Investment Matters

A rush of REIT raisings

Your Investment Team spends time just observing - this week we thought we would note the interesting developments in REIT land over the last two months.

[REIT = real estate investment trust; listed property vehicles that own property assets from which they generate rental income.  They also often have ancillary operations such as property development and funds management.]

What has happened?

In early May Mirvac kicked things off with a $825m capital raising.  I think it would be fair to say this raising was not expected by the market, and its magnitude did surprise.

Well, then along came the lemmings (actually this characterisation is actually a little unfair, as it seems that from the perspective of the REITs, the raisings have probably been a very smart thing to do; more on this below). 

Since Mirvac, five more REITs have conducted substantial capital raisings.  The total raised has been in excess of $3.4 billion (see the table below).

(There has also been a number of smaller ones: Centuria Industrial REIT $75m, Growthpoint Properties $165m, and APN Industria REIT $35m.)

Justification for the raisings

The rationale put forward for the raisings has been a combination (to various degrees) of 1) to fund asset/property purchases and 2) to reduce gearing or "replenish funding".    With added fluff about future capacity / developments etc.

Selling a raising with a justification to purchase assets is usually received more positively by the market than to one reduce gearing (which is dilutionary to existing security-holder returns).

It certainly feels like gearing levels / the debt market outlook is at the heart of these raisings.  We have previously discussed future uncertainty in regard to the bond market (e.g. inverted yield curve). 

As seen in the table below, gearing levels have been increasing for these REITs in the last 6 months (small increases in gearing levels should not be underestimated in relation to their significance).  This is excluding Cromwell and National Storage, which started with quite high gearing (high 30%s), and therefore a reduction in the gearing levels seems to be a key motivation (justified with a mixing in of acquisitions or an intent to make acquisitions).

[Gearing in the article is calculated as net debt / (net debt + equity).]

Nature of the raisings

All six have been institutional placements with token share purchase plans (for retail shareholders).  Interestingly, none have been done as a rights issue (which allows proportional participation of all security-holders), along with only shortfalls provided to new institutional investors.

Well supported

All raisings seem to have been well supported, and it appears underwriting has not been not hit in any instance. Anecdotally, this is also supported by 1) the Mirvac raising was reportedly twice oversubscribed (AFR 30-May-19), and 2) the Charter Hall Long WALE REIT increased its raising size 5.6% post bookbuild.

This is interesting given the following backdrop:

  • all have been done at a substantial premium to net tangible asset value (NTA) (see table below)
  • over the past 5+ years, NTAs have been climbing, driven often by comparative valuations (rather than intrinsic rent/income driven valuation increases)
  • NTA growth appears to be moderating, and in the retail (shopping centre) sector is starting to go backwards, and
  • Most REITs are paying out a very high portion of their earnings.

In other words, this backdrop is indicating the purchases of these new securities are not getting a bargain, and there isn’t huge upside potential for them.

Then why?

Why were these raisings well supported?  It appears the chase for yield is back on – lower interest rates mean that investors are seeking a greater return (albeit with higher risk).

Additionally, it would not be surprising if the funds flows we discussed in the recent Wealth Intelligence article are a factor – as often Industry Funds’ mandates are restricted to large entities (such as ASX20 and larger scale REITs).

Sensible for the REITs?

The comment “fill your boots” while you can, came to mind.  Why wouldn’t the REITs raise as much as they could when they can do it at a meaningful premium to NTA, and when there are real uncertainties on the horizon (from debt markets, to economic growth, to valuations especially in the retail sector, which GPT and Mirvac are exposed to).  Now seems like a good time to have a nice secure balance sheet.

Sensible for us?

Nope.  Paying more for an investment than it is worth is not a good strategy for your long term wealth.  The premia of the raising to NTA (see the table below) are too great. 

To be fair, REITs can have an element of value that is not encompassed in its NTA, for instance from a development business or property funds management earnings.  For all of these recent raisings, we do not assess the premium to be warranted, even given this – especially given the short to medium term economic outlook.

 

Mirvac (MGR)

GPT (GPT)

Dexus (DXS)

Cromwell (CMW)

National Storage REIT (NSR)

Charter Hall Long WALE REIT (CLW)

Gearing 30-Jun-18

24.80%

26.50%

24.90%

38.80%

39.20%

31.00%

Gearing 31-Dec-18

28.60%

28.70%

25.10%

35.10%

35.00%

32.10%

             

NTA 31-Dec-18

$2.44

$5.58

$10.07

$0.99

$1.52

$4.01

Raising price

$2.97

$6.07

$12.10

$1.15

$1.71

$4.74

Premium/(Discount) to NTA

21.70%

8.80%

20.20%

16.20%

12.50%

18.20%

             

Placement

$750.00

$800.00

$900.00

$375.00

$170.00

$190.00

SPP

$75.00

$50.00

$50.00

$30.00

$20.00

$10.00

Total raised

$825.00

$850.00

$950.00

$405.00

$190.00

$200.00

SPP portion to Placement

10%

6%

6%

8%

12%

5%

 

 

 

 

 

 

 

 

 

Source: Company reports and announcements, First Samuel

- Fleur Graves