By EMILYN YAP
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BANKS may have loosened their purse strings but many real estate investment trusts (Reits) here are sticking to rights issues or private placements for funds - despite their dilutive effects.
Since June, another five Reits have conducted such exercises to raise more than $1.23 billion. Investors were not too pleased in some cases and sold out, driving unit prices down. Why would some Reits rather incur the wrath of unitholders than turn to banks?
For Reits looking to trim gearing, there are few other fund raising options. While credit conditions have certainly improved, 'leverage' remains a dirty word and many would prefer to repay debt than to refinance or borrow more. Frasers Commercial Trust was one which made a cash call in June for this.
'Peer pressure' keeps Reits particularly disciplined. With many paring down debt in the last few months, those with relatively higher leverage ratios would start drawing the wrong kind of attention from watchful analysts and investors. Just two out of 13 Reits have gearing levels exceeding 40 per cent, a CIMB report this week shows.
While refinancing may have become easier, there is no saying if credit might tighten again. Banks are still exposed to the recession - the default rate on commercial mortgages held by US banks, for instance, more than doubled in the second quarter from a year ago.
Rolling over debt in unstable times means that refinancing fears can haunt again and again. A DBS Vickers report last week found that Reits have just $1.89 billion of debt maturing next year. But this will surge to $3.28 billion and $4.28 billion in 2011 and 2012 respectively. So cutting debt still seems the prudent thing for many Reits to do.
Even Reits willing to borrow more from banks may not have much room to do so. Some analysts are expecting further asset value writedowns - particularly for commercial property. If this happens, gearing for affected Reits (determined by comparing debt with assets) will rise with or without an increase in borrowings.
In fact, CIMB believes that asset devaluation could trigger more equity raising by Reits. The cash would reduce debt, counter the effect of lower asset values and keep gearing stable.
Reits looking to buy assets but are not keen to raise debt will also value funds from rights issues and private placements. Starhill Reit raised $337.3 million recently not just to reduce debt, but also to capitalise on acquisition and asset enhancement opportunities.
CIMB further suggests in its report that Frasers Centrepoint Trust, CapitaMall Trust and Suntec Reit could also expand their portfolios and issue cash calls.
It helps that the stock market has surged, allowing Reits to issue new units at better prices. Fortune Reit, for example, announced a HK$1.9 billion (S$353.2 million) rights issue last week with new units going at HK$2.29 apiece - a large discount from the last traded price of HK$4.10 then. The rights issue price would have been much lower if the exercise had happened at the end of last year, when units traded at just HK$1.99.
Banks may be more willing to lend, but many Reits will want to keep their hands in unitholders' pockets until economic skies are clear again.
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