Ascendas Real Estate Investment Trust Will Be Issuing Perpetual Securities Soon: What Does This Mean For Investors?

Ascendas Real Estate Investment Trust (SGX: A17U) announced yesterday evening that it has priced its upcoming issue of S$300 million in perpetual securities.

Last month, Ascendas REIT revealed a A$1.013 billion acquisition of 26 logistics properties in Australia. Given the size of the deal, the REIT would have to raise a large amount of capital to fund it.

As such, the aforementioned S$300 million issue of perpetual securities is just one piece of the puzzle. In fact, when Ascendas REIT announced the acquisitions, it also mentioned that part of the sum will be paid for using onshore loans in Australia.

The nitty-gritty of the perpetuals

The perpetual securities, which are expected to be issued on or around 14 October 2015, will be in denominations of S$250,000. It will carry an annual interest rate of 4.75% for the first five years.

There’s an interesting feature in the securities in that the interest rate will be reset every five years, with the first reset happening on 14 October 2020 (more on this later). The perpetual securities can only be redeemed at the option of Ascendas REIT, so there’s no danger of the REIT having a source of funding being yanked out from under its feet.

At the moment, ratings agency Moody’s Investors Service has given a credit rating of A3 to Ascendas REIT. The REIT’s perpetual securities have not been rated yet, but are expected to be given a Baa2 rating by Moody’s.

Impact to current unitholders

Holders of the perpetual securities are entitled to receive regular interest payments from Ascendas REIT. If the Australian logistics properties fail to deliver additional income that exceeds the interest payments of the perpetual securities (along with the interest expenses of the new chunk of debt that has to be taken on to finance the acquisition), then current unitholders of Ascendas REIT may suffer as the REIT’s distributions will likely be negatively impacted.

One other thing to look out for involves the repricing feature of the perpetual securities. If interest rates climb materially higher over the next five years and beyond, the interest rate on the perpetuals may get reset to an onerous level for the REIT and thus become a heavy burden.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim does not own shares in any of the companies mentioned above.