The Monetary Authority of Singapore (MAS) issued a consultation paper on proposed amendments to the leverage requirements for S-REITs on the 24 Jul 2024.
Currently, S-REITs can borrow up to 50% of the value of its assets. The borrowing limit drops to 45% if the adjusted interest coverage ratio (ICR) falls below 2.5 times.
MAS’ proposed changes are:
- a leverage limit at 50% for all S-REITs
- S-REITs must meet a minimum ICR of 1.5 times at all times. If this is breached, the S-REIT should not incur additional borrowings or enter into further deferred payment arrangements. However, it can continue to refinance existing borrowing
- S-REITs are required to perform and disclose sensitivity analyses on the impact of changes in earnings before interest, taxes, depreciation, and amortization (EBITDA) and interest rates on S-REITs’ ICR. This disclosure is to be made at the interim financial results and annual reports.
What is Interest Coverage Ratio (ICR)?
The interest coverage ratio (ICR) measures the S-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. S-REITs with ICR below 2.5 times will be limited to make debt-funded acquisitions.
The proposed changes, if implemented, would be good positive cues for the S-REITs sectors:
- The lower ICR limit would provide some breathing space when S-REITs' revenue are impacted when the properties asset undergoes AEI or redevelopment, or when there is a transition in tenancy.
- It gives room for S-REITs to fund growth through debt, which is currently a cheaper option compared to equity through rights issuances. It is especially helpful for S-REITs with ICR of between 1.5-2.5x, and leverage of 40-50%. Using the screener from REITsavvy, we can quickly filter out the S-REITs with these factors.
