among the sectors, retail REITs also have the highest gearing of 39.2%.

Sponsors play a key role in tough times. With the freeze in credit market, REIT sponsors will have increasingly important roles to play as the pillar of funding support for their sponsored REITs. So far, we had seen Mapletree Investments, sponsor of MLT, taking up the excess units during its recent rights issue exercise; and Keppel Corp, a key shareholder of K-REIT, providing a new loan of S$391m to refinance the remaining bridging loan. In a scenario whereby banks freeze refinancing for REITs, we think strong sponsors could act as ‘lender of last resort’ for REITs and preventing any fire-sale of assets.

Refinancing is the key to re-rating. Under current market conditions, we think REITs with little or no near-term refinancing needs and backing from strong sponsors could outperform their peers. Risk-return matrix is turning attractive for the sector and we believe that re-rating should occur either when short-term refinancing needs have been addressed or when the credit market functions normally again. Our top picks for the S-REITs sector are Suntec REIT (Fair value S$1.53, FY08 yield 9.9%) and CapitaMall Trust (Fair value S$3.05, FY08 yield 7.9%).

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