ARA US HOSPITALITY TRUST (SGX:XZL)
ASCOTT RESIDENCE TRUST (SGX:A68U)
CDL HOSPITALITY TRUSTS (SGX:J85)
FRASERS CENTREPOINT TRUST (SGX:J69U)
KEPPEL REIT (SGX:K71U)
REITs – Singapore - Well-Balanced Approach To Provide More Flexibility
- The MAS has initiated industry consultation on allowing higher leverage of 50% if S-REIT meets the minimum ICR of 2.5x. S-REITs with good financial discipline could have higher leverage of 55%.
- The slight relaxation, if implemented, will enable S-REITs to respond faster and make more sizeable acquisitions. These new limits remain well below those in many other jurisdictions. S-REITs are unlikely to depart from their culture of prudence in managing capital structure.
- Maintain OVERWEIGHT.
WHAT’S NEW
Making tweaks to regulations on leverage.
- The MAS has embarked on an industry consultation to seek feedback on using a combination of leverage limit and interest coverage ratio (ICR) to recalibrate the leverage limit allowed for S-REITs:
- The MAS will consider allowing a S-REIT’s leverage to exceed 45% but not more than 50% if the S-REIT has a minimum ICR of 2.5x after taking into account the interest payments arising from the new debt. The leverage limit is not considered breached if the S-REIT’s ICR subsequently falls below the ICR threshold of 2.5x due to circumstances beyond the control of the S-REIT manager.
- The MAS is also seeking views on whether it is appropriate for an S-REIT that has demonstrated good financial discipline, such as having a higher ICR threshold, to be allowed a higher leverage of 55%.
Conservative management of capital structure.
- While the current leverage limit is at 45%, S-REITs usually keep their leverage within 40% (average leverage at 34% as of May 19). The industry practice to maintain a 5% buffer below the regulatory limit is necessary to respond to changing market conditions, such as declining property prices.
ACTION
Maintain OVERWEIGHT.
- We see the proposed changes in regulations as well calibrated. It maintains an optimal balance to provide S-REITs with more flexibility to expand, while maintaining a prudent capital structure. All S-REITs that will benefit from the slight increase in leverage limit are:
- Larger S-REITs with backing of strong sponsors, which spells lower cost of debts and higher ICR, would benefit from a potentially higher leverage limit of 55%.
- Smaller S-REITs could also grow at a faster pace with the higher leverage limit of 50%.
Improve timeliness to acquire larger assets.
- Recently, S-REITs have been acquiring overseas assets from third parties in search of higher yield spreads. These acquisitions involve a competitive bidding process and are highly time-sensitive. A higher leverage limit provides more flexibility for S-REITs to optimise their capital structure as debt tends to be a cheaper source of capital.
- In addition, raising equity capital takes more time. Thus, the higher leverage limit would enable S-REITs to respond more effectively to opportunities to acquire good quality assets.
Improve flexibility to acquire larger assets.
- On many occasions, smaller S-REITs had to acquire larger assets over multiple phases. For example, FRASERS CENTREPOINT TRUST (SGX:J69U) was limited to acquiring just 30% of Waterway Point from its sponsor and would have to consider acquiring the remaining 70% stake at a later stage. Having a higher leverage limit could pave the way for smaller S-REITs to acquire larger assets in one transaction.
Regulations for S-REITs remain stringent and conservative.
- Malaysia imposes a 50% limit while Thailand allows REITs to leverage up to 60% if they have an investment grade credit rating. Belgium, Germany and the Netherlands have limits ranging from 60.0% to 66.25%. The US, Canada, Australia, France and Japan do not impose any leverage limit. A slight easing in terms of leverage limit would allow S-REITs to expand in a prudent manner.
SECTOR CATALYSTS
- Interest rates are expected to drift sideways in the foreseeable future.
- Limited new supply for office, hotel and logistics segments in 2019 and 2020.
ASSUMPTION CHANGES
- We kept our earnings forecasts unchanged.
RISKS
- Uncertainties from the US-China trade conflict.
TOP BUYS
| REIT | Recommendation | Share Price | Target Price |
|---|---|---|---|
| ARA US HOSPITALITY TRUST (SGX:XZL) | BUY | US$0.89 | US$1.15 |
| ASCOTT RESIDENCE TRUST (SGX:A68U) | BUY | S$1.28 | S$1.46 |
| CDL HOSPITALITY TRUSTS (SGX:J85) | BUY | S$1.66 | S$2.06 |
| FRASERS CENTREPOINT TRUST (SGX:J69U) | BUY | S$2.64 | S$2.72 |
| KEPPEL REIT (SGX:K71U) | BUY | S$1.28 | S$1.37 |
Jonathan KOH CFA
UOB Kay Hian Research
|
Peihao LOKE
UOB Kay Hian
|
https://research.uobkayhian.com/
2019-07-04
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