Disclaimer: This article is based on observations on past trends. It is not a prediction on future events that may happen in the REITs space. Please seek your financial advisor for advice.
A number of REITs issued rights in the past year or so, including First REIT. Hence, we will be taking a look at REITs that are more likely to have rights issue in the near term to reduce the gearing/leverage ratio to meet the SGX maximum gearing criteria of 50%. Using the StocksCafe REIT screener, we will be selecting REITs with >40% gearing ratio, >3% Weighted Average Cost of Debt and <3 Interest Coverage Ratio (ICR).
By selecting the filters above, there are 3 REITs fulfilling these criteria, namely ARA Hospitality Trust, Lippo Malls Indonesia Retail Trust, and OUE Commercial Trust. We will not be covering Eagle Hospitality Trust as it is still currently suspended.
Below is an overview of the 3 REITs, followed by a comparison table of the Gearing Ratio, Weighted Average Cost of Debt and ICR.
Listed on SGX on the 9 May 2019, ARAHT is the first pure-play U.S. hospitality trust listed in Asia. ARA US Hospitality Trust comprises 41 upscale select-service hotels, totaling 5,340 guest rooms across 22 states in the United States. Its total portfolio valuation is about US$700 million. Its sponsor is ARA Asset Management, which is also the sponsor for ARA LOGOS Logistics Trust and Suntec REIT.
As of the latest Q1 2021 Business Updates, its gearing ratio is 49% and Weighted Average Cost of Debt is 3.40%. Interest Coverage Ratio (ICR) value is not provided.
Lippo Malls Indonesia Retail Trust is first listed on SGX on 19 November 2007. Its portfolio comprises 29 Retail properties in Indonesia, with a total portfolio valuation of S$1,791.5 million. Its sponsor is Lippo Karawaci, which is also the sponsor for First REIT. LMIR Trust has recently raised S$281m in a rights issue in Q1 2021, with the funds used to purchase Lippo Mall Puri in Jakarta.
As of the latest Q1 2021 Business Updates, its gearing ratio is 41.7%, Weighted Average Cost of Debt is 6.54% and Interest Coverage Ratio (ICR) is 1.3x.
OUE Commercial REIT is first listed on SGX on 27 January 2014. Its portfolio comprises seven properties in the Office, Retail and Hospitality sectors, with properties in Singapore and Shanghai, with a total portfolio valuation of S$6,524.8 million. Its sponsor is OUE Limited.
As of the latest Q1 2021 Business Updates, its gearing ratio is 40.4%, Weighted Average Cost of Debt is 3.10% and Interest Coverage Ratio (ICR) is 2.6x.
Gearing Ratio of ARAHT highest among currently trading S-REITs
One observation is that ARA Hospitality Trust’s Gearing Ratio has gone up considerably since Q1 2020, which is also the start of the COVID-19 pandemic. It has gone up from 32.1% in Q4 2019, to 49% in Q1 2021.
Most Recent Rights Issue: First REIT
Other than LMIR Trust, another REIT that has undergone a rights issue is First REIT in Q1 2021. In order to raise S$158.2mil, 791,062,223 new units have been issued, of which S$140.1 million (equivalent to 88.6% of the gross proceeds of the Rights Issue) has been used to repay loans (specifically part of the 2018 Secured Loan Facilities).
From the Gearing History chart in the StocksCafe REIT screener, we can see that First REIT’s gearing ratio reached 49.0% in Q4 2020, close to SGX’s gearing limit of 50% before the rights issue brought the gearing ratio down to around 35%.
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Kenny Loh is a Senior Consultant and REITs Specialist of Singapore’s top Independent Financial Advisor. He helps clients construct diversified portfolios consisting of different asset classes from REITs, Equities, Bonds, ETFs, Unit Trusts, Private Equity, Alternative Investments, Digital Assets and Fixed Maturity Funds to achieve an optimal risk adjusted return. Kenny is also a CERTIFIED FINANCIAL PLANNER, SGX Academy REIT Trainer, Certified IBF Trainer of Associate REIT Investment Advisor (ARIA) and also an invited speaker of REITs Symposium and Invest Fair. Kenny Loh also offers REIT Portfolio Advisory for a fee. Do contact him at email@example.com