Watch S-Reit results for signs

News of a pair of S-Reit refinancings is good sign

THE recent news of two successful refinancings bodes well for the broader Singapore real estate investment trusts (S-Reit) sector.

CapitaCommercial Trust announced last week that it would be able to refinance some $580 million in commercial mortgage-backed securities (CMBS) due in March 2009, using a 3-year term loan facility with four banks. In December, Cambridge Industrial Trust said it successfully refinanced $390.1 million of loans.

Some $3.4 billion 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 securitised 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 distribution per unit.

… but equity issues still likely

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, whose $44.75 million 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 favour 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 quarterly results

Today, Ascendas Reit kicks off the results season for the quarter ended Dec 31, followed by a slew of other S-Reit results next week.

We expect the results to be significant price movers for two reasons: Firstly, achieved rental reversions in the quarter ended Dec 31 will show the first impact of the global economic crisis on the sector.

Secondly, several S-Reits will be announcing the results of their annual property revaluations. Saizen Reit and Frasers Commercial Trust have already reported revaluation losses of about $97 million (as of 30 June) and $83 million (as of 30 Sept) respectively. S-Reits tend to revalue their properties at the end of their financial year.

Disclosures at these results could be a key bellwether of the future direction of revaluations.

We maintain our Neutral rating on the sector.

Disclaimer: This report should not be construed as an offer or solicitation for the subscription, purchase or sale of the securities mentioned herein. Any opinion or estimate contained in this report is subject to change without notice. You may wish to seek advice from a financial adviser regarding the suitability of the securities mentioned herein, taking into consideration your investment objectives, financial situation or particular needs, before making a commitment to invest in the securities.

Meenal Kumar, OCBC Investment Research team

Source : Today – 15 Jan 2009

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