As per market expectations, on July 7, the manager of First REIT announced that it will not redeem a $60 million 5.68% tranche of perpetual securities on July 8, 2021. Instead the distribution rate shall be reset on July 8 to 4.9817% a year, which takes into account the prevailing 5-year swap offer rate of 1.0567% a year plus the initial spread of 3.925%. The manager says it remains committed to paying distributions on these perpetual securities.
For REITs, perpetual securities can be classified as equity so long as there is no step up, and a dividend stopper is present.
The manager said: “In arriving at the decision to allow the distribution rate for the perpetual securities to be reset and not redeem the perpetual securities on 8 July 2021, the manager has considered the long term interests of First REIT and the current macroeconomic environment, including but not limited to the following factors: (i) given the uncertain economic environment, the manager is adopting a prudent stance to preserve cashflow and liquidity; (ii) drawing down on debt to redeem the perpetual securities will increase First REIT’s leverage and reduce the debt headroom available for acquisition opportunities and asset enhancement initiatives during a market recovery; and (iii) current market conditions are not favourable for First REIT for the issuance of perpetual securities at a lower yield than the reset distribution rate.”
The manager added that it would maintain the flexibility with the option to exercise its right to redeem the perpetual securities on any distribution payment date when market conditions normalise.
In Feb this year, First REIT completed a recapitalisation exercise to raise $158.2 million through a dilutive rights issue. Of this, $140 million was to partially repay a $400 million loan where there was a shortfall of $140 million.
In FY2020, First REIT announced a 51.7% decline in DPU to 4.15 cents and a revaluation loss of $400 million, taking property values down to $939.7 million, reflecting less inflated valuations than in previous years.
First REIT's unit price is up 12.5% to 27 cents this year, but down 59% over a one year period.
