Features that make perpetual securities of REITs more equity-like than debt

The Edge Singapore
The Edge Singapore 6/11/2021 6:31 AM GMT+08  • 7 min read
Features that make perpetual securities of REITs more equity-like than debt
Certain features make perpetual securities - which are back in fashion - more equity-like than debt-lik
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Perpetual securities, or perps as they are often called, are in the news again, but in a positive way. Lendlease Global Commercial REIT (LREIT) announced that it plans to increase its interest in Jem to as much as 31.8%, for up to $337 million. This will enlarge its portfolio to around $1.8 billion. The agreed property value for Jem would be $2.08 billion and the acquisition is subject to an EGM. With the acquisition, LREIT’s DPU could rise by 3.8% while its gearing ratio would fall to 33.8% from 35.1% as at end December 2020.

How can LREIT acquire a property on a DPU accretive basis and yet anticipate that its gearing ratio could fall? That’s because perps issued by REITs are viewed as equity for the purpose of a REIT’s capital structure. Therefore, in Table 1, we have perps as a percentage of total equity that includes perps and minority interests.

On May 27, LREIT announced it would issue $200 million in perpetual securities on June 4 at a coupon of 4.2%. Perps are the closest thing to a panacea for REITs looking to keep gearing under control. Some REIT managers view perps as expensive debt. This is because perps are subordinate to bonds and hence cost more. On the other hand, perps cost less than equity.

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