Singapore Real Estate Investment Trusts (REITs)

15 Jan 2009
By Meenal Kumar, OCBC Research

The recent news of two successful refinancings bodes well for the broader S-REIT sector. CapitaCommercial Trust announced last week that it will be able to refinance some S$580m in commercial mortgage-backed securities (CMBS) due in March '09 using a 3-year term loan facility with four banks. Meanwhile, Cambridge Industrial Trust announced in December that it has successfully refinanced S$390.1m of loans.

Some S$3.4b of S-REIT debt is still due for refinancing in the next nine months but the news is overall a positive signal – especially as the smaller Cambridge, was perceived as relatively higher risk. We still see some risk – especially for smaller, non-sponsored REITs that have historically relied on securitized financing options like CMBS and are only now building relationships with traditional 'balance sheet' lenders like banks. We expect the cost of debt achieved to also be higher across the board, impacting DPU.

On the flip side, we still believe fresh equity issues are a likely imperative. REIT managers will have to align their debt tolerance with the market's tolerance – and especially with their lenders' tolerance. If gearing is too high, the REIT would need to raise capital, most likely in the form of a straightforward equity issue (with the proceeds used to repay debt) or an equity-funded acquisition (making the loan-to-value ratio more palatable to existing lenders).

Saizen REIT recently proposed a renounceable non-underwritten rights issue. The S$44.75m proceeds will be used to repay loans. Saizen is one of the highest geared S-REITs. Most tellingly, Saizen said the issue was motivated by lenders, who "generally favor lower leverage under the current credit environment". Significantly, Saizen also proposed a scrip-only dividend scheme, to conserve cash for loan repayments. We reiterate our view that lender risk appetite will drive equity raising plans – and perhaps even distribution decisions.

Watch out for 4Q CY08 results
Ascendas REIT kicks off the 4QCY08 results season this Thursday, and a slew of S-REIT results will be out next week. We expect the results to be significant price movers for two reasons: 1) achieved rental reversions in 4QCY08 will show the first impact of the global economic crisis on the sector, and 2) several S-REITs will be announcing the results of their annual property revaluations . We maintain our NEUTRAL rating on the sector.










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