Debt Profile of REITs

REITs are highly leverage as compared to normal company. Their debts are non-amortizing type which means that they are only required to pay interests. Principals are normally being refinanced upon maturity, of course will be subjected to bank approval. There are risks associated if debts are not managing well. Below are things to look out for when assessing debt profile of REITs.

Understand debt profile of REITs is important

1) Gearing Ratio
Where to Get: Presentation Slide

Gearing ratio = total debts / total assets. Monetary Authority of Singapore (MAS) impost a 45% gearing limit on REITs, but this is not applicable to real estate business trust. The lower the ratio,the safer as it provides a cushion in the case of properties value being re-evaluated downward. If 45% limit is hit, then REIT would have to raise fund to pay down down debts either through sales of properties or share placement. On the flip side of the coin, long period of low gearing ratio could also indicate that the particular REIT is conservative in acquisition for growth.

2) Interest Coverage Ratio
Where to Get: Presentation Slide or Calculate from Financial statement

There are few methods to calculate interest coverage ratio:
i) EBIT / Interest Expense
ii) EBITDA / Interest Expense
iii) NPI / Interest Expense
Where EBIT is Earning before Interest, Tax;
EBITDA is Earning before Interest,Tax, Depreciation, Amortization.
NPI is Net Property Income
If the REITs have interests in joint venture/associate, then add in distribution received from joint venture/associate. This value can get from cash flow statement under investing acititivites.

Most REITs provide this ratio in presentation slides with 1 of above methods, besides Sabana REIT which provide profit cover ratio. So do read the note before you take the figure directly. For REITs that do not provide this information, you would have to calculate manually from financial statement.

Sabana REIT profit cover

I prefer to use (EBITDA + Distribution Received from Joint Venture/Associate - Unrealized Gain/Loss - Non-Recurring Gain/Loss) / Interest Expense. Unrealized gain/loss can be fair value change in properties/financial derivatives. Non-recurring gain/loss can be disposal of properties or one off gain/loss. The higher the ratio, the better the REIT managing their earnings and expenses. Whichever method you prefer, ensure that you compared using the same method, apple to apple.

3) Cost of Debt
Where to Get: Presentation Slide or Calculate from Financial statement

This refer to average interest rate that REITs pays on its debt, the lower the better. For REITs that do not provide this information, you could estimate by dividing interest expenses over total debts, then annualized it. Cost of debt should not be higher than property yield.

4) Fixed Debt %
Where to Get: Presentation Slide

The higher the fixed debt %, the more stable the interest expense is. It provides peace of mind and no  surprises until debts are due. You could search this value with keyword "fixed" or "hedged", but do read the detail before taking the figure. For example, as at 30 Dec2018, Starhill Global indicate hedging of interest rate at 91.1%, but fixed debt is actually at 87%.

Starhill Global REIT Borrowing

5) Unsecured Debt %
Where to Get: Calculate from Financial Statement

Unsecured debts are debts that do not require to pledge assets as collateral. Lenders have no rights to seize the assets should borrowers default on payment. For the case of secured loan, REITs would have limited flexibility and control on their pledged properties. REITs with strong sponsor, good credit rating and good track record have tendency to have higher % of unsecured debt.

6) Weighted Average Debt Maturity
Where to Get: Presentation Slide

This refer to the weighted average time that all debts are due. Take note of those REITs with low weighted average debt maturity, there is always risk that they are unable to refinance upon debt maturity.

7) Highest % of Debt Maturity in Same Year 
Where to Get: Presentation Slide

Check what is the highest % of debt that would matured in a same year. A good REIT manager would ensure that its debts maturity are spread as evenly as possible. Be aware of REITs that have high % of debt maturity in a particular year. Risk is they could get caught in a situation where high % of debt is matured in an unflavored economy period.

Beware of REIT with short weighted average debt maturity and high % of debt maturity in same year

Some REITs adopt natural hedge strategy which means borrowing in the same currency as underlying assets. This could reduce the risk of negative effect on foreign exchange fluctuation. However, not all REITs disclose this information thus I find it difficult to compare it apple to apple. Hope the above information are helpful to you, if you have other things in mind that I've miss out, feel free to share.