MAS proposes to lower minimum interest coverage ratio for REITs. What's the impact?

The Monetary Authority of Singapore (MAS) today issued a consultation paper on proposed amendments to the leverage requirements for REITs. 

Currently, S-REITs can borrow up to 50% of the value of its assets. The limit drops to 45% if the adjusted interest coverage ratio (ICR) falls below 2.5 times. 

MAS’ proposed changes are:

• a single leverage limit at 50% for all REITs;
• all REITs must meet a minimum ICR of 1.5 times at all times. If this is breached, the REIT should not incur additional borrowings or enter into further deferred payment arrangements. However, it can continue to refinance existing borrowing;
• REITs are required to perform and disclose sensitivity analyses on the impact of changes in EBITDA and interest rates on REITs’ ICR. This disclosure is to be made at the interim financial results and annual reports.

What is the interest coverage ratio?

The interest coverage ratio (ICR) measures the REIT’s ability to service its debt. 

It is the ratio of operating income over the sum of interest expense and dividend on perpetual securities. 

In the last one year, ICRs have generally fallen as income growth have not caught up with rising interest expense. 

6 out of the 41 S-REITs have a ICR below or close to 2.5x at end-Mar 24. This has limited the ability of REITs to make debt-funded acquisitions.

The REITs with a ICR below 2.5x include:

• Suntec REIT - 1.9x
• Lippo Mall Trust - 1.9x
• OUE REIT - 2.3x
• Manulife US REIT - 2.3x
• AIMS APAC REIT - 2.4x
• ARA Hospitality Trust - 2.5x

Beansprout's view on proposed amendments to REIT leverage ratios

The changes, if implemented, are positive for the REIT sector:

• In general, ICRs are likely to come under pressure this year as interest costs are still expected to rise through 2024. 
• The lower ICR limit would provide breathing space when revenue is impacted when the asset undergoes AEI or redevelopment, or when there is a transition in tenancy. 
• It gives room for REITs to fund growth through debt, which is currently a cheaper option compared to equity. It is especially helpful for REITs with ICR of between 1.5-2.5x, and leverage of 40-50%.
• It may help to alleviate concerns over Suntec REIT and Lippo Mall Trust, whose ICRs are hovering at 1.9x in 1Q24 and leverage ratio above 40%. 

Check out our Best Singapore REIT screener to compare the leverage ratio of Singapore REITs and for the best REIT for your portfolio.

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