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3 Singapore REITs That Have Limited Financial Flexibility for Acquisitions

Jeremy Chia

Recently, I discussed three REITs that have the firepower to make yield-accretive acquisitions. Those REITs had low debt-to-asset ratios and could negotiate low interest rates on their borrowings.

On the other end of the spectrum, some REITs have maxed out their ability to take on more debt. These REITs have a limited ability to make acquisitions that can help grow their distributions per unit.

With that said, here are three REITs that will likely not be making debt-funded acquisitions to drive growth anytime soon.

No. 1: ESR-REIT

As of 30 June 2019, ESR-REIT (SGX: J91U) had a gearing ratio of 39% and a weighted average all-in cost of debt of 3.98%. The REIT managers were likely uncomfortable with such a high gearing and have raised funds through an equity offering that will be partially used to pay off debt.

The issuance of new units to pay off debt will most likely have a dilutive impact on DPU in the coming quarters.

Its high gearing and high cost of debt has also left the REIT with a relatively low interest cover of 3.1 times. The interest cover measures a REIT’s ability to pay off its interest expense with its income. 

No. 2: OUE Commercial Real Estate Invest Trust

With a gearing ratio of 39.3% and an average cost of debt of 3.5%, OUE Commercial Real Estate Invest Trust (SGX: TS0U) will likely not be able to make any debt-funded acquisitions anytime soon.

The REIT was in the news recently due to its proposed merger with OUE Hospitality Trust (SGX: SK7). Under the proposed scheme, OUE Commercial REIT will fully acquire OUE Hospitality Trust for S$0.040705 in cash plus 1.3583 new OUE Commercial REIT units for each OUE Hospitality Trust stapled security.

Unfortunately, based on my calculations, OUE Commercial REIT is paying a hefty premium for OUE Hospitality Trust, and its gearing will also increase to more than 40% after the merger.

No. 3: Soilbuild Business Space REIT 

Completing the list is Soilbuild Business Space REIT (SGX: SV3U). The REIT, which owns 11 properties in Singapore and two in Australia, has a gearing ratio of 39.4% and a high average interest cost of 3.56%. Its interest cover as of 30 June 2019 was also fairly low at 3.8 times.

Investors should also note that the company’s existing portfolio has not done so well in recent times. A high supply of industrial space in Singapore has put pressure on rents, and the REIT again reported a negative rental reversion rate of 3.3% in the first half of 2019, which will likely be a drag on future DPU.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn’t own shares in any companies mentioned. 

Motley Fool Singapore 2019