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Stresses in foreign S-REITs calls into question global REIT listing hub

The Edge Singapore
The Edge Singapore  • 6 min read
Stresses in foreign S-REITs calls into question global REIT listing hub
Global REIT hub label in danger as foreign S-REITs reveal increasing stresses in their financially engineered structures
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Less than a year ago, the SGX was articulating that high-quality global sponsors - Manulife, Digital Realty and Daiwa - were listing their REITs in Singapore. The SGX has been promoting Singapore as a REIT-listing hub for global assets for some years.

In 2022, as part of celebrating the 20th anniversary of Singapore’s REIT sector, speeches lauding the S-REIT sector also pointed out that S-REITs had weathered the GFC and Covid.

This time round, foreign S-REITs are increasingly likely to be casualties of the accelerated pace of rate hikes by the US Federal Reserve. These foreign S-REITs include REITs with US and Chinese assets. For the time being S-REITs with European assets are stressed but not quite distressed yet.

On April 7, EC World REIT’s manager announced that “EC World REIT’s external auditors have advised the Manager that based on the current information and documents made available to them, they do not have sufficient audit evidence to form a conclusion on the likelihood of Mandatory Repayment by 30 April 2023 and consequently the appropriateness of the use of the assumption in the audited financial statements for FY2022 that EC World REIT is able to continue operating as a going concern.”

To mitigate the alarm caused by the phrase “to continue operating as a going concern” EC World REIT’s manager points out that the lenders haven’t requested an acceleration of the loans. “EC World REIT has not received any indication from the Lenders that they intend to accelerate the Existing Offshore Bank Loans or the Existing Onshore Bank Loans at this juncture,” the announcement says. If the lenders asked for an acceleration, that would confirm it is likely to be curtains for the REIT.

EC World REIT’s manager has also notified the SGX that it would like to hold its AGM on July 27 instead of by April 30. The excuse is that its financial statements are unlikely to be audited by April 30.

This is because the sponsor and related parties have not been able to complete the acquisition of two ECW REIT properties to raise cash for the settlement of the “mandatory repayment”. Without this, its lenders are unlikely to refinance certain loans. And, as a result, auditors are unable to sign off on FY2022’s financial statements.

Increasingly, market watchers are wondering why EC World REIT’s manager doesn’t just ask for an injection of equity from unitholders, or divest its properties to third parties. The sponsor and its related parties contribute more than 80% to rental income in the form of master leases and this may complicate divesting assets to third parties.

Distressed funds would be interested

Property fund managers The Edge met with in the past week have articulated that the only way for third parties to look at EC World’s assets would be for a distressed fund to acquire the assets and restructure the properties. Distressed funds usually acquire assets at significant discounts to valuations.

Separately, Dasin Retail Trust’s manager announced that a related party to the sponsor which had master leased 20,261 sq m at two of the trust's malls, Xiaolan Metro Mall and Dasin E-Colour Mall, was in arrears with its rent as a result of Covid lockdowns. The master leased area is too big to source enough replacement tenants during the pandemic, the manager says.

An underlying sub-tenant at Xiaolan Metro Mall, Youyuecheng Store Management, will be leasing directly from the mall. Youyuecheng Store Management is also a tenant at Shiqi Metro Mall. In the meantime, the manager is proceeding to look for tenants who will be able to sign leases for the returned units at Dasin E-Colour Mall.

The same property fund managers that studied EC World REIT's portfolio also looked at Dasin Retail Trust’s assets but noted that there were too many related party transactions for their funds to consider.

Elsewhere, unitholders of Manulife US REIT are particularly anxious as their REIT’s NAV as at end-Dec 2022 is 57 US cents, and the stock is trading at a P/NAV multiple of around 0.36x. This is especially alarming given that its aggregate leverage is close to 50%, and its manager has articulated that it’s challenging to divest the properties at their last valuation. Indeed, at MUST’s current balance sheet, its debt/equity (D/E) is at around 100%. Further cuts in valuation would take D/E to above 100%.

Too many portfolios for sale in the US

Asian-based property fund managers that have looked at MUST’s portfolio have pointed out that a number of commercial portfolios in the US are up for sale. Furthermore, when interest rates were at 0% to 1%, property fund managers could undertake various tenant incentives and capital expenditure at cost of funds that would be accretive distributable income. At the current Federal Funds Rate of 5%, tenant incentives and capex - usually funded by debt - are no longer accretive to distributable income.

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While the focus has been on MUST, Prime REIT’s portfolio is of a similar ilk although its aggregate leverage and D/E are not as high.

To be sure, MUST and Prime REIT are not the only stressed REITs. Lippo Malls Indonesia Retail Trust (LMIRT) has been downgraded by the ratings agencies. Its inability to provide distributions to its perpetual security holders has caused the dividend stopper to be triggered. It’s still not too late for LMIRT (to survive) if it can divest of some of its malls.

LMIRT is trading at a P/NAV 0.23x compared with 0.4x for EC World REIT and 0.41x for Prime REIT. Although LMIRT, MUST, EC World REIT and Prime REIT are pretty distressed, they can still raise equity in dilutive equity fund raising exercises, or divest of properties, or both. While MUST may be looking to get a partner to inject some properties in exchange for units, this can’t possibly be accretive at this juncture.

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