REIT Placements and Rights Issue – Yield Accretive vs DPU Accretive

by: Tam Ging Wien


All examples and stocks quoted here in this article and on the ProButterflyTM and REITScreenerTM site are for learning purposes; it does NOT constitute financial advice or a Buy/Sell recommendation. Contents are reflective of personal views and readers are responsible for their own investments and are advised to perform their own independent due diligence and take into account their own financial situation. If in any doubt about the investment action you should take, you should consult a professional certified financial adviser.


Throughout 2017 and 2018, ProButterfly has covered many REITs, their IPOs and their corresponding corporate actions in great detail. Among some of our most popular articles are:

We notice a very common confusion among readers with regards to the topic of accretion with regards to REITs and their acquisitions. Many readers mistakenly believe that DPU accretive and Yield accretive acquisitions the same and use the terms interchangeably. However, this is a mistake as REITs acquisitions could sometimes be Yield Accretive but DPU Dilutive.

Here in this article, we elaborate with examples the differences between both DPU accretion and Yield accretion.

Understanding How REITs Grow

Typically, when REITs acquire, they need to raise funds via equity, debt or a combination of both.

Equity-based fund raising refers to the REIT creating new units for sale to the public or existing unitholders in order to raise funds. The most common way a REIT raises funds via the sale of equity is through the use of rights issues and placement of units.

For more details on Equity-based fund raising, we recommend reading the article entitled 3 Types of Equity Financing in REITs by Chang Yue Sin.

Debt-based fund raising refers to the REIT taking on debts from through loans or bonds. The debts could be secured against their assets or portfolio or unsecured. Typically, the later would cost more in terms of the interest rates.

For more details on Debt-based fund raising, we recommend reading the article entitled 4 Types of Debt Financing in REITs also by Chang Yue Sin.

By raising funds through a combination of equity- and debt-based financing, REITs are able to raise the necessary funds to acquire real estate assets to grow their portfolio. This mode of growth is termed as “inorganic”. Chang Yue Sin has also written a very detailed article with regards to “inorganic” growth in REITs entitled How do REITs grow their business? (Inorganic Growth).

Adding fresh assets to the portfolio will increase the REITs overall rental income. However, if equity-based fund-raising is used, there will also be more units created. On the other hand, if debt-based fund-raising is used, the REIT will take on additional debt and increase its interest cost.

The REIT manager who negotiates and structure the acquisition would need to strike a balance between all these various factors in order to come up with a deal that is palatable to the seller, the sponsor, the major unitholders and the minority unitholders.

Yield Accretive vs DPU Accretive

It’s a common misconception that a Yield Accretive acquisition is also DPU Accretive. As a result, many investors use the terms interchangeably. However, we wish to highlight through a hypothetical example below that these 2 terms are not the same.

Let’s start with a hypothetical ProButterfly REIT that:

  • Pays a distributable income of $100 per year
  • Has 1,000 Units in issue
  • Market price is currently $1.00 per unit

In this case, the DPU will be $0.10 ($100/1,000 units) and the yield is 10.0% ($0.10/$1.00 * 100%). Hopefully this example is simple enough for readers to understand.

Scenario 1: DPU Dilutive but Yield Accretive

Now let’s say ProButterfly REIT acquired a new real estate asset which is expected to add $20 to the distributable income in the next 1 year after the completion of the acquisition. ProButterfly REIT expects to raise to raise funds to purchase this new asset by selling 250 new units via equity-based fund raising (be it rights issue or a private placement) at 30% discount to the current market price (i.e. $0.70 per unit).

The market price should then theoretically adjust to a lower price based on the theoretical ex-rights/placement. We can calculate this by:

As a result of this acquisition, the hypothetical ProButterfly REIT now:

  • Pays a distributable income of $120 per year
  • Has 1,250 Units in issue
  • Theoretical ex-rights/placement price is now $0.94 per unit

Let’s calculate the expected DPU: $120/1,250 = $0.096

Let’s calculate the expected Yield: $0.096/$0.94 * 100% = 10.2%

Did you notice in this example, the asset acquisition is yield accretive? The yield has now gone up from 10.0% to 10.2%.

However, on a per unit basis, the DPU has now fallen to $0.096 compared to $0.10. This is an example of a DPU dilutive but yield accretive acquisition.

In this scenario, a unitholder is faced with a decision. The unitholder will need to fork out additional cash in order to subscribe to the additional units or else they face dilution on their yield.

In terms of Yield on his theoretical cum-rights price, he would experience a yield dilution of $0.096/$1.00 * 100% = 9.6% if he chooses not to subscribe to the additional units. On the other hand, if the unitholder decided to subscribe and acquire the new units, he would enjoy a yield accretion of $0.096/$0.94 * 100% = 10.2% based on his theoretical ex-rights price.

This is the most common scenario that unitholders face when they invest in REITs that raise funds via equity fund raising method - fork out additional cash or face dilution.

Scenario 2: DPU Accretive and Yield Accretive

Now let’s say ProButterfly REIT acquired a new real estate asset which is expected to add $26 to the distributable income. ProButterfly REIT intends to fund this acquisition purely using equity-based financing by selling 250 new units (be it rights issue or a private placement) at 30% discount to the current market price (i.e. $0.70 per unit).

As a result of this acquisition, the hypothetical ProButterfly REIT now:

  • Pays a distributable income of $126 per year
  • Has 1,250 Units in issue
  • Theoretical ex-rights/placement price is now $0.94 per unit

Let’s calculate the expected DPU: $126/1,250 = $0.1008

Let’s calculate the expected Yield: $0.1008/$0.94 * 100% = 10.7%

Did you notice in this second example, the asset acquisition is both Yield Accretive and DPU Accretive?

In this scenario, even if a minority unitholder did not subscribe to the new units, on a per unit basis the minority are still better off as the DPU is higher that before the acquisition. This is regardless of the unitholder’s decision whether or not he subscribes to the additional units.

In terms of Yield on his theoretical cum-rights price, he would be getting a yield of $0.1008/$1.00 * 100% = 10.08% if he does not subscribe to additional units. On the other hand, if the unitholder decided to subscribe and acquire the new units, he would enjoy a higher yield of $0.1008/$0.94 * 100% = 10.7% based on his theoretical ex-rights price.

Scenario 3: DPU Dilutive and Yield Dilutive

Now let’s say ProButterfly REIT acquired a new real estate asset which added only $15 to the distributable income. Similarly, ProButterfly REIT expects to raise to raise funds to purchase this new asset by selling 250 new units via equity-based fund raising (be it rights issue or a private placement) at 30% discount to the current market price (i.e. $0.70 per unit).

As a result of this acquisition, the hypothetical ProButterfly REIT now:

  • Pays a distributable income of $115 per year
  • Has 1,250 Units in issue
  • Theoretical ex-rights/placement price is now $0.94 per unit

Let’s calculate the expected DPU: $115/1,250 = $0.092

Let’s calculate the expected Yield: $0.0.092/$0.94 = 9.8%

Did you notice in this example, the asset acquisition is both Yield Dilutive and DPU Dilutive. This would be the worse scenario that a unitholder would want.

Regardless of the unitholder’s decision to subscribe to the additional units, the investor would be diluted. Such actions would be viewed as value destructive to unitholders.

Case Studies of REITs For All 3 Scenarios

Let’s consider a few examples of all 3 scenarios among the Singapore listed REITs.

Scenario 1: DPU Dilutive but Yield Accretive

In general, most rights issue should fall into this category. It is usually very difficult to achieve both DPU and Yield Accretion during a rights issue as units are usually offered at a steep discount. However, if the manager is able to at least achieve a yield accretive acquisition, unitholders would have an option to subscribe to the additional units and avoid a dilution scenario.

Manulife US REIT

Manulife US REIT acquisition of Plaza via a rights issue resulted in Yield Accretion but DPU Dilution.

Source:  Manulife US REIT

Cromwell European REIT

Cromwell European REIT is another example of a REIT which had issued a rights issue to acquire assets in Europe.


Source:  Cromwell European REIT

Keppel-KBS US REIT

Here is an example where the illustration of


Source: Keppel-KBS US REIT

Scenario 2: DPU Accretive and Yield Accretive

We have yet to identify any Singapore listed REITs in the recent years which managed to pull-off a DPU Accretive rights issue. However, there are a few recent private placements that certainly fit this criteria which we will list here for illustrative purposes.

Keppel DC REIT

In the announcement dated 07-May-2018, Keppel DC REIT proudly announced that its acquisition of the Kingsland Data Centre funded by its private placement was expected to be DPU Accretive.


Source:  Keppel DC REIT

Source:  Keppel DC REIT

In the pro forma DPU section, Keppel DC REIT also illustrated that the its DPU is expected to increase.

Ascendas REIT

Ascendas REIT acquired in 2 phases a portfolio of UK properties funded by a combination of debts and private placements in H2-2018. In both private placement acquisition announcements, the DPU was illustrated to be accretive on a pro forma basis.

Source:  Ascendas REIT First UK Acquisition

Source: Ascendas REIT Second UK Acquisition

Fraser Logistics & Industrial Trust

Fraser L&I Trust performed an equity fund raising to purchase a portfolio of 21 properties in Europe and had shown an expected pro forma DPU increase as a result of acquisition.

Source:  Fraser Logistics & Industrial Trust

Scenario 3: DPU Dilutive and Yield Dilutive

This is the worse scenario for unitholders as the impact of the equity fund raising will result in a dilution regardless of the unitholder’s decision to subscribe or not.

CDL Hospitality Trust

Source:  CDL Hospitality Trust

Ascott Residences Trust


Source:  Ascott Residences Trust

CapitaLand Commercial Trust


Source:  CapitaLand Commercial Trust

OUE Commercial REIT


Source:  OUE Commercial REIT

Conclusion

Hopefully both the hypothetical examples and real-life examples have helped 

readers to understand the differences between a Yield Accretive and DPU Accretive acquisition. In the most ideal situation, it would favour unitholders for REITs to acquire assets resulting in Yield Accretion and DPU Accretion.

However, we do acknowledge that sometimes having both are difficult due to market circumstances. As investors, we hope that REIT managers would at least make acquisitions that are Yield Accretive but DPU Dilutive and provide unitholders the option to subscribe to those additional units to avoid dilution.

The worse case for investors are for REITs to acquire assets which are both Yield and DPU Dilutive and force unitholders to bear the value destruction.

Observing the past history of REITs and management decisions on acquisitions could potentially give investors an insight into the considerations and thinking of REIT managers. We at ProButterfly would prefer to avoid REITs which has in the past performed Yield and DPU Dilutive acquisitions.

 

 

We really want to appreciate our many readers who trusted and supported ProButterfly throughout the years. It is only with you that we are able to successfully sell-out well ahead of time the January and March 2019 run of our flagship REITs to Riches: Everything You Need To Know About Investing Profitably In REITs workshop!

But there is good news for those who are still interested. We have opened early-bird registration for our June-2019 run taking place on 22/23-June-2019 (Sat/Sun)!

Using the early-bird promo-code EARLYBIRD100 will immediately get you $100-off of workshop price. For just $488 for 2 Full Days, this is by far the most comprehensive REITs investment workshop available in Singapore.

We focus on REITs can deliver both capital appreciation and sustainable dividends. During the workshop, we focus our learning with practical examples of real world REITs case studies both local and overseas. This is to ensure that attendees can immediately apply what they learn.

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Meanwhile, do also check out the book REITs to Riches: Everything You Need to Know About Investing Profitably In REITs available at all major bookstores around Malaysia and Singapore. To purchase the eBook (PDF) copy, navigate to http://aktive.com.sg/store/reits-to-riches/.

 

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