Explain why S-REITs raise equity as a matter of routine, and spot when a fund raising is a warning sign.
Darren, an example investor, has held a REIT for three years when it announces its first equity fund raising. The units fall several percent that morning, and forum posts call the raising a cash grab. He remembers that two years earlier another REIT he followed also raised money, and its units rose afterwards. From the headlines alone he can't tell which kind of raising this one is.
Raising new equity is routine for S-REITs. The point of this module is to tell a raising that helps you as a unitholder from one that rescues the REIT. The price move on announcement day won't settle it either way. Darren's units fell and the other REIT's units rose, and neither headline showed what kind of raising it was.
An S-REIT must distribute at least 90% of its taxable income to keep its tax treatment, as Lesson 4.2, "The payout rule and tax transparency", explained. Many S-REITs pay out close to all of their taxable income. A company that keeps half its profit, for comparison, can fund growth from its own cash. A REIT that pays out nearly everything keeps very little retained income, so it can't fund growth that way.
When a REIT wants to buy a property, it has two sources of money: new debt and new units. Debt is limited by the regulatory gearing rules, the interest coverage rules and by what lenders will offer. You looked up the gearing and interest coverage rules in Lesson 4.4, "How MAS regulates S-REITs". Because of these limits, most acquisitions of any size need some new equity. S-REITs announce equity fund raisings far more often than most companies do. Frequent raisings are part of how the structure works and are not in themselves a sign of trouble.
A raising to grow pays for something new: a property, a portfolio, a development, or a stake in another fund. The REIT usually issues units for part of the price and borrows the rest. It lifts DPU when the new property earns more, after interest on the new debt, than the new units dilute. Lesson 5.1, "DPU is the number that pays you", showed how total income can grow while DPU falls. A good acquisition does the opposite and raises DPU. Managers call such a deal DPU-accretive.
A raising to grow is not automatically good. It is good only when the numbers behind the accretion claim hold up, and that claim comes from the manager. As Lesson 4.3, "How the manager is paid, and why it matters to you", explained, the manager earns fees on the deal. If the seller is the sponsor, the manager is negotiating with its own owner, which is a conflict of interest.
A raising to repair pays down debt. It usually follows a fall in property values, a rise in interest costs, or both. The trigger is gearing moving towards the regulatory limit, or interest coverage falling towards its regulatory minimum, and the REIT needing to bring them back. A raising to repair usually means the REIT is under pressure. The money goes to lenders and buys nothing that earns new income, so the new units dilute DPU and nothing is added to offset it. Repair raisings often happen when the unit price is already low. The REIT then has to issue more units to raise the same amount, which makes the dilution worse.
A repair can still be the right move. It can prevent a forced asset sale at a bad price, or a breach of the regulatory limits. For an income investor, a repair usually means a lower DPU for some time.
Many raisings mix the two kinds. A REIT may raise money to buy a property and say it will also reduce gearing. For a mixed raising, judge it by where the money actually goes, whatever the headline says.
SGX rules require an issuer that plans to issue new units for cash to announce the issue promptly, stating its terms and its purpose. Find the announcement on SGXNet, along with any document the REIT publishes with it. Read three parts:
Use of proceeds: how much goes to the acquisition, how much to repaying debt, and how much to fees and costs. A raising used mostly to repay debt is a repair, whatever the headline says. Pro forma effect on DPU: the manager's estimate of what last year's DPU would have been if the deal and the raising had already happened. Where the manager gives this figure, compare it with actual DPU. A positive difference is the accretion claim. Pro forma effect on gearing: what gearing would be after the raising and the deal. A REIT that raises equity and still ends up with higher gearing used the raising mainly to grow.
Keep in mind that the accretion claim is the manager's. Check how much goes to fees, check whether the deal involves the sponsor, and test the numbers. Lesson 7.3, "Placements and dilution", shows how to test them. For the current disclosure rules, check the SGX Rulebook.
Two facts decide which kind of raising you're looking at: its stated purpose and its expected effect on DPU.
When Darren opens the circular, the use of proceeds shows that his REIT's raising is mostly for an acquisition from the sponsor, with a small amount going to debt. The pro forma section shows a modest increase in DPU. That makes it mainly a raising to grow, and a deal with the sponsor on which the manager earns fees. Whether the accretion claim is believable depends on assumptions he hasn't yet learned to check. The next two lessons cover the assumptions behind a pro forma DPU claim.
In the activity you will find the most recent raising by one S-REIT on SGXNet and write down its stated purpose and its expected effect on DPU, the two facts that decide which kind of raising it was.
On SGXNet, find the latest equity fund raising by one S-REIT. Write down its stated purpose and the effect on DPU it expects.
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