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Low rates breathing life into S-Reit perps space: DBS

Quest Macquarie Park - Ascott Residence Trust.jpg
Quest Macquarie Park, part of Ascott Residence Trust's (ART) portfolio. DBS believes ART has ample liquidity to consider redeeming its perps in December.

DEMAND is returning to Singapore-listed real estate investment trust (S-Reit) perpetual securities - with year-to-date issuances totalling some S$575 million from three deals in the third quarter.

DBS Group Research wrote in a report on Tuesday that the low interest-rate environment and a rebound in markets fuelled by an infusion of liquidity have revived the space, which was earlier "shut" by S-Reits' heightened volatility and uncertainty over cash flow in the first half of this year.

Proceeds from the three issuances in Q3 so far have been used to either fund acquisitions or refinance existing perps before their first coupon reset dates. The research team said that these issuances will result in about 1-1.9 per cent accretion to the three S-Reits' distributions.

Based on DBS's initial estimates, other S-Reits with upcoming reset dates for their perps may potentially explore the market again to refinance the instruments at the call dates, although this will be subject to whether they can achieve lower or similar spreads versus letting the coupon reset.

The next soonest reset will take place in May 2021, for Frasers Hospitality Trust's S$100 million 4.45 per cent perp. Following that, Lippo Malls Indonesia Retail Trust's 7 per cent perp resets in September 2021 while Mapletree Logistics Trust's 4.18 per cent perp resets in November 2021.

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More S-Reits dipping into this space will, over time, infuse confidence in investors on the viability of the perps market, DBS analysts said.

They added that the ability of S-Reits to maintain fairly healthy financial metrics through the depth of the recession in H1 2020 could have led to greater confidence in these trusts' financing or refinancing ability.

Although S-Reits have not tapped perps in a big way, the securities offer wider financing options for the trusts, the analysts said.

They noted that S-Reits have so far issued just S$2.4 billion worth of perps, compared to S$45 billion in debt instruments including bank loans and equity value of S$105 billion.

During the third quarter this year, AIMS Apac Reit sold a S$125 million 5.65 per cent perp to fund its acquisition of the 7 Bulim Street logistics facility, Keppel Reit issued a S$150 million 3.15 per cent perp to refinance its 4.98 per cent perp with a Nov 2 call date, while Ascendas Reit priced a S$300 million green perp at 3 per cent to refinance its existing securities ahead of the Oct 14 first call.

Ascendas Reit's latest issuance saw strong institutional demand coming in at S$725 million - more than twice the offer size. DBS estimates that this new green perp will bring savings of close to S$5 million for Ascendas Reit, or about 1 per cent of its distributable income.

"While not material, it goes towards limiting downside risks on earnings and creates more buffer for Ascendas Reit to manoeuvre the fragile economic outlook," the analysts said.

They have a "buy" call on the counter with a S$4.00 target price. Ascendas Reit units were trading at S$3.21 as at 11.04am on Tuesday, down S$0.02 or 0.6 per cent.

As for Ascott Residence Trust (ART), DBS believes the stapled group has ample liquidity to consider redeeming its recently reset perps at the next available call date this December.

In June, ART decided to allow its S$250 million perp to reset to 3.07 per cent - lower than the previous 4.68 per cent coupon rate - instead of redeeming it at first call. Analysts said then that more Reit issuers of perps may follow in ART's footsteps. DBS also flagged that investors could face a risk of a 1-1.8 percentage point drop in coupon rates if the issuers skipped their first calls.

While ART's non-call move was unprecedented, the manager's decision was sound, given that there was heightened uncertainty in the operating outlook at the time with hotels being shut down, DBS noted on Tuesday. The manager's focus on improving ART's liquidity position was "paramount in maintaining the overall soundness of its capital structure", the analysts said.

However, since then, ART's liquidity position has improved, and the manager has been consistently recycling capital, out of which DBS estimates net proceeds of more than S$230 million to be received in H2 2020 to Q1 2021.

This thus puts the manager in good stead now to consider a call of the perps in December, or to redeploy the improved liquidity into other yield-accretive acquisitions, the analysts added.

DBS rated ART a "buy" with a S$1.10 target price. Its stapled securities rose S$0.01 or 1.1 per cent to trade at S$0.93 as at 11.04am on Tuesday.

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