Perpetual securities lower gearing but please use sparingly

Goola Warden
Goola Warden4/6/2022 8:27 PM GMT+08  • 7 min read
Perpetual securities lower gearing but please  use sparingly
Perpetual securities are helpful for REITs by keeping their gearing levels manageable, but they should be used sparingly
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The first perpetual security (perp) issued this year was by Lendlease Global Commercial REIT (LREIT). It was met with strong demand and upsized from the original $150 million priced at 5.5% to $200 million priced at 5.25%. In the end, the tranche was 5.3 times subscribed, an indication of demand for yield products.

Last year, LREIT issued $200 million of perps, taking its total to $400 million. Last month, LREIT raised another $400 million through an equity placement. The first call or reset date of the perps, issued on April 11, will be April 11, 2025. Including the perps and an additional $648.8 million of equity, LREIT’s pro forma total equity would be around $2.15 billion. Its total perp issuance translates to more than 18% of total capital (see table 2).

Originally, on Feb 14, when the acquisition of 100% of Jem was announced, LREIT’s manager had indicated in a presentation that the acquisition would be more than 10% accretive subject to an equity fundraising of 1,025 million units at 82 cents. Since then, LREIT’s equity fundraising has comprised 551.73 million units at 72.5 cents and 345.58 million units at 72 cents. LREIT will also be issuing $200 million of perps at 5.25%. The cost of debt has not been announced but the cost of perps is SORA plus a spread of 3.04%. Against this background, the accretion from the Jem transaction is likely to be closer to 2% than the 10.5% that was indicated in a Feb 14 presentation although that financing structure could keep aggregate leverage at or just below the 40% mark.

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