Reits: A blast from the past

In Property, Reits on 21/11/2011 at 7:11 am

Our constructive, nation- building media are promoting Reits as “safe” investments, so maybe it’s time to read or reread “Initially, I wanted to title this post “The Disastrous Singapore REITs Model” but decided otherwise”, written late last year?

It analyses what went wrong in the S-Reit sector in the period up to massive rights issues in 2009.

In a report issued last Thurday, CIMB identified K-Reit Asia, Frasers Commercial Trust (FCOT), Ascott Residence Trust (ART) and Suntec Reit as those likely to engage in equity fundraising in the near future. “The first signs of more cash calls to come have surface.”

The Reit industry is stronger than it was three years ago, CIMB said. Across the sector, the proportion of short-term debt to total debt stood at 8%  in September, much lower than the 38% in June 2008. With reduced pressure from short term liabilities, Reits are less likely to make cash calls, even if the industry’s average gearing did climb to 36%  (from 34% in 2008). But some Reits -(especially those in the office sector) could be vulnerable to asset devaluation as a downturn looms. Lower property values push up gearing ratios.

According to CIMB K-Reit, ART and Suntec Reit had gearings of 42%, 41% and% respectively at end-Sept, higher than the average of 36%.

The risk of a cash call is greatest for K-Reit. Its aggregate leverage remains high despite a massive rights issue (17 for 20) now underway to fund the purchase of Ocean Financial Centre from parent Keppel Land, and 20% of its debt is due for refinancing next year.

 ART not only has high leverage but its European assets could see a devaluation, raising its leverage- a vicious cycle. But if it divests Somerset Grand Cairnhill, which has provisional approval for redevelopment into a residential and hotel project, a near-term cash call could be avoided.

Suntec Reit  may not need a cash call until it is ready to acquire Phase 2 of Marina Bay Financial Centre and its capital expenditure needs could be partly met by proceeds from selling Chijmes.

FCOT is  a potential candidate for a rights issue because of  its relatively high leverage of 37%  and low interest coverage ratio. Also, all of its debt is maturing next year. But it could divest KeyPoint. Given F&N as its “big brother”, it could refinance its debt at lower interest rates.

But CIMB believes that Reits are still safe, maintaining its ‘overweight’ call on the sector.

  1. Good post.

    I am a shareholder in CapitaMall Trust and was rather surprised recently when they did a private placement of over 139 million shares at $1.79 (which I recall was below the market price then). As an existing shareholder, why was I not offered the rights to subscribe to more shares so as to maintain my percentage holdings in the REIT? Now, my ownership is diluted and the stock price has dropped to $1.76 (thereabouts). Given the low gearing ratio of the REIT and its investment grade rating by the major rating agencies, why couldn’t they have raised more debt via a 5-year bond issuance? What happened to proper “corporate governance”?

    I would also rather they paid out less dividend then raise more capital, although I understand there is some law that states REITs must payout 90% of rental earnings as dividend so they may not have the luxury of choosing this option.

  2. REITs are leveraged financial vehicles without much cash reserves. When there is financial crisis or credit crunch, you can bet your ass that REITs will issue shares like fleas from rats. Just do proper asset allocation and go for those with low short-term debts and gearing if you still want REITs in your portfolio. No matter how good the REITs, if there is bear market they will also go down but maybe with less damage. E.g. STI drop 50%, safe REITs drop 30%. Just look at how REITs performed during 2008-2009 via-a-vis STI to have a feel.

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