THE Monetary Authority of Singapore (MAS) on Wednesday (Jul 24) published a consultation paper proposing to simplify leverage requirements for all real estate investment trusts (Reits).
Under the set of proposals, all Singapore Reits, or S-Reits, will be subject to a minimum interest coverage ratio (ICR) threshold of 1.5 times, and an aggregate leverage limit of 50 per cent.
Commenting on the proposed ICR, the regulator said: “This underscores the responsibility of Reit managers in ensuring that Reits can adequately meet their interest payments.”
Currently, Reits that intend to increase their aggregate leverage from 45 per cent to 50 per cent must meet a minimum ICR requirement of 2.5 times. In the proposals, this requirement will be removed.
The ICR and aggregate leverage work complementarily to indicate a Reit’s financial strength, said MAS.
The ICR is a measure of how well a company can repay the interest on its debt, while the aggregate leverage refers to the ratio of a Reit’s total debt to total assets. The aggregate leverage, also known as gearing ratio, indicates a company’s ability to take on more debt.
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To simplify the requirements, MAS is proposing that a single aggregate leverage limit of 50 per cent apply to all Reits going forward.
“A leverage limit of 50 per cent, together with the ICR floor, will continue to foster prudent borrowing by Reits,” said the authority.
The proposals, which are available in a consultation paper published on MAS’ website, come as the high interest rate environment has been punishing for locally listed Reits amid rising finance costs and valuations coming under pressure.
They also come as the reporting season for Reits kicks off this week.
MAS is also proposing that Reits perform and disclose sensitivity analyses on the impact of changes in earnings before interest, taxes, depreciation, and amortisation, as well as interest rates on their ICRs.
This disclosure should be made in their interim and financial results and annual reports to provide investors with information on how a Reit’s credit profile could be affected by changes in market conditions, said MAS.
The last time the leverage limit was adjusted was in 2020, when it was raised from 45 per cent to 50 per cent to give S-Reits greater flexibility in managing their capital structures. This was amid the challenging environment in the wake of the Covid-19 pandemic.
Veteran investor Gabriel Yap told The Business Times that the latest proposals by MAS did not come as a surprise, but warned that Reits could see their valuations suppressed if they lowered their ICR to 1.5 times.
“Investors therefore have to be even smarter about where Reits are re-orientating their assets and profiles,” he said.
The full consultation paper is available on MAS’ website. Interested parties can submit their views on the proposals online by Aug 23, 2024.
