Reit perp holders risk drops in coupon rate if issuers reset

Singapore

AS analysts expect more Reit issuers of perpetual bonds to follow in Ascott Residence Trust's (ART) footsteps, DBS Group Research on Monday flagged that perpetual holders could face a risk of a 1 to 1.8 percentage point drop in coupon rates if the issuers choose to skip their first calls.

In the second half of this year, Ascendas Reit's 4.75 per cent S$300 million perpetual bonds and Keppel Reit's 4.98 per cent S$150 million perpetual bonds will approach their first call date on Oct14 and Nov 2, respectively.

DBS thinks that given how their reference rate is calculated, and the recent plunge in Singapore's five-year swap offer rate (SOR), holders of perpetuals may find their coupon rates adjusted downward to 2.9 per cent and 3.2 per cent, respectively - which is more than 150 basis points below the original rates.

DBS in its report said that ART set a precedent when it decided to reset its S$250 million, 4.68 per cent perpetual issue rather than the more common approach of redeeming existing perpetual bonds and replacing them with a new issuance of perps.

The analysts now expect that more Reits may view this as a possible option to conserve cash amid the uncertainty in the Covid-19 fallout.

There are currently about S$1.55 billion of perpetual securities in issue, they said. In 2021, there are four perpetuals with reset dates, totalling S$555 million in quantum. They are from Frasers Hospitality Trust, Lippo Malls Indonesia Retail Trust, Mapletree Logistics Trust, and Soilbuild Business Space Reit.

"While there is no decision made yet, assuming a similar reset in coupon rates, it will imply a drop in coupon rates of 1 to 1.8 (percentage point), at current five-year SOR rates of 0.5 per cent," they said.

For ART, the reset coupon rate of the 4.68 per cent perps, though not yet announced, could be about 3 per cent, based on the pre-determined reference rate of five-year SOR plus 2.5 per cent, which is 168 basis points lower than the original coupon. The five-year SOR back in 2015 when it was issued was 2.18 per cent.

Still, DBS said the non-redemption is a positive for unitholders of ART, as the Reit is able to preserve its gearing capacity. ART's manager had also cited unfavourable market conditions to issue new perps to repay the existing perps as well as pressure on its financial metrics if the manager taps on debt to repay the perps as reasons for its non-redemption.

DBS analysts cheered the decision as a good one for unitholders as the manager seeks to maintain its gearing level and achieve interest savings of S$2.5 million to S$3 million per year, which translates to 2.3 to 2.5 per cent of the Reit's estimated FY20 distributable income.

They also expect the indexation of the Reit onto the EPRA NAREIT Global Developed Index, after its recent merger with Ascendas Hospitality Trust boosted its market cap to about S$3 billion.

Though the non-redemption is a "bitter pill" for perp holders to swallow, they can look forward to future redemption when market normalcy resumes, the analysts said. The next distribution date for perp holders is on Dec 31, 2020.

They maintained their "buy" rating on the stock with a target price of S$1.11. Units of ART closed flat at S$0.96, while the yield of its perps recovered to 5.089 per cent from double digits the previous week as perp holders sold down aggressively.

The perps of Ascendas Reit and Keppel Reit also saw yields rise to 3.062 and 3.361 per cent, respectively. Yields move inversely to prices.