Australian REITs have robust model to withstand risks: Moody's
Australia real estate investment trusts (A-REITs) have large headroom under their gearing and interest cover covenants, which reduces their risk of covenant breaches during uncertain times, according to a new report by Moody's Investors Service.
The report, Real Estate Investment Trusts - Australia: Covenant Headroom Is Strong, and Much Stronger Than Before Global Financial Crisis, covers 11 A-REITs such as Charter Hall Retail REIT, Goodman Group which Moody's rated as of June 30, 2016.
"This strong positioning is primarily due to their conservative approach to debt management, while asset recycling and use of capital partners to share development risk have also contributed to the sector's strong financial profile," says Maurice O'Connell, a vice president and senior credit officer at Moody’s.
"Goodman Group (Baa2 stable), with a gearing ratio of 20%, has the most cushion under its gearing covenant, while Charter Hall Retail REIT (Baa1 stable), with a ratio of 39%, has the least," says O'Connell. "And The GPT Group (A3 stable) has the most headroom under its interest cover covenant with a 6.3x ratio, and ALE Direct Property Trust (Baa2 stable) has the least, with a 2.7x ratio."
The report also references covenants as of this date and says gearing is typically defined as debt/tangible assets or net debt/net tangible assets, while interest cover is typically defined as EBIT/interest expense or EBITDA/interest expense.
The average covenant gearing ratio for the four A-REITs with data before the global financial crisis -- Goodman, GPT, DEXUS Property Group (A3 stable) and Scentre Group (A1 stable), which was restructured from the former Westfield Group (rating withdrawn) -- has fallen sharply, to 28% with 51% headroom by June 2016, from 37% with 28% headroom as of June 2008.
Interest cover has also increased generally for rated A-REITs, owing to both lower interest rates and, for some, lower debt levels. Their average interest cover ratio rose to 5.0x with 2.1x-4.3x headroom as of June 2016 from 3.0x with around 1.0x headroom as of June 2008. GPT improved the most with actual interest cover rising to 6.3x as of June 30 this year from 2.7x as of June 2008.