Watch Reits loan-to-value ratio: report

Source : Business Times - 10 Mar 2009

WATCH the loan-to-value ratio of real estate investment trusts (Reits) rather than the leverage, OCBC Investment Research said in a report yesterday.

This comes as S-Reits’ financial statements give mismatched estimates of their debt and balance sheet strength, said analyst Meenal Kumar, keeping her ‘neutral’ rating.

‘Loan-to-value is more important than reported leverage,’ she noted.

The loan-to-value ratio is used to determine the fair value of an asset against the loan that is financing its purchase and can indicate losses from non-payment that may be recovered by selling the asset.

Most fourth-quarter results from the S-Reits were in line with Ms Kumar’s expectations, but she said that this is not a sign of a stable market.

‘This quarter’s performance was not evidence of stability or invulnerability but more a function of timing lags,’ she said.

She added that indicators such as reversionary rents - the change in income after a rent review or renewal of a lease - at Suntec City have fallen 11 per cent on a quarterly basis.

‘The same inertia played out in net asset values,’ she said.

‘Overall, we feel cap rates used by the independent valuers still do not fully reflect the downward trend in capital values.’

As a result of this lag, Ms Kumar said reported balance sheet figures are ‘under-estimating leverage and over-estimating balance sheet strength’, adding that the market is now valuing S-Reits at an average 61 per cent discount to their reported net asset value.

She noted that unit prices ‘more than reflect the realities of falling capital values and refinancing risks’. ‘The focus is now on how deeply S-Reit earnings will be affected by deteriorating economic conditions - and consequently what is the ‘real’ distribution yield,’ she said.

With more equity fund-raising such as rights issues expected among S-Reits, Ms Kumar said the issues will need underwriters to secure funding amid stiff competition.

‘The strength of the sponsor and the size of its stake will make a difference,’ she said.