In a report on S-REITs, Bank of America (BofA) points out that average sector leverage as at FY2022 stands at 38%, a touch lower than the 39% seen in 1H2008 during the Global Financial Crisis.
“Assuming physical yield spreads (against bond yields) revert to historical average levels, we estimate cap rates would need to expand by 50–100 bps, implying a 10– 15% decline in capital values, or 5-10 percentage points (ppt) increase in average gearing ratios,” BofA notes.
According to the report, S-REITs with the greatest buffer to the 50% gearing limit set by the Monetary Authority of Singapore are CapitaLand Ascott Trust (CLAS), Frasers Logistics and Commercial Trust, Digital Core REIT, Keppel DC REIT and Frasers Centrepoint Trust.
The S-REITs with the least buffer are CapitaLand Integrated Commercial Trust (CICT), Lendlease Global Commercial REIT, Mapletree Pan Asia Commercial Trust and Suntec REIT.
In a nutshell, analysts are concerned about demand for office space. Hence the selldown in the US office REITs. The likes of CICT, Keppel REIT and Suntec REIT could also be affected, although their assets are mainly in Singapore and Australia with a touch in Europe or the UK.
In 2008–2009, office rents collapsed by 65%, leading to a 55% fall in capital values, BofA recalls. “We see the current rent cycle as much less volatile with JLL’s estimate showing a muted +5% rent growth in the last three years, still some 26% below pre-GFC peak levels,” the BofA report says.
See also: CICT's manager proposes to acquire ION Orchard at $1.85 billion, subject to EGM
According to the report, tenants from the tech industry account for less than 5% of occupied space on average in S-REIT portfolios.
“In short, we think a GFC-like collapse in asset values is unlikely. Meanwhile, the retail mall sector looks more defensive coming out of Covid, while demand for business parks and logistics is likely to stay sticky,” BofA continues.
Successful EFRs provide roadmap
See also: CICT's manager proposes to acquire ION Orchard at $1.85 billion, subject to EGM
At any rate, REITs that have tested the market have found willing investors. Link REIT can be said to have had a successful fundraising. It announced on Feb 10 a fully underwritten one-for-five rights issue of 425.6 million units at HK$44.20 ($7.49) per unit to raise approximately HK$18.8 billion, which was successfully listed on the Hong Kong Stock Exchange on March 30.
The rights issue price was at a discount of 29.6% to the last close as at Feb 9, and a 26% discount to the theoretical ex-rights price or TERP. Link REIT continues to trade above its rights price but below TERP of HK$59.70.
The rights issue was 2.4x covered despite the size of the transaction and Link REIT being an internally managed REIT with no controlling unitholders to anchor the transaction.
Link REIT has just completed the acquisition of Jurong Point and Swing By @ Thomson Plaza from Mercatus Co-operative for $2.161 billion.
The success of Link REIT’s rights issue — and the overwhelming yes vote at ESR-LOGOS REIT’s (E-LOG) EGM for unitholders to approve its issuance of up to 461.6 million new units in a preferential equity fund raising (EFR) and the transfer of a controlling interest to ESR Group — provide a roadmap for other REITs.
ESR is underwriting the preferential EFR. In all, E-LOG raised $150 million via a placement and is raising a further $150 million in the preferential equity fund raising.
Separately Mapletree Logistics Trust (MLT) is in the process of a placement of 121.3 million to 124.2 million units to raise $200 million. The indicative price range is likely to be $1.61 to $1.649. (Units issued under the private placement will not be entitled to the cumulative distribution.) The forecast yield based on analysts’ consensus DPU for 12 months to March 20 (MLT’s FY2023) is 5.4% to 5.53%.
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On March 30, MLT’s manager announced the proposed acquisition of six Japanese properties, one Australian property and a Korean property. The properties cost a total of $913.6 million, and the cost represents a 4% discount to valuation. In total, including expenses, the cost is $946.8 million.
Analysts who attended a briefing on the acquisition indicate that the MLT’s properties are being acquired from unrelated third parties; they are fully occupied by e-commerce and 3PL tenants; and the portfolio has a blended weighted asset lease expiry of 4.4 years. The average age of portfolio is 5.5 years with Japan and Korean assets completed in last 3 years.
REITs that need to raise equity
Among the handful of troubled S-REITs, two are in urgent need of fresh capital. Manulife US REIT’s (MUST) manager announced a strategic review by Citigroup to be completed by end-March. While all options are on the table, raising equity coupled with divesting some properties would be the most sensible way out.
Like Link REIT, MUST does not really have the full support of a sponsor, although Manulife is officially its sponsor. MUST’s manager could be exploring a dilutive placement or a dilutive rights issue, and this could explain the pressure on its unit price for most of March.
Lippo Mall Indonesia Retail Trust (LMIRT) has announced the appointment of financial adviser Sterling Coleman Capital for capital management initiatives. LMIRT acquired properties priced in rupiah over the years.
LMIRT’s options are likely to be similar to those of MUST. They are: a placement to a third party that dilutes unitholders; a dilutive rights issue in the manner of First REIT’s; and/or divesting properties, similar to First REIT after its rights issue divestment. LMIRT has divested properties in the past.
As REITs get increasingly emboldened to undertake EFRs, some REITs which have reset their perpetual securities instead of calling them because of a lack of enthusiasm for the structure may be able to take this opportunity to replace their perpetual securities with equity. REITs that have not called their perpetual securities include MLT, CLAS, Suntec REIT and LMIRT.
Perpetual securities have helped to keep the aggregate leverage of some REITs in check without causing dilution to unitholders. However, perpetual securities are increasingly being viewed as double-edged swords, given that investors are beginning to view them as having the disadvantages of both equity and debt without the advantages.
