REITs Subject to Minimum Interest Coverage Ratio of 1.5 times and Aggregate Leverage Limit of 50%, and Enhanced Disclosure Requirements

Introduction

On 28 November 2024, the Monetary Authority of Singapore (“MAS“) announced the following changes affecting real estate investment trusts (“REITs“), which will take immediate effect:  

  1. Imposition of a minimum interest coverage ratio (“ICR“) of 1.5 times and a single aggregate leverage limit of 50% on all REITs; and
  1. Requirement on REITs to perform and disclose sensitivity analyses on the impact of changes in EBITDA[1] and interest rates on their ICR in their financial result announcements and annual reports.

These revisions follow the broad support received in response to the earlier MAS’ consultation issued in July 2024  (“Consultation“). Click here to read our Legal Update on the Consultation. MAS also issued its Response to feedback received on the Consultation (“Response“). The revisions are reflected in the revised Code on Collective Investment Schemes (“CIS Code“).

Simplified Leverage Requirements

Under the revised CIS Code, a minimum ICR of 1.5 times and a single aggregate leverage limit of 50% will be applied to all REITs. This revision rationalises the requirements across all REITs. Previously, a minimum ICR of 2.5 times was imposed only on REITs which intended to increase their aggregate leverage from 45% to 50%.

Streamlined definition of ICR: For the computation of the ICR for the purpose of the minimum threshold of 1.5 times, MAS has streamlined the previous two different “ICR” definitions (i.e. “ICR” and “Adjusted-ICR“) to a single definition of “ICR“. “ICR” now refers to “a ratio that is calculated by dividing the trailing 12 months’ EBITDA, by the trailing 12 months’ interest expense, borrowing-related fees and distributions on hybrid securities“.  

 In managing REITs’ aggregate leverage and ICR levels, MAS expects REITs to take into account volatility in foreign exchange and interest rates and tenant defaults.

Enhanced Disclosures

REITs will be required to provide additional disclosures concerning the outlook and management of their leverage and ICR levels in their financial result announcements and annual reports.

The following stepped-up disclosures will apply:

  1. Leverage and ICR levels: REIT managers will be required to disclose how they intend to manage the REIT’s aggregate leverage and ICR levels in the REIT’s interim and full-year financial result announcements, and annual reports for any financial period ending on or after 31 March 2025. Where the ICR of a REIT has fallen below 1.8 times, the REIT manager should take steps and/or have plans in place to improve the REIT’s ICR and will also need to disclose this additional information.
  1. Sensitivity analyses: REITs must perform and disclose sensitivity analyses on the impact of changes in EBITDA and interest rates on the REITs’ ICRs. The sensitivity analyses should minimally include two separate scenarios based on: (i) a 10% decrease in EBITDA; and (ii) a 100-basis point increase in interest rates. REIT managers may include additional scenarios, apart from the aforementioned prescribed base-case scenarios. MAS also clarified that loans with fixed interest rates or hedged against fixed rates should not be excluded from the sensitivity analyses, as such exclusions would underestimate the impact of movements in interest rates, especially in scenarios where such loans or their hedges are nearing maturity.

These additional disclosure requirements are meant to enhance accountability in REITs’ financial management to enable investors to be aware of how a REIT’s credit profile could be affected by changes in market conditions. With these enhanced requirements, REIT managers must exercise greater care when considering additional leverage or when a REIT’s ICR position is weakened.

For more information, please refer to the Consultation on the finalised positions and the CIS Code amendments.

Concluding Remarks

These changes offer REITS greater flexibility in managing their financial structures and attain a healthy balance between prudent borrowing practices and the adaptability to respond to a constantly changing economic environment. This will foster a more robust and dynamic REIT sector.  

Further, these changes will dovetail with SGX RegCo’s efforts to enhance financial disclosures by listed issuers (which include REITs) on SGXNET, as contained in its Regulator’s Column issued in 2023 highlighting its expectations of disclosures on key financial indicators such as liquidity ratios, especially where these indicators raise investor concerns. 

If you have any queries on the above development and its impact on the management of REITs, please feel free to contact our team members below who will be happy to assist you.

[1] Earnings before interest, tax, depreciation and amortisation, excluding effects of any fair value changes of derivatives and investment properties, and foreign exchange translation.


 

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