Investors appear increasingly comfortable with higher levels of gearing. In April 2020, the Monetary Authority of Singapore (MAS) lifted aggregate leverage levels for locally listed REITs from 45% to 50%. Since then, several REITs have lifted their gearing levels.
The troubled Riady REITs, Lippo Mall Indonesia Retail Trust (LMIRT) and First REIT both raised equity through dilutive rights issues. LMIRT completed its rights issue in January and First REIT in February. Excluding its perpetual securities, LMIRT’s gearing is 41.7%, and its interest coverage ratio is just 1.3% as at March 31, following its rights issue to part-finance the acquisition of Puri Mall in Indonesia.
In 2016 and 2017, LMIRT issued two tranches of perpetual securities, of $140 million at 7% per annum, and $120 million at 6.6% per annum. The first reset or call date is on Sept 27 for the $140 million tranche and on Dec 19, 2022, for the $120 million tranche. LMIRT’s annual report states that there is no fixed redemption date.
It is not clear if LMIRT can reset its $140 million tranche at lower rates or issue a fresh set of perpetual securities at a lower rate. Its US$250 million ($333 million) guaranteed senior notes were issued at 7.25% per annum, and it matures in 2024. Its US$200 million senior guaranteed notes was issued at 7.5% per annum, and it matures in 2026.
First REIT’s gearing as at Dec 31, 2020, stood at 49%. Since then it should have eased as its rights issue concluded in February, and its pro forma gearing would have been lower, at 34.6%. In 2016, the REIT issued $60 million of subordinated perpetual securities at a fixed rate of 5.68% per annum, with the first distribution rate reset on July 8.
According to an announcement on May 18 and following First REIT’s recapitalisation, the REIT manager said the REIT had secured a term loan facility of $178.5 million and a revolving credit facility of $42.5 million with an accordion option for a $39 million increase in commitments from OCBC Bank and CIMB Bank.
The price performances of both REITs have been better than peers because of their sharp declines in 4Q2020. It remains to be seen how investors view their ability to either call their perpetual securities and refinance with lower-cost debt or reset them. First REIT’s reset could be at the swap offer rate plus a margin of 3.92%. Refinancing with debt would push gearing levels higher.
ARA LOGOS Logistics Trust (ALOG) has been the runaway best performer this year with its unit price alone up 29% since the start of the year. Interestingly, OCBC Credit Research pointed out that ALOG’s actual gearing post its transformational transaction in Australia could be higher than the reported 37.4% level as at March 31.
In November 2020, ALOG completed a $50 million private placement and in January, raised a further $50 million through a preferential offering of equity. A remaining $88.7 million of equity was placed to LOGOS and Ivanhoé. The acquisition of stakes in two funds and an Australian portfolio was completed in April when the debt was drawn down for the properties. Hence, OCBC Credit argues that 1QFY2021 ended March results do not take into account the additional debt and assets.
“ALOG’s disclosed post-transaction pro-forma numbers show a combined debt at the New LAIVS Trust and OP Fund level of A$389.8 million. Based on our calculation, the debtto-asset ratio of the funds on a combined basis would be around 49% based on the pro-forma debt and using a total asset value of $777.8mn. As an illustration, ALOG’s stake in these funds would imply a share of around $173 million of debt at the fund level. However, we understand that the fund investments will be classified as investments in real estate-related assets where the debt at the fund-level will not be included in the reported aggregate leverage,” OCBC Credit explains.
ALOG will most likely take into account the acquisition debt, value of new properties acquired and the fund investment amount of $178.5 million into the denominator. Including the acquisition debt for Heron Property which will be acquired in November 2021 and its asset value, OCBC Credit calculates the reported aggregate leverage would rise to around 43%. If 50% of ALOG’s perpetual securities are classified as debt, adjusted aggregate leverage would be nearer 46%, it says.
The other Singapore-listed REITs managed by ARA Asset Management also have gearing levels in the 40s. Suntec REIT’s gearing is 44.4%, and ARA US Hospitality Trust’s gearing is at 49%.
Elsewhere, Mapletree Industrial Trust (MINT) announced the acquisition of a US$1.32 billion portfolio comprising 29 data centres in the US. Based on equity funding of $800 million comprising a placement and preferential equity fundraising, the portfolio is likely to be accretive to DPU and NAV on a pro forma basis. If the acquisition had been completed in FY2021 for the 12 months to March 31, DPU would have risen by 3.3% to 12.97 cents and NAV would have risen by 10 cents to $1.76.
In addition, the acquisition extends MINT’s weighted average lease expiry to 4.6 years from four years; the portion of data centres in the portfolio rises to 53.6% by value and 65.8% of the portfolio by value is now freehold, up from 55.9% before the transaction. Gearing is likely to rise to 40.3% up from 36% as at end FY2021.
