REIT ASIAPAC
L E G I S L AT I O N
“ESG is getting bigger in the
J-Reit universe, and we are
have made great strides in
the E and G, and there is still
some way to go on S,” says
Yoji Tatsumi, President of
GLP Japan Advisors Inc.
Invincible Investment Corporation is one example with a track “The wider than average spread is in part due to concerns
record of sponsor-driven dilutive issuances, which had led to regarding a significant ramp up in Japan’s hotel supply. However,
investors abandoning the J-REIT, causing the discount to NAV the bulk of the excessive risk premium for Invincible is the
for the company to worsen. This, in turn, makes it more difficult result of poor handling of conflicts of interest by the company’s
for the REIT to fund future acquisitions. management,” says one fund manager.
One of the cheapest J-REITs, Invincible Investment Corporation’s REIT AsiaPac asked Invincible about their dilutive
offerings. Please see their response below.
shares trade at a 7.4% dividend yield – 350 basis points (bps)
Finally, Ichigo Hotel REIT
became the first J-REIT
to have no fixed fee for
managers. Managers are
remunerated based solely
on the performance of
Yoji Tatsumi,
the assets. “Our directors
President & CFO, GLP Japan
are independent of our
Advisors Inc.
sponsor, and bound by well-
established related party
transaction rules,” Hiroshi Iwai, Statutory Executive Officer,
Head of the Hotel REIT division, tells REIT AsiaPac.
wider than the J-REITs’ average and 260 bps higher than the
Hotel J-REIT average.
JAPAN’S INVINCIBLE SAYS DILUTIVE OFFERINGS RESULTED
IN INCREASED DIVIDENDS
“Consonant Investment
Management (CIM),
Invincible’s asset manager,
believes that the last three
equity offerings were
positive for unitholders
because it increased the
quality of the portfolio,
contributed to portfolio
diversification and have
or will increase Dividends
Per Unit (DPU).”
REITS’ TENDENCY TO ISSUE
DILUTIVE EQUITY FOR ACQUISITIONS
HURTS SHAREHOLDERS
Another controversial issue concerns related-party transactions.
Potential asset acquisitions are sometimes introduced by parties
connected to the sponsor. In most markets in the Asia Pacific,
REITs are required to hold Extraordinary General Meetings (EGMs)
to allow shareholders to vote on any significant events including
the acquisition of assets from the sponsor. With the sponsor as a
major shareholder, he or she has a greater influence on the vote.
In Japan, the problem is further complicated by the fact REITs
are not required to hold EGMs for related-party transactions. In
general, non-independent directors also dominate the number of
board seats at J-REIT asset management companies, with most
board members coming from the sponsor. This arrangement will
inevitably lead to outcomes where decisions made benefit the
sponsor at the expense of other shareholders.
MONA Shin-Urayasu, Kenedix Retail REIT
management structure. The only recourse for investors is to sell
shares of the company in question.”
JAPAN’S SILENT PARTNERSHIPS
Asset managers have also raised issues relating Japan’s so-
called “silent partnership” arrangement, known as Tokumei
the purchase, management, and sale of the real estate in a tax-
efficient manner. It is an arrangement where an investor makes a
financial contribution to an operator, and the operator conducts
“An example is a tendency for some J-REITs to issue dilutive
equity to fund property acquisitions often under the influence of
heavy-handed sponsors,” explains Rico Kanthatham, Managing
Director and Portfolio Manager at Barings. Because some
J-REITs trade at a discount to their Net Asset Value (NAV), the
acquisition of assets through equity issuance is dilutive to their
earnings, erodes their intrinsic value, and financially hurts their
existing shareholders. business under its own name. The identity of the TK investor is
“In such situations, shareholders have virtually no voice in the
matter, no way of expressing their displeasure for such decisions
or effecting what they perceive as necessary changes into the investments in silent partnerships.
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The Ritz Carlton, Grand Cayman
Kumai (TK), which is aimed at allowing investors to profit from
not disclosed to third parties who engage in transactions with
the TK operator.
Some REITs have 100% stake investments in such silent
partnerships. The proposed tax reforms announced on 14th
December included the requirement that a REIT does not own
50% or more of the equity of another corporation, through
Fund managers with whom REIT AsiaPac Media spoke say
As you point out, Invincible has conducted three NAV dilutive
offerings in the past two years.
Consonant Investment
Management (CIM), Invincible’s asset manager, believes that
the last three equity offerings were positive for unitholders
because it increased the quality of the portfolio, contributed
to portfolio diversification and have or will increase Dividends
Per Unit (DPU). In 2017 and 2018, Invincible conducted three
equity offerings increasing its unit count by 56.4%. During this
period, Invincible acquired 20 assets and disposed of 12 assets.
The impact was that proforma net income increased to JPY 17.9
billion or by 88.2% versus a 56.4% increase in the unit count.
These offerings resulted in a 20.6% increase in DPU, whereas if
we did not do any offerings, DPU would have been flat.
The first of these three offerings in March 2017 allowed Invincible
to acquire two high-quality residential assets in Tokyo, Royal
Parks Tower Minami-Senju and Royal Parks Seasir Minami-Senju.
In particular, the Royal Parks Tower Minami-Senju is performing
extremely well and has been a major contributor to rent growth
with rents up by over 10% for new and renewal contracts over
the past two years and Net Operating Income (NOI) up by over
4% each year.
During the past two offerings, Invincible acquired high-quality
hotels with rental growth. Specifically, the Sheraton Grande
Tokyo Bay Hotel is a flagship hotel located next to Tokyo
Disneyland, and NOI grew by 5.3% in 2018. Furthermore,
36.6% of Invincible’s NOI comes from Tokyo hotels, which is also
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