When REITs come to the limit of the Gearing Ratio, they still want to raise funds to acquire the property. In addition to issuing new shares, they can also issue Perpetual notes.
In Malaysia, the only sunreit has ever issued perpetual notes, but in Singapore, perpetual notes have become commonplace, and most REITs have perpetual notes.
Unlike traditional borrowing, PERPETUAL NOTE is between stocks and bonds. The same as bonds, REITs must regularly pay interest to PERPETUAL NOTE holders until redemption. However, like stocks, PERPETUAL NOTE is not considered borrowing, so it does not include Liabilities, and eventually won’t increase the gearing ratio. Instead, it will be included in the unit holder’s fund.
When paying dividends, REITs must first pay perpetual note interest and then pay dividends, so perpetual note has advantages. However, because perpetual note belongs to a shareholder fund when the company’s funds are tight, it can choose not to distribute perpetual note interest.
when REITs go bankrupt, Perpetual noteholders have priority over ordinary shareholders at the time of liquidation.
The advantage of Perpetual note is that it breaks the limit of Gearing ratio, but the disadvantage is that the interest rate is higher.
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