Weekend Comment Mar 9: Will more REITS follow MapletreeLog's perps steps?

INVESTORS HAVE GIVEN Mapletree Logistics Trust’s sale of $350 million worth of perpetual securities with a 5.375% coupon a warm response, subscribing to over three times the number of units issued.

Following the latest round of fund-raising, analysts are positive on MLT and betting that other REITs -- constantly worrying about how to fund their next acquisition at a palatable cost to keep growing -- will also tap into this new fund-raising channel.

 

“(Perpetual securities) could potentially be a future equity fund raising option for other REITs approaching their gearing targets,” writes Credit Suisse analyst Yvonne Voon. “We believe such issuances will likely be more popular with the private banking market segment given the low interest rate environment and close-to-zero fixed deposit rates,” states Voon, who has an “outperform” recommendation and target price of $1.09 on this counter.

 

A perpetual security, also known as a “perp”, is a mix of debt and equity. Under accounting guidelines issued by the Monetary Authority of Singapore, perpetual securities are to be treated as equity. Within the pecking order, perpetual securities sit higher than shareholders’ equity but lower than other forms of debt.

 

Compared to long-term debt, perpetual securities tend to be more costly, but, when put against a rights issue or private placement, it is a cheaper form or raising new equity without diluting existing unit holders’ stakes.

 

“Our view is that as long as the funds are raised are used to finance new acquisitions and not to pay debt, the net impact to unit holders would be positive,” write UOB KayHian analysts Terence Khi and Vikrant Pandey in a March 9 note. The brokerage currently has a buy call and target price of $1 on the stock, which closed on Friday one cent higher at 91.5 cents.

 

“The successful offering is a testament to MLT’s financial stability and resilience, underpinned by cash flows from a diversified portfolio of assets,” says Richard Lai, CEO of the trust’s manager, Mapletree Logistics Trust. “MLT’s balance sheet will be further strengthened when the securities are issued, thereby providing more debt headroom and financial flexibility to capitalise on growth opportunities and optimise returns to its unitholders,” he adds.

 

MLT is raising funds to buy some $400 million worth of assets in Japan and South Korea, on top of two already announced acquisitions in Malaysia. With this new injection of funds, MLT’s gearing will drop below 40%. As of December 31 2011, MLT owns a portfolio of 98 logistics properties across Asia, with a book value of more than $3.7 billion. 

 

While MLT is the first REIT to issue perpetual securities, it is but the latest addition to the string of similar issues by other stocks. They include Olam International’s $275 million tranche at 7% for the first decade, and Global Logistic Properties’ $250 million at 5.5% and, of course, the biggest to date: Genting Singapore’s $1.8 billion issue at 5.125%, described by HSBC, a joint coordinator of the issue, as “truly ground-breaking”.

 

Meanwhile, other REITs have been raising funding in their own ways. For example, the CapitaLand-linked Ascott Residence Trust, which owns a string of service apartments, is acquiring a property in Kyoto for 1.2 billion yen, or $19 million -- offering a 35% discount to valuation and an initial yield of 5%. This acquisition, which will be funded using borrowings, will bring its gearing up to 41% -- still within the management’s desired range of 40 to 45%.

 

Another CapitaLand-linked vehicle, CapitaMall Trust, meanwhile, has secured lines worth $800 million to refinance its borrowings under the commercial mortgage backed securities (CMBS) which will mature later in October 31 this year.

 

“The facilities have maturities of up to 3 years from the date of draw down and were secured without any collateralised property. We understand that the interest is likely to be better than the existing cost of debt of about 3.5% under the CMBS structure,” states DBS Vickers in a report.