Asset Infusion

When  assets are infused to a REIT there are several paths to fund the infusion of the assets.

• Asset for share swap - is when a REIT would buy assets/properties from their sponsor/parent company, and new common shares are issued in exchange for those assets. This will causes the number of shares of the REIT to increase.. Hence, dilution of shares happen here, where current shareholders have less common stocks than before the infusion. The newly issued shares are given to the  sponsor. 

  • The goal is for the infusition of the asset must be dividend yield accretive. Meaning even if the total number of shares increases, the dividend per share (DPS) must at least be the same or increase.

  • Another eaffect of Asset for share swap is the number of shares owned by the sponsor would increase; resulting in more shares/ownership to the company. But according to the Philippines REIT Law, the public float must be maintained at least 33.3% or 1/3 of the total outstanding shares. Hence before the infusion is executed, the sponsor must sell/dispose some shares where adding new issued shares will not violate the 33.3% minimum public float rule.

    • Since our market volume for PSE is very small, the REIT will have trouble selling their shares especially when it is in hundred of millions to billions pesos amount; Normally a REIT only have single or double digit million pesos worth of shares sold per day. If they need to dispose hundreds of million of share it would take time. Hence the sponsor would sell their shares to an institution (either local or foreign) like a institutional fund, government controlled institution (GSIS, SSS, Landbank) thru what we call a block sale.

    • A block sale is a private transaction between two entity that can be done off the market with a set price. Normally during a block sale, the REIT stock price would also irrationally go down. This is an opportunity for retail investor to buy REITs for a discount.

  • Asset for share swap is the most common way REITs have been doing infusion so far. This has been done by AREIT, MREIT and RCR.

•  Buying asset through leverage - a REIT can make a loan to purchase asset to be infused.

  • REITs are allowed by law to leverage up to 35% of their deposited property. And if  it has a publicly disclosed investment grade credit rating by a duly accredited or internationally recognized rating agency, it can leverage up to 70% of their deposited property.

  • This is what CREIT did with their 5 Billion USD green bond offering proceed last 2023.

• Buying through excess cash - a REIT purchase new asset through their excess cash. 

  • REIT usually perform this immediately after IPO where they have excess cash. from the IPO proceed.

  • Also, REIT are required by law to give as dividend , a minimum of 90% of their distributable income. Hence some REIT give less than 100% and that excess cash becomes can be used to purchase new asset. This is what AREIT did for Seda Lio purchase.

  • Another way to raise fund raise by REITs is thru disposition of asset done by AREIT  when they sold 3/6 of Alabang BPI Philam Condo property to fund buying the Seda Lio property.

After a REIT raises fund, they are required to submit a reinvestment plan for the proceed. They are required to invest in the Philippines projects to promote growth. 

Although block sale is usually performed to execute asset for share swap. Sometimes block sale can be used to raise fund or diversify shareholder ownership. This is what happened for CREIT when it sold a third of company to SMIC to raise fund.