Analysing REITS

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Business Times - 18 Nov 2011

Reits cash calls looking more likely: CIMB

K-Reit, FCOT, ART, Suntec Reit on list; it keeps overweight call on sector

By EMILYN YAP

REAL estate investment trusts (Reits), many of which relied on rights issues or private placements to boost their balance sheets during the last financial crisis, may have to go down the same path again as the economic outlook dims.

In a report yesterday, CIMB identified K-Reit Asia, Frasers Commercial Trust (FCOT), Ascott Residence Trust (ART) and Suntec Reit as those likely to engage in equity fundraising in the near future. 'The first signs of more cash calls to come have surfaced,' said analysts Janice Ding and Tan Siew Ling.

The Reit industry is stronger than it was three years ago, they stressed. Across the sector, the proportion of short-term debt to total debt stood at 8 per cent in September, much lower than the 38 per cent in June 2008.

With reduced pressure from short term liabilities, Reits are less likely to rush into cash calls, even if the industry's average gearing did climb to 36 per cent (from 34 per cent in 2008).

But some Reits - especially those in the office sector - could be vulnerable to asset devaluation as a downturn looms.

Lower property values push up gearing ratios, and that could be more taxing on some Reits than others. According to CIMB data, K-Reit, ART and Suntec Reit had gearings of 42 per cent, 41 per cent and 42 per cent respectively at end-Sept.

Its analysts believe that the risk of a cash call is greatest for K-Reit. Its aggregate leverage remains high despite a recent rights issue to fund the purchase of Ocean Financial Centre, and 20 per cent of its debt is due for refinancing next year.

They noted that ART also has a high leverage and its European assets could see a devaluation.

But there is a smaller chance of a near-term cash call if it divests Somerset Grand Cairnhill, which has provisional approval for redevelopment into a residential and hotel project.

Suntec Reit, which also has high leverage, faces headwinds in the office sector, Ms Tan and Ms Ding said. But it may not need a cash call until it is ready to acquire Phase 2 of Marina Bay Financial Centre and its capital expenditure needs could be partly met by proceeds from selling Chijmes.

They also picked FCOT as a potential candidate for equity fundraising, given its fairly high leverage of 37 per cent and low interest coverage ratio. In addition, all of its debt is maturing next year. But it could divest KeyPoint and refinance its debt at lower interest rates.

Risks of cash calls aside, CIMB believes that Reits are still safe, maintaining its 'overweight' call on the sector.