The Monetary Authority of Singapore is said to be considering raising the current leverage limit of 45% for Singapore real estate investment trusts (S-REITs).
A higher gearing limit will enable REITs to increase their debt-to-asset ratios, allowing REITs to take on more debt to optimise their capital structure.
The move to increase the gearing limit could potentially benefit REITs that have access to cheap debt and have higher interest coverage. With that said, here are three REITs that could benefit from a higher gearing limit.
Parkway Life REIT
Since listing in 2007, Parkway Life REIT (SGX: C2PU) has utilised debt to great effect. The healthcare REIT has taken on debt to make strategic acquisitions in Japan, which have been a big reason for its distribution per unit (DPU) more than doubling over that time.
At present, the REIT has a gearing ratio of 36.4%, which the REIT manager says is optimal considering the current gearing limit. However, if the gearing limit should increase, Parkway Life REIT has the capacity to take on more debt.
For one, it has access to very cheap debt. As of 31 March 2019, the healthcare REIT had an effective all-in cost of debt of 0.91%, the lowest among REITs in Singapore. On top of that, its interest expense is 13.2 times covered, which means the REIT can easily pay off all of its finance costs using current net property income.
CapitaLand Commercial Trust
CapitaLand Commercial Trust (SGX: C61U) is another REIT that could potentially benefit from a higher gearing limit. The office REIT sports an aggregate leverage of 35.2%, which is a safe distance from the current 45% regulatory cap.
Its average cost of debt stands at just 2.5%, well below most other S-REITs. It’s also sponsored by CapitaLand Limited (SGX: C31), which is one of the biggest property companies in the world.
Furthermore, its interest expense is well covered at 5.8 times. With grade-A office rents in Singapore picking up, the REIT’s interest cover is likely to improve even more over the next few quarters. What’s more, 92% of its borrowings are on fixed rates, which provides certainty to interest expense in the future.
Industrial-focused Ascendas REIT (SGX: A17U) is another REIT that could potentially benefit from a higher gearing limit. The REIT has an interest cover of 5.2 times, and its weighted average all-in cost of debt stands at 3.0%. It has a high credit rating of A3 by Moody’s, which should enable it to continue to have access to cheap debt.
Morever, 90.8% of its properties are unencumbered. Should MAS increase the gearing limit, Ascendas REIT is well-placed to take on more debt for DPU-accretive acquisitions.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of CapitaLand Commercial Trust, CapitaLand Limited, and Parkway Life REIT. Motley Fool Singapore contributor Jeremy Chia does not own shares in any companies mentioned.