MARKET
Market
J - REITS
SECONDARY
OFFERINGS
UNFAIRLY
IMPACT ISSUER
AND INVESTORS
Unit price falls about 4% from the closing on
secondary offering announcements
By Christian Bernasconi,
Managing Director, B&I Capital
Photo by Hui-ming Hong on Unsplash
J-REIT secondary offerings often involve an unnecessarily lengthy process
which negatively impacts both the issuer and existing investors.
“The stock exchange, issuers,
and the industry should
consider the current practice
and look to reforms that limit
unit price erosion resulting
from secondary offerings. Such
practice only benefits new
unitholders at the expense
of existing unitholders and
changes some of the metrics of
the transaction.”
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In most markets, REITs can suspend their units for the day on which they
decide to issue new units, and a book of demand is built overnight or even
within a few hours. Bookbuilding is a process through which a company
generates and records investor demand when raising capital to achieve the
optimal price. Generally, discounts are quite small, and the units resume
trading the following day.
There are technical differences in other markets that allow REITs to raise
capital which don’t exist in Japan. J-REITs are generally required to time
their secondary offerings very close to their dividend dates so that the
new units will not dilute the dividends of existing investors. While this is
prudent, it means that the REIT management has little flexibility in how
it times its acquisitions or how it taps the equity market. This is negative
for the issuer and existing investors as it creates an overhang given the
market can anticipate an upcoming capital raise and will either sell or not
buy the units.
We looked at recent J-REIT secondary offerings and found that on average
J-REITs fell roughly 4% from the closing price when they announced
their secondary offering until the date where the price was fixed for the
new units. On top of this, the discount of roughly 5.5% with costs (3%
underwriting fee to underwriters and 2.5% discount on new units to the
investor), and the issue cost swells to about 9.5%.
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