SREITs – OCBC

Impact of interest rates hike on S-REITs

Debt profile varies among the S-REITs. We consolidated the debt profiles of the S-REITs under our monitor, and we think that any impending interest rates hike will add on to borrowing costs, and thus affect distributable income for unitholders. However, not all S-REITs will be impacted similarly. Some of the S-REITs have more fixed-rate borrowings than others (using instruments such as fixed rate CMBS, fixed rate term loan, fixed rate MTN, convertible bonds, retail bonds etc.) S-REITs also have varying degrees (as % of total borrowings) of hedging their outstanding loans using interest rate swaps. The debt maturity profiles are different for different S-REITs. Some are weighted more towards short-term borrowings, while others are contracted on longer-term basis, which may or may not be fixed rated. The resulting refinancing risks are thus different for different S-REITs.

Impacting S-REITs differently. We think any rate hike is likely to have a greater impact on S-REITs that 1) have a lower percentage of fixed rate borrowings, and 2) have a substantial amount of borrowings maturing near the interest rate hike period (likely 2H11-FY12), or if they still have not refinanced to a latter date. Any refinancing done thereafter will be at much higher rates, even for fixed rate borrowings.

Mitigation tactics. Generally, all S-REITs under our monitor have some form of fixed rate contractual agreements or hedge using interest rates swaps to mitigate the effects of interest rate risks. For FY10/11, some S-REITs have taken the following actions in anticipation of the interest rate hike, 1) lengthening the debt term-to-maturity with more fixed rate borrowings, 2) hedging using Interest rate swaps, and 3) cash hold-up for some since FY10, in anticipation of borrowings maturing in 2011-2012.

Conclusion. Overall, we think fundamentals for the majority of the S-REITs remain strong, and any increase in interest rate will have some, but not material impact on their financials (since most of them are already expecting a hike in interest rate and have been preparing for it). This is corroborated by our correlation analysis of the percentage change of the FSTREI index vis-à-vis pp change of the 3-month Sibor, which registered a low -3.4% from 2006 till to-date. Factoring in delay effects of 1-24 months, the correlation is also marginal, ranging from -7.8% to 8.6%. Maintain our OVERWEIGHT rating on the S-REITs sector.