Asset devaluation in a recession can also raise gearing. I think this was how the small cap reit suffered. Create your personal stress test to see how much the REIT you invested in can take before running into trouble. What do you think ?
Hi , Mr Bobby Tay had replied me , pls see below :
Dear Mr. Bobby Tay,
Re: Acquisitions of the properties; 39 Ubi Road 1 , 3A Joo Koon Circle and 2 Toh Tuck Link.
I am a unitholder of Sabana Shari'ah REIT and hope you can help to enlighten me on the below questions.
1. Please advise are these acquisitions yield accretive to DPU ? Yes as they are all debt funded.
2. After these acquisitions , the aggregate leverage will hit 33.7%.
Will the leverage be capped at a level where we do not have problem to roll over our borrowings when there is another global financial crisis similar to that of the 2008/2009 ? Our internal target is not to go beyond 40% like we saw that most reits encountered in 08 when they leverage beyond 50%.
Please reply at your soonest.
Hi Stocker
Thanks for sharing. Bobby and Phillip analyst also replied me, and I am glad to share as follows:
1) Interest rates targeted for 3 new properties (3NP) are 4-4.2%, vs existing rates of 4.8% pa. So slight benefit here.
2) Expected NPI yield is ~7.5%, so yield accretive
3) Occupancy rates between Master lessees and Sabana REIT are 100%. While occupancy rates between master lessees and sub-lessees are not available. So with 3-5 year lease, we are assured of occupancy at 100%.
Conclusion: Not true that Bobby is unresponsive, though the analyst replied much faster of course. I guess he must be flooded with lots of the same emails, so he might as well attend to them!
What is the maximum levearge that a reit can take by law or regulation ?
60% if it obtains a rating from a rating agency.
(16-09-2011, 01:41 PM)freedom Wrote: [ -> ]60% if it obtains a rating from a rating agency.
Thanks. If sabana's leverage is capped at 40% , it will be considered "fairly safe".
(16-09-2011, 01:57 PM)Stocker Wrote: [ -> ] (16-09-2011, 01:41 PM)freedom Wrote: [ -> ]60% if it obtains a rating from a rating agency.
Thanks. If sabana's leverage is capped at 40% , it will be considered "fairly safe".
Why would a gearing of 40%
now be considered safe ?
On 31 Dec 2008, CIT had a gearing of 38% ($369 mil debt) while MI-REIT gearing stood at 40%. However by 31 June 2009, CIT gearing rose to 42% with minimal changes in their total debt. This was due to a decline in the valuation of their investment properties from $967 million to $880 million. Similarly MI-REIT saw its gearing rising to 45% on 30 Sept 2009 with minimal changes in the total debt. The rise in their gearing was attributed by a decline in property valuation from $530 million to $490 million. Both of these REITs was forced to refinance their loans at higher interest and had to raise DPU-dilutive equity fund-raising exercises.
In other words, the gearing is always in flux. There are 2 sides to the story - 1) Total Debt and 2) Property Valuation. A REIT may keep to their self imposed 40% limit during good times by limiting their debt but they cannot control how their property valuation will change in a recession. Investors should bear this in mind and seek a margin of safety ie a decline of property valuation by 10% and the gearing still remains < 38%.
Please feel free to point out any incorrect data/facts.
(Not Vested in any REIT)
All businesses have risks, this is one of the risks that unitholders have to face.