You will be able to judge how a placement to institutional investors affects retail holders.
Darren woke up to an announcement that his REIT had sold new units overnight to institutional investors, at a discount to the last price, and nobody had offered him any. By the time he read the news the deal was done, and his units were a slightly smaller slice of a slightly bigger REIT.
That is a placement. This lesson explains what it does to retail holders and how to test the claims that usually come with it.
In a private placement, a REIT sells new units to a selected group of investors, usually institutions such as fund managers, through a bank that runs the process. It is quick: the REIT often announces it after the market closes, the bank collects orders overnight, and the price and the number of units are confirmed before the next morning.
The new units are sold at a discount to the recent market price, to attract buyers. Retail holders are usually not invited to take part.
Speed is the reason REITs like placements. A rights issue or preferential offering takes weeks and exposes the REIT to the market moving against it. A placement is done in hours, and it can raise a lot of money at a known price.
The units you hold do not change in number, but the total in issue goes up, so your share of the REIT shrinks, which is what people mean by dilution.
With made-up figures, a REIT has 2,000 million units in issue, trading at S$1.00. It places 200 million new units at S$0.90, a 10% discount, and the placement brings in S$180 million. Units in issue rise to 2,200 million. Your share of the REIT falls by about 9.1%, because the same holding is now divided by a larger total.
The discount also costs you. Before the placement, the REIT's units were worth S$2,000 million at market. Add the S$180 million raised and divide by 2,200 million units, and the theoretical value per unit is about S$0.991. Your units lost about 0.9% of their value to the discount given to the placees.
Many S-REITs pair a placement with a preferential offering to existing holders, so retail holders can buy new units at a similar price and keep their share. If no preferential offering runs alongside, retail holders are diluted with no way to take part at the placement price.
The placement announcement gives you three numbers to read.
The first is the discount, the issue price set against the recent market price. When demand from the placees is strong the discount tends to be small, and a large one tells you the REIT had to give away more value to get the money.
The second is the size: the new units as a share of units in issue before the placement. The bigger the share, the more you are diluted.
The third is who received the units. Announcements often list the main placees, or say whether the sponsor took part. A sponsor buying a large share of a placement while retail holders are excluded is worth noting. SGX rules restrict placements to certain related parties, and the announcement will state how those rules were met.
Most placements that fund an acquisition come with a claim that the deal is DPU-accretive, and you can test that claim with the method below, shown here with made-up figures.
Before the deal, the REIT earns S$140 million of distributable income on 2,000 million units, a DPU of S$0.070. It buys a property for S$400 million that earns S$22 million a year in net property income, a yield of 5.5% on the price. It funds the purchase with the S$180 million placement and S$220 million of new debt.
If the new debt costs 4%, interest is S$8.8 million a year. The property adds S$22 million less S$8.8 million, which is S$13.2 million. Distributable income becomes S$153.2 million, on 2,200 million units. DPU is about S$0.0696, slightly lower than before. The deal is dilutive.
If the new debt costs 3% instead, interest is S$6.6 million and the property adds S$15.4 million, so DPU becomes about S$0.0706 and the same deal is now slightly accretive.
One percentage point on the cost of debt flips the answer. Real circulars include more items, such as fees, the cost of the placement and changes in the existing debt, but the method is the same. Find the assumed property yield and cost of debt in the circular, then ask whether they are realistic. A property yield at the top of the market's range and a cost of debt below what the REIT pays on its existing loans are both reasons for doubt.
Lesson 5.2, Gearing, interest coverage and the debt profile, showed you where to find the REIT's current average cost of debt. That is the first number to compare with the circular's assumption.
Darren's placement was about 8% of units in issue at a discount of around 5%, with no preferential offering. The circular claimed a small DPU gain, but it assumed new debt would cost well below what the REIT was paying on its existing loans. He wrote that down as a reason for doubt rather than a reason to sell.
In the activity you will read one real placement announcement and record the discount, the share of units issued and the claimed effect on DPU, which are the three facts you need to judge it.
Read one placement announcement and record the discount, the share of units issued and the claimed effect on DPU.
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