S-Reits’ proposal for distribution reinvestment plans positive: Fitch

FITCH Ratings says a recent proposal by some Singapore-listed real estate investment trusts (S-Reits) to introduce distribution reinvestment plans (DRPs) for unitholders is positive from a ratings standpoint.

But the ratings agency pointed out that S-Reits’ effectiveness in retaining cash remains limited.

In a new report, Fitch says that while DRPs improve credit profiles, they are not expected to lead to a positive rating migration in the S-Reit sector.

Analyst Peeyush Pallav says that participation in a DRP by a large proportion of an S-Reit’s unitholders can improve the Reit’s liquidity profile.

‘The retained cash can be utilised for debt repayments, or for meeting capital expenditure requirements, and serve as a source of additional liquidity for the S-Reit,’ he writes in the report. ‘This can be especially beneficial for S-Reits operating in property sectors with more volatile cash flows, such as hotels.’

DRPs can also be an efficient means of raising new capital for S-Reits in general, Mr Pallav reckons.

Several S-Reits included DRP provisions in their listing prospectus that allow them the flexibility to implement a DRP if need be. Such plans propose distributing quarterly dividends for an S-Reit either in the form of units, cash or in a combination of both, with the choice being up to individual unitholders.

At least two S-Reit managers have considered implementing a DRP this year – Saizen Reit and Cambridge Industrial Trust.

Saizen Reit this year proposed paying dividends for its fiscal second quarter in units instead of cash, but abandoned the plan after talks with the Singapore Exchange. But analysts believe that new Reit regulations could allow DRPs in future.

For example, a proposal for a DRP was approved at Cambridge Industrial Trust’s extraordinary general meeting on Oct 30.

However, Mr Pallav says that there are still many considerations. For one thing, DRP proposals may attract lesser participation from institutional investors that consider S-Reits to be dividend-driven investments.

Fitch also believes that the presence or absence of a DRP is not expected to be a primary rating driver, as putting the option in the hands of the investors means that they may choose not to participate in the DRP, especially when the prevailing market sentiment is negative and equity markets are unfavourable.

Separately, Moody’s Investors Service is looking to see if commercial mortgage-backed securities (CMBS) sponsored by S-Reits have enough liquidity arrangements in place to cover potential cashflow disruption in the event that an S-Reit is subjected to bankruptcy proceedings.

Depending on the type of bankruptcy proceedings to which an S-Reit is subjected to, there may be cashflow disruption, the ratings agency believes.

‘To ensure timely payment on the CMBS notes, CMBS transactions should have certain liquidity arrangements to cover the potential cash flow disruption, such that the rating of the CMBS notes’ linkage to that of the S-Reit can be minimised,’ Moody’s analyst Jerome Cheng said in a recent note.

Moody’s assessment is that at least 12 months of liquidity is needed to minimise the rating linkage. Ratings of those CMBS transactions with insufficient liquidity protection will be linked to that of the S-Reit.

Currently, Moody’s has outstanding ratings of Aaa to Aa3 on seven CMBS transactions sponsored by seven S-Reits, all with investment-grade ratings.

Right now, three of the seven outstanding Moody’s-rated transactions have no general purpose liquidity in place, while the remaining four transactions have liquidity facilities covering six to nine months of stressed debt service payments, Moody’s said.