Drizzt Wrote:ok can someone help explain the rule of thumb for raising capital based on the level of NAV? it seems that it makes more sense to raise close or above NAV rather than at a huge discount. why is that?
Generally, when units are selling above NAV, the yield is low. This makes it easy to make a yield-accretive acquisition - you issue units yielding 4% for cash to buy an asset yielding 5%. DPU goes up and everyone is happy.
The converse is true when units are selling below NAV; the yield is high. If you issue units yielding 5% for cash to buy an asset yielding 4%, the transaction is yield-negative i.e. DPU goes down. Investors will not normally support such a transaction except under duress.
Note that the test is relative yield rather than premium or discount to NAV. You could issue units at 50% of NAV, yielding 10%, to buy an asset yielding 15%, and everyone would be quite happy.
(08-12-2010, 02:36 PM)lonewolf Wrote: [ -> ]In other words, NAV is not a very meaningful concept and usually not taken in account much when REITs raise capital.
Rather is how big a discount you can give compared to adjusted volume weighted average price(VWAP) of the unit.
Yes of course...but if you issue shares below your NAV, you are going to lower it dramatically. Plus when you are trading below your NAV, it is safe to assume you are a pretty high yielding stock so it will be a lot harder to make a decent yield accretive investment. It may even be a yield negative acquisition. It is akin to issuing bonds below par value to finance an acquisition IMO.
Moreover, yield is merely a function of the client's credit risk. If the Trust yield is too high, it may only be restricted to dealing with high yielding assets ie junk assets like vessels or buildings leased to weaker companies. Whereas if the Trust yield was low, it can purchase lower yielding assets from blue chips companies or government agencies and still boost its DPU. The former is expansion while the latter is diversification since there is a reduction in the overall risk profile.
(08-12-2010, 02:54 PM)Nick Wrote: [ -> ]Yes of course...but if you issue shares below your NAV, you are going to lower it dramatically. Plus when you are trading below your NAV, it is safe to assume you are a pretty high yielding stock so it will be a lot harder to make a decent yield accretive investment. It may even be a yield negative acquisition. It is akin to issuing bonds below par value to finance an acquisition IMO.
Moreover, yield is merely a function of the client's credit risk. If the Trust yield is too high, it may only be restricted to dealing with high yielding assets ie junk assets like vessels or buildings leased to weaker companies. Whereas if the Trust yield was low, it can purchase lower yielding assets from blue chips companies or government agencies and still boost its DPU. The former is expansion while the latter is diversification since there is a reduction in the overall risk profile.
Ah... I see. Good points.
This was exactly what happened when the higher yield REITs issue rights (AIMSAMP, Saizen) vs a lower yield REITs issuing rights/PO (like A-REIT, Capmall, CCT). I observed it a few times but could never really understand the rationale. Thanks for pointing out.
(08-12-2010, 04:44 AM)Drizzt Wrote: [ -> ]ok can someone help explain the rule of thumb for raising capital based on the level of NAV? it seems that it makes more sense to raise close or above NAV rather than at a huge discount. why is that?
IMO the more pertinent reason would be the dilution of NAV if units are issued below NAV. Conversely, issuing above NAV would instead beef up its balance sheets and increase the average assets available per share. That naturally must be a good thing. EPS would decrease regardless of the issue price, so obviously its better to obtain more cash using the same number of shares being issued, ceteris paribus. Same applies for ROE, thus logically cash calls should only made if one expects the net income to increase substantially thereafter. Assuming one
needs to raise cash, then its a natural choice to raise at as high a price as possible since the other results are indifferent.
Rights issues and private placements are rarely made below the prevailing share price simply because it would be difficult to attract takers if otherwise. In the same way the comparison of current yield versus a prospective yield-accretive acquisition is meant to make it easier to swallow for existing shareholders. If we assume share price to be equal to NAV at the point of acquisition, then it would mean the target asset should naturally be yielding more than the existing yield for the above statement to hold true.
Another implicit benefit I can think of with raising capital above NAV especially with private placements, is the positive message it brings to investors. In cases where strategic partners for instance are willing to cough up an amount greater than what is available easily via open market purchases, in order to obtain a substantial stake, one cannot help but think towards the better cause. This will certainly work in uplifting perceptions surrounding the company.
Relook at Singapore’s defensive yield instruments - UOB KayHian
Written by Dow Jones & Co, Inc
Thursday, 17 March 2011 10:32
UOB KayHian says while there are still uncertainties on the potential fallout on regional economies from the Japanese disaster, “some defensive yield instruments have fallen to attractive levels. We think investors should relook at these investment assets which are backed by interest or dividend incomes.â€
It notes among corporate bonds traded on the SGX, Jurong Town Corp pays a coupon of 4.826%. It says preference shares provide a specific dividend before any dividends are paid to the common shareholders, and take precedence over common stock in the event of liquidation, with DBS Bank 6% NCPS 10 (D14.SG) currently yielding 5.96%.
Among REITs under its coverage, the house notes Sabana REIT (M1GU.SG) has a forecast FY11 yield of 9.2%, followed by Ascendas REIT (A17U.SG) and Ascott Residence Trust (A68U.SG) both at 7.2%.
Lastly, it notes among stocks that pay dividends, it notes StarHub (CC3.SG) leads with a forecast FY11 dividend yield of 7.7%, then Hong Leong Finance (S41.SG) at 6.9%.
Sabana Shari’ah Compliant Industrial Reit rated 'outperform' by Daiwa
Written by The Edge
Friday, 18 March 2011 16:03
Daiwa Securities Research in a Mar 15 research report says: "Sabana REIT is Singapore's first Shari'ah-certified real estate investment trust.
"We believe Sabana REIT’s investment-property portfolio stands out from those of other industrial-property S-REITs for its exposure to the high-value-added high-tech industrial, and chemical-warehouse and logistics segments. Overall, Sabana REIT’s portfolio is made up of consistently high-quality assets, in our opinion.
"We initiate coverage of Sabana REIT with an Outperform rating and six-month target price of $1.05, equivalent to target DPU yields, based on our forecasts, of 8.3% for 2011-13, and a target premium to book (post-IPO) of 6%.
"Our target yield of 8.3% is in line with the current 2011 DPU yield for Sabana REIT’s industrial property S-REIT peers. OUTPERFORM (initiating coverage).
The Khua continued to buy one more millions on 25 March.
People seem to think this is one of the worst industrial twits around. I wonder if anyone actually rates it at this current price and yield.
What is your take on this Drizzt ?
nick, its not the best reit out there, but seriously, when it comes to industrial reits, not alot of people can discern good from bad. hell with such a big portfolio i can say areit have some bad ones probably.
taking that out of the equation, the valuation,demand and economic picture matters more. thats my take.