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How Do You Know If a Private Placement is Good for Existing REIT Unitholders?

Real estate investment trusts (REITs) sometimes use private placements to raise funds for an acquisition or to pay off debt. Unlike preferential offerings, private placements offer new units only to privileged investors. As such, retail unitholders will not be entitled to purchase the new units on offer. Most recently, Dasin Retail Trust (SGX: CEDU) announced that it would be using a private offering to raise funds to partially pay for the acquisition of a property.

With many REITs in Singapore often choosing to use private placements, I thought it would be useful to point out some of the key aspects of private placements that investors should assess. 

Offer price

Perhaps the most crucial aspect of the private placement is the offer price. Investors should compare the offer price against the current market price of the REIT.

In addition, unitholders should also find out if the offer price is being sold at a discount to book value and what the implied yield of the new units on offer are. This will determine whether the REIT is raising equity funds at a reasonable price.

The offer price should be reasonable relative to both the REIT’s book value and market price. For instance, warning bells start to ring when the private placement’s offer price is too far below its book value or represents a steep discount to its current market price. Raising funds by selling units at below book value will inexplicably dilute the group’s book value and result in a decrease in book value per unit.

Reason for private placement

There should also be a compelling reason why the REIT is only offering new units only to a particular group of investors. The privileged investors should be able to add value to the REIT in some way.

For instance, private placements may be used when a deal needs to be executed quickly and a particular investor is willing to provide the funds much faster than through a preferential offering. 

Often, the private offering is extended to sponsors. Sponsors can increase their stake in the REIT, which demonstrates to retail investors that the sponsor is willing to support the REIT through capital injection.

However, on other occasions, a good reason for the private placement may not be apparent. Investors will need to question the REIT managers to find out if the deal was really fair to retail investors.

Use of proceeds

Lastly, investors should also note what the proceeds raised will be used for. In most REIT cases, private placement proceeds are used to make acquisitions. However, there are instances when the proceeds are also used to pay off debt and to improve existing assets.

Recently, ESR-REIT (SGX: J91U) raised funds through a private placement and preferential offering. Part of the funds raised was to pay off debt and for asset enhancement initiatives.

Investors will need to determine if the use of the proceeds will benefit shareholders over the long-term.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn't own shares in any companies mentioned.