MLT – UOBKH

Property Nuggets: A closer look at perpetuals

What’s New

• Mapletree Logistics Trust (MLT) is the first S-REIT to issue perpetual securities (perpetuals), raising S$350m at an interest rate of 5.375%.

• Our view is that this form of fund raising is generally positive for REITs if used to finance accretive acquisitions, but would be expensive to replace debt.

• We anticipate that this may be the beginning of more such issuance to come and highlight some of the implications for REITs.

Essentials

• Avoiding additional leverage. The Monetary Authority of Singapore’s (MAS) guidelines allow REITs to account for perpetuals as equity, as opposed to debt, thus reducing aggregate leverage when used to finance acquisitions. However, credit rating agencies do treat these hybrid securities as 50% debt/ 50% equity in calculating leverage, and excessive levels of perpetuals would trigger a credit downgrade.

• More competitive than equity fund-raising. Given that the cost of debt for REITs ranges from 2-4%, 5-5.5% perpetuals would be an expensive replacement for debt. However, when matched against the cost of equity at between 6-9% for REITs, perpetuals can be a viable alternative to raising equity.

• Essential to acquire properties with funds raised. Due to their costs, REIT managers should only issue perpetuals to fund acquisitions, and our view is that the issuance of perpetuals is a market signal that sizeable acquisitions are forthcoming. REIT managers would likely take care to closely match the timing of acquisitions and the issuance of perpetuals due to their high holding costs.

• Higher likelihood of being used by industrial and hospitality REITs due to higher acquisition NPI yields for industrial (6.5-8.5%) and hospitality (6-6.5%) properties compared against lower NPI yields for office (3.5-4.5%) and retail (5- 6%) properties. This would enable acquisitions financed through the perpetuals to be DPU-accretive to ordinary unitholders. Perpetuals could also be used to fund overseas acquisitions, especially in countries where the cost of debt is high, such as Australia, although this exposes the REIT to exchange rate risk.

• Risk is in fixed payments and higher priority vs ordinary unitholders. The main risk for REITs is in the fixed payout for the perpetuals, which would not change due to shifts in occupancies or rentals. Holders of perpetuals would also rank higher in priority than ordinary unitholders, but would not enjoy potential dividend growth in the longer term.

Action

• Larger REITs with higher exposure to the industrial and hospitality sectors are likely to issue perpetuals to fund yield-accretive acquisitions. Top picks include Ascott Residence Trust, MLT and Mapletree Industrial Trust.