Now a REIT can fund the acquisition of a property by using equity or debt. Using equity usually means raising cash by issuing more shares either via rights issue or private placement. So using equity usually leads to near term dilution of DPU. Using debt, on the other hand, usually leads to increase in DPU, as long as rental yield of the acquired property is higher than the interest of the debt. So ideally, a REIT can keep borrowing more and more to fund more and more acquisitions to grow the DPU indefinitely. Of course in reality things do not happen this way as once the debt of the REIT is above its asset value, it will put the REIT in a very risky situation. The REIT may also face serious cash flow problem when loan interest starts to rise and rental yield starts to decline.
According to the MAS Code on Collective Investment Schemes, there is actually a gearing limit for the REITs. Following is the extract of the related section Aggregate Leverage Limit, under section 9.2:
"The total borrowings and deferred payments (together the “aggregate leverage”) of a property fund should not exceed 35% of the fund's deposited property. The aggregate leverage of a property fund may exceed 35% of the fund’s deposited property (up to a maximum of 60%) only if a credit rating of the property fund from Fitch Inc., Moody’s or Standard and Poor’s is obtained and disclosed to the public. The property fund should continue to maintain and disclose a credit rating so long as its aggregate leverage exceeds 35% of the fund’s deposited property."
Simply put it, if the REIT has a corporate rating by Fitch, Moody's or S&P, its gearing limit can go up to 60%. Otherwise it can only be up to 35%. The corporate rating may not be easily determined as it is not a standard reported item. You may need to look through the announcements or press releases, or in the earnings presentation slides, normally under the section on Capital Management. Fortunately we do not have to go through that for all the REITs as those which are currently or has ever been above 35% in gearing would definitely already have a corporate rating. Following table shows the corporate rating, if any, the latest gearing, and the gearing limit:
[Update as at 28 Nov 2009]
| REIT | Rating | Gearing | Limit |
| AscendasReit | Baa1 - Moody | 30.50% | 60.00% |
| AscottReit | Baa3 - Moody | 41.50% | 60.00% |
| Cambridge | BBB- - S&P | 42.60% | 60.00% |
| CapitaRChina | 34.40% | 35.00% | |
| CapitaComm | Baa2 - Moody | 31.20% | 60.00% |
| CDL H-Trust | BBB- - Fitch | 20.20% | 60.00% |
| CapitaMall | A2 - Moody | 30.40% | 60.00% |
| FirstReit | 15.60% | 35.00% | |
| Fortune | 25.70% | 35.00% | |
| FrasersComm | BB - S&P | 38.90% | 60.00% |
| FrasersCT | Baa1 - Moody | 29.90% | 60.00% |
| K-Reit | Baa3 - Moody | 29.50% | 60.00% |
| LippoMapleTrust | 11.80% | 35.00% | |
| MapleTreeLog | Baa2 - Moody | 38.10% | 60.00% |
| MacCookReit | Caa1 - Moody | 44.70% | 60.00% |
| PLife | BBB - Fitch | 23.20% | 60.00% |
| Saizen | Caa1 - Moody | 43.50% | 60.00% |
| Starhill Gbl | Baa1 - Moody | 27.20% | 60.00% |
| Suntec | Baa1 - Moody | 34.30% | 60.00% |
The highest gearing I have seen was that of MapleTree Logistic Trust in 2008, well above the 50% mark. This was later brought down to the 30++ % level after a rights issue exercise. So when the gearing of a REIT is near its limit, you will have to be prepared for possible recapitalization exercise (rights issue or private placement).
Related Posts
- All about REIT - The Basics Part 5: Sponsors
- All about REIT - The Basics Part 3: Gearing
- Other articles from All about REIT
Is there an updated version of this datasheet ?
ReplyDeleteThanks
SnOOpy88
Hi Spoopy88,
ReplyDeleteThanks for the comments. I have added a statement that says the data is updated as at Nov 2009. Should have done that earlier in order not to cause confusion. Sorry wrote this article way back in 2009 and at that point in time did not know it will be read at a much later date. Will need some time to compile and update the data. Anyway if you are looking at the gearing limit i don't think there are any changes so far. The corporate rating should only have minor changes. The gearing will probably be different for most. But it is not difficult to determine from the earnings report. You can refer to All about REIT - The Basics Part 3: Gearing
Hi, could anyone explain this statement to me.
ReplyDelete"So using equity usually leads to near term dilution of DPU. Using debt, on the other hand, usually leads to increase in DPU, as long as rental yield of the acquired property is higher than the interest of the debt."