Too many S-Reits making cash calls that don't add value for unitholders
THE pace of fundraising activities among Singapore-listed real estate investment trusts (S-Reits) has been accelerating.
Nearly half of the 60-odd rights issues and preferential offerings launched in the 20-year history of S-Reits have come over the past 5 years.
Investors, then, find themselves having to decide more frequently on whether they should subscribe for these offerings.
Some will find themselves stuck between a rock and a hard place - cough up cash for new units, or opt out and suffer a dilution in their unitholdings.
"I don't think there will be a standard answer for whether investors should or should not subscribe to rights or preferential offerings," said Jefferies analyst Krishna Guha. He added that investors can exit through the secondary market along with the accrued dividend to prevent any dilution.
Veteran Reit investor and chairman of GCP Global Gabriel Yap warned that in some cases, investors could be "throwing good money into bad Reits".
He noted that even sophisticated accredited investors have lost money from S-Reits' equity fund-raising through private placements.
Out of the 20 private placements by S-Reits over the past 2 years, data compiled by Yap showed that 13 are trading below their respective placement prices.
Estimating the total amount raised through these placements at around S$4 billion, he said these "well-advised, accredited and high net worth (HNI) investors" could have suffered a combined capital loss of as much as 10 per cent, or S$400 million.
"I shudder to calculate the losses that (ordinary retail) investors have suffered in subscribing for rights issues in the past 2 years," Yap added. "Clearly, investors have to be wary of Reits that sell their 'koyok' (Singlish for 'quack medicine') and ask: 'Do these acquisitions necessarily increase shareholders value?'"
Beyond distributions paid, RHB analyst Vijay Natarajan said unit-holders must scrutinise the Reits' proposed acquisitions and associated funding mechanisms carefully to evaluate if they are a good fit with existing portfolios, in line with the Reits' stated objectives, and present good long-term potential.
Some key considerations, he said, include whether the transaction is accretive to net property income (NPI) yield and distribution per unit (DPU).
"For any capital raise - private placements, rights issues or preferential offerings - investors have to look at dividend and net asset value (NAV) accretions," Guha added. "If it is absent on a pro-forma basis, then one has to look at whether those accretions will happen over a longer time horizon. And if they are present, then the question is whether those accretions will be present only in the short term."
"For Reits with long enough operating history, one can work out the internal rate of return (IRR) of all distributions paid and equity capital raised and compare it against investors' expected return on equity or the Reit's cost of equity," he said.
But Yap argued that the current pro forma DPU and NAV accretions shown by Reits to justify their acquisitions is "not sufficient".
"Investors need to understand that certain figures can be easily re-worked and tweaked to show positive DPU and NAV acquisitions when clearly some of the asset acquisitions are highly questionable," he said.
