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More REITs rely on mezzanine financing to secure capital
By Anna J. Park
Various Real Estate Investment Trusts (REITs) listed on the Korean stock market are expected to have a harder time this year to refinance their debts amid the high interest rates. While major REITs may succeed in refinancing their debt, increased costs from soaring interest rates will lower investors' dividend profits.
According to the REIT industry, NH All-one REIT has successfully refinanced its senior secured debt of 118 billion won ($92.7 million) for Bundang Square Building, the maturity date of which was January this year. NH NongHyup Bank is said to have participated in the refinancing deal as one of its key lenders, giving assurance to other lenders joining the deal.
The interest rate for the senior secured debt was 3 percent back in 2020, yet the interest rate for the refinancing this time is expected to rise to around seven percent. This rate will significantly lower the REIT's dividend payments by about nine percent, compared to last year.
LOTTE REIT has loans approaching maturation totaling about one trillion won. In October last year, the investment trust borrowed a one-year maturity secured loan of 280 billion won and issued a three-month maturity debenture bond of 200 billion won to refinance a previous secured loan of 478 billion won. The interest rate for the three-month debenture was 6.2 percent, and it will reach maturity within this month. The trust is considering various refinancing options to repay the debt, but it will have to bear an even higher interest rate.
Other publicly traded REITs, such as IGIS Residence REIT and SK REIT, are also in dire need of capital to refinance their debts, as they face approaching maturities during the first half of this year.
Market insiders say more REITs are expected to modify their bylaws to be able to include mezzanine financing, such as the issuance of convertible bonds or bonds with warrants. As a hybrid of debt and equity, mezzanine financing allows more flexible repayment terms adapted to each company's cash flow.
For instance, Mirae Asset Global REIT revised its bylaws during its shareholders' meeting last month to be able to issue both types of bonds. Shinhan Alpha REIT has also changed its company rules to allow various types of mezzanine financing.
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