Published November 28, 2008

Reits treading warily in market minefield

Refinancing a bigger focus; acquisitions on hold; sector shakeup possible

By EMILYN YAP
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(SINGAPORE) The latest earnings season has been a chilly one for real estate investment trusts (Reits) hit by the credit crunch and a cooling property market.

Many Reits are working to shore up confidence in their credit positions. Property acquisitions are virtually off the table while industry watchers are divided on whether consolidation within the sector is on the cards.

'Reits are definitely paying more attention to financing,' said DMG & Partners Securities analyst Brandon Lee. The research house estimates that the sector has at least $4.5 billion up for refinancing in 2009 alone. With credit tightening and spreads widening, the market is watching closely for signs of trouble.

According to a CIMB-GK report, borrowing spreads for Reits have risen from an average of 150 basis points (bps) to 200-300 bps for three-year loans in the last six months.

'While average all-in cost of debt for most Reits has been contained within 4 per cent thus far . . . we expect the all-in cost for those with significant refinancing due in 2009 to rise,' said associate vice-president of research Janice Ding.

Reits have tried to soothe market anxiety in the past few weeks by releasing more details on debt. Ascendas Reit (A-Reit), for instance, won confidence votes when it said it had secured firm commitment of $200 million to help refinance a $300 million loan due in August next year.

Suntec Reit also made it a priority to refinance a $700 million loan due in December 2009. 'Whilst we have no major financing needs in the next 12 months, we are keenly aware of the liquidity crunch,' said the Reit manager's CEO Yeo See Kiat last month.

Reits also have to worry about asset devaluation as the slowing economy weighs down on rents and occupancies. Lower property values would raise gearing ratios. Frasers Commercial Trust (FCOT) booked a revaluation loss of $83.5 million in the third quarter ended Sept 30.

Reits have pushed asset acquisition plans to the bottom of the agenda. Even organic growth has slowed. Suntec Reit shelved redevelopment plans for Park Mall. CapitaMall Trust also held back enhancement plans for three malls because of high construction costs.

'We will review new commitments carefully and will not sacrifice our liquidity,' said the Reit manager's chairman Hsuan Owyang last month.

Analysts advise investors to be selective. While low unit prices have boosted yields, it would help to 'pay extra attention to (Reits') refinancing profile, especially the quantum of short-term debt due within the next six to nine months,' said DMG's Mr Lee in a note. 'We like S-Reits with strong sponsors (and) excellent track record.'

CIMB-GK's Ms Ding added: 'The presence of strong sponsors and government-linked sponsors is advantageous at this juncture.'

FCOT, for instance, managed to take a $70 million loan from parent company Fraser and Neave last week to repay debt. The trust is in talks to refinance the $70 million loan and all debt maturing next year. In response, Standard & Poor's Ratings Services took FCOT off 'CreditWatch' status and said that the outlook is stable.

ARA Asset Management Group CEO John Lim believes that consolidation in the sector seems unlikely because Reits would be more concerned about their own refinancing and asset valuation issues.

CIMB-GK's Ms Ding said that in today's market, it would be difficult 'for any single entity to have enough funds to buy over the entire (Reit) unless it's a distressed sale'.

But an industry observer believes that consolidation could happen because the sinking tide has left some Reits looking weaker than their peers. To avoid coughing up cash, a potential acquirer can offer units in itself to the target Reit, he added.