S-REITs to issue perpetual securities

But will it offer good returns or just pose higher risks?

According to DBS, Mapletree Logistics Trust was the first Sreit to issue perpetual securities with a non-cumulative feature.

Here's more from DBS:

This landmark transaction has added depth and a new development frontier to the Sreit market in Singapore. Essentially, it enables Sreits to diversify their funding sources and widen its investors’ base. At present, apart from equity (64% of total funding source), traditional instruments sources such as bank loans, MTNs/Notes, CBs and retail bonds make up the balance.

Balancing risk and return. Unfamiliar with this relatively new instrument, investors are grappling with its classification as debt or equity. Given that the issuer does not have the obligation, but an option, to redeem the securities, the accounting treatment and regulator perception is one of equity in nature.

Thus, gearing is unlikely to be affected, which further underlines the attraction of this instrument from the issuers’ perspective. While this offers a cheaper cost of equity, we expect a selective issue of these securities given it would need existing strong financial and liquidity metrics to support the ‘rated’ nature of this instrument. In addition, backing of a reputable sponsor and good credit rating are preferred to secure more efficient pricing.

No one size fits all models; potential beneficiaries. Even with potentially cheaper cost of funds, we do not expect managers to lower their target IRR hurdles in assessing potential acquisitions. We believe this instrument will be most effectively deployed for Sreits looking to acquire but face possible DPU/NAV dilution if new equity units are issued.

While the ultimate goal for Sreit manager is to achieve further accretion for equity unitholders, on a risk adjusted basis, we believe perpetuals are also better suited for real estate sectors where the target assets yield greater that the coupon rates (industrial, healthcare & hospitality) and are subjected to lesser income volatility given the increased coupon obligations for the issuer. Our scenario study highlights potential beneficiaries such as A-REIT, MCT, MINT, P-Life, where unitholders will enjoy better accretion from acquisitions financed with perpetuals instead of equity fund raising.