PERPETUAL SECURITIES: IMPACT ON S-REIT �S COST OF CAPITAL

Abstract

Perpetual Securities (Perps) have long been considered as a grey area in the realm of real estate financing. Under the Monetary Authority of Singapore’s (MAS) regulations, perpetual securities are to be considered equity if they meet stated requirements, but some industry players are of the opinion that they should be treated as debt. The first Real Estate Investment Trust (REIT) to issue Perps was Mapletree Logistics Trust (MLT) in 2012. Since then, several other REITs have followed suit and turned to Perps for various financing purposes, such as refinancing of existing debt and to finance acquisitions. This research aims to study the reasons behind the issuance of Perps by S-REIT’s, namely whether Perps have an impact on S-REITs’ cost of capital which led them to issue Perps. This research focuses on the Perp issuances by S-REITs, of which there are 17, and the cost of debt and equity for the S-REIT during the financial quarters before and after the issue. Furthermore, the research will cover a counterfactual study to determine whether the leverage limit of the S-REIT will be exceeded if debt had been used given that the Perp issuance was used for an acquisition, as well as whether the acquisition would have been dilutive to equity holders had equity been raised as capital for the said acquisitions. Additionally, the counterfactual study also explores the effects that Perps might have on the Net Asset Value attributable to unitholders. The results obtained support the study’s hypotheses to a large extent, providing evidence that Perps have an impact on S-REIT’s cost of capital, by lowering its WACC.