Recapitalization and refinancing to dominate sector news flow. S$580million debt capital and S$1.4bn equity capital have been raised from the market YTD. With sector-wide deleveraging and optimal gearing ratios likely lower than in the past, capital raisings will likely continue to dominate sector news flow in the short term. We estimate that about S$4.1bn equity capital would be required to overhaul the entire sector’s balance sheet. Average S-REIT gearing is at present 35%, which would drop to 25% if S$4.1bn of fresh equity capital were raised.

Availability of the right kind of debt is the critical issue. Cambridge Industrial Trust and CapitaCommercial Trust have in the past few weeks announced successful debt refinancings (albeit at higher cost and, in the case of Cambridge REIT, more restrictive terms). Debt of sufficiently long-dated maturity is however not sufficiently available, and to properly match REIT liabilities with their long-duration assets, we continue to believe that additional equity capital is required.

Dividend retention is not enough. Dividend retention or scrip dividend has been proposed by some REIT managers to retain capital during this challenging period. S$348 million worth of distributions were announced and paid by the S-REITs sector in the latest quarter. But even assuming no deterioration in the underlying net property income, we estimate the S-REITs sector would generate an annualized dividend of only S$1.4bn, compared with S$2.7bn debt up for refinancing this year. In addition, we estimate that it would take the sector 2.5 years, on average, with zero dividend payout to restore its balance sheet to a level that we would consider reasonable.

A-REIT remains as our top pick. We favor larger cap S-REITs that have recapitalized with defensive fundamentals.