In September, three REITs announced equity fund-raising plans which are likely to exceed $1.7 billion. All three made, or are in the process of making, interested- party transactions, that is, they bought or are buying properties from their sponsors. IREIT Global announced the purchase of the remaining stake of 60% in four Spanish office buildings it does not own from Tikehau Capital for EUR47.8 million ($76.4 million). Tikehau Capital is one of IREIT Global’s two sponsors, the other being City Developments.
The manager has since announced — on Sept 18 — that it will be raising $142.8 million or EUR88.7 million through an issuance of 291.4 million new units, with a ratio of 454 units for 1,000 units at 49 cents apiece. This would result in a theoretical ex-price (TERP) of 65.5 cents. Based on pro forma net property incomes and distributable incomes for 1HFY2020 and FY2019, the transaction is dilutive to the extent of around 21% based on distribution per unit (DPU), and a dilution of 11.4% to 11.7% based on distribution yield.
When asked why the manager is proposing such a dilutive transaction, the manager accepts that the transaction is not immediately DPU-accretive. However, the occupancy of the Spanish portfolio is around 84.7%, providing the manager with the opportunity to lease the vacant area with a potential for positive rental reversions. In addition, the Spanish properties have remained resilient, with less than 2% of tenants by rent requesting for rental rebates in the April-June 2020 period, during the Spanish lockdown.
For IREIT Global unitholders, the last day for rights application is Oct 18. The rights issue is renounceable, but not underwritten by a bank. The sponsors have undertaken to take up their pro rata allocation, and AT Capital, a major unitholder, is prepared to take up excess units.
Frasers Centrepoint Trust’s (FCT) fund-raising is the largest this year for a REIT, at around $1.3 billion, but its transaction is the most accretive. On Sept 3, FCT announced it plans to acquire the 63.1% of PGIM Asia Retail Fund it does not own.
To fund the purchase, FCT has announced a placement and preferential equity fund-raising for $1,300 million. As an example, if FCT issues 585.6 million units priced at $2.22 apiece, the acquisition would provide a DPU accretion of 8.59% based on FY2019’s pro forma numbers. Hence DPU would rise to 13.02 cents from FY2019’s 11.97 cents. The transaction is less accretive if 9M2020 figures are used, but it is still accretive. Besides, with FCT trading at $2.55 as at Sept 23, the new units are likely to be priced at around $2.30. FCT’s EGM is on Sept 28, and details of its equity fund-raising will be released then.
Lippo Mall Indonesia Retail Trust (LMIRT) has the most dilutive rights issue by an S-REIT. On Sept 18, it announced that it would raise $280 million by issuing more than 4.68 billion units at six cents per unit, which is 160% more than the 2.93 billion units in issue. Hence LMIRT’s rights issue is in the ratio of 160-for-100 units. The monies raised are to part-fund the acquisition of Lippo Mall Puri, which is being sold to the REIT at $330.2 million by sponsor Lippo Karawaci. LMIRT’s market capitalisation is marginally below $300 million. LMIRT divested Pejaten Village in July and Binjai Supermall in August.
Unitholders of LMIRT could suffer a double whammy. Apart from the dilutive nature of the transaction, the master lease for Lippo Mall Kemang ended on Dec 16, 2019, amounting to $19.6 million of income support. The actual underlying income of the areas under the Lippo Mall Kemang’s master lease is below the master lease income. Hence, excluding the master lease rent, DPU in FY2019 would have been 1.84 cents instead of 2.23 cents (see table).
Even after stripping out the master lease for Lippo Mall Kemang, the FY2019 DPU is more than double the pro forma DPU of 0.69 cent when the rights issue and acquisition of Lippo Mall Puri are taken into account. Unitholders will get to vote on the rights issue, the acquisition, an interested party loan, and a white-wash waiver.
