S-REITs fatten portfolios with debt-funded acquisitions: Moody's

On average, acquisitions are funded by 33% debt, 47% equity, and 20% cash on hand.

Singapore REITs’ (S-REITs) financial profiles are expected to weaken over the next 12-18 months, as the trusts carry out debt-funded acquisitions and revamp their asset portfolios through redevelopments in search of higher yields, Moody's Investors Service said.

According to a report, S-REITs will seek growth overseas due to the environment that has low yields and cash flows.

Moody's cited CBRE, which said yields across industrial and retail fell due to softening rents.

In the third quarter, warehouse rental yields declined to 2.52% from 3.18% in early 2011, and Orchard Road retail yields declined to 4.77% from 5.32%. Grade A office yields also declined to 3.06% from 4.14% during the same period. In comparison, yields of S-REITs' recent overseas acquisitions have ranged between 5% and 7%.

Moody's said the trusts funded their acquisitions on average with about 33% debt, 47% equity and 20% with cash on hand mainly from asset sales.

Of the equity portion, the trusts issued perpetual securities to fund around 15% of the total acquisitions.

"MAS typically classes these instruments as equity. However, we treated the instruments issued by the S-REITs as 50% equity and 50% debt," Moody's AVP-analyst Saranga Ranasinghe said.

Despite the growth overseas, S-REITs’ exposure to foreign exchange risk will be manageable, the analysts said.

Trusts borrow funds for the acquisitions in the regions that they are acquiring the assets in. Debt split by region shows the S-REITs' increasingly diverse geographical asset mix.

Moreover, aggregated debt maturities over the next 12-15 months are around 18% of total debt. This compares with over 25% at the end of 2008.

"The industry’s debt maturity profile has improved considerably since the global financial crisis because trusts have been proactively managing their debt maturities ahead of time," Ranasinghe said.

The brokerage added that REITs with strong sponsors and banking relationships are at an advantage, because of their more stable access to funding.

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