REITs – BT

Debt turns from foe to friend for many Reits

Debt has turned from foe to friend for many real estate investment trusts (Reits) as they pursue acquisitions again at a time of low interest rates.

This can be seen in the rising levels of borrowings among Reits against their assets. Out of a sample of 16 Reits in Singapore, as many as 10 had a higher aggregate leverage or gearing ratio at end-December 2010 compared with the previous year.

Several Reits had relied considerably on debt to fund growth until the global financial crisis hit in 2008, which forced them to cut borrowings as credit markets froze. Investors developed a phobia of highly-leveraged Reits, worried that they would collapse without sufficient financing.

But this is no longer the case. Ascendas Reit’s (A-Reit) shifting level of indebtedness, for instance, illustrates how tolerance for debt in the industry – and among Reit investors – has changed.

Between 2008 and 2009, A-Reit strove to lower its aggregate leverage from 42 per cent to 31 per cent through equity fund raisings and other capital management strategies. But as the economy grew last year and credit markets improved, so did its aggregate leverage, which crept up to 35 per cent by end-2010.

Take Suntec Reit as another example. Its aggregate leverage had dipped from 37 per cent at end-2008 to 35 per cent a year later, but jumped to 40 per cent at the close of 2010.

For a handful of Reits, the debt-to-asset increase is slight. CDL Hospitality Trusts is one which has maintained a relatively conservative debt profile over the last few years.

But many other Reits took on much more debt to feed their resurgent appetite for inorganic growth. ‘2010 was the most active year for new asset acquisitions that the market has seen in years,’ said Jason Kern, HSBC managing director and head of real estate investment banking for Asia Pacific.

K-Reit Asia was one which went on an acquisition spree last year. Its buys included a $1.4 billion one-third stake in the first phase of Marina Bay Financial Centre (MBFC). Consequently, its aggregate leverage rose to 37 per cent at end-December from 28 per cent in the previous year.

Suntec Reit also paid around $1.5 billion for a stake in properties at MBFC Phase One.

‘We are seeing more office Reits shoring up their aggregate leverage ratios,’ said OCBC Investment Research analyst Ong Kian Lin in a recent note. ‘We think that 40 per cent will be the new norm for FY2011.’

Reits outside the office sector, such as A-Reit, Mapletree Logistics Trust and Parkway Life Reit, also snapped up assets last year.

The low cost of debt, helped by sustained near-zero interest rates in the US, has facilitated borrowing.

Most Reits ‘are quite comfortable with the credit conditions’, said CIMB analyst Janice Ding. She believes that the average aggregate leverage among Reits could reach the high 30 per cent range.

While the credit environment is friendlier, market watchers do not expect Reits to ratchet up aggregate leverage to levels seen before the financial turmoil anytime soon.

Increasing gearing levels are a sign that property investors are gradually becoming more comfortable with leverage as they move further away from the financial crisis, said HSBC’s Mr Kern.

Nevertheless, he does not think investors are ready to see Reits revisiting the 40-50 per cent aggregate leverage that was common earlier. ‘Reits that are seen pushing the envelope on gearing too much will be punished with a lower equity valuation,’ he said.

The credit crunch had been a ‘very painful’ lesson for the Reit sector, Ms Ding said. As a result, Reits ‘will definitely be a lot more cautious’.