REIT ASIAPAC MAGAZINE REITASIAPAC 4Q 2018 ISSUE | Page 18

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.” 18 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%. 19