IT is that time again in the life of an investor where they have to exercise their voting rights and a decision has to be made.
A circular by Tigere real estate investment trust (REIT)’s asset manager was circulated calling unit holders for an extraordinary general meeting to decide on whether or not to purchase a real estate asset.
Tigere REIT, the first ever listed real estate investment trust in Zimbabwe, which currently owns two properties, namely Highland Park Phase 1 and Chinamano corner, are looking to buy its third property, which is Highland Park Phase 2.
Highland Park Phase 2 is a property adjacent to phase 1 in terms of physical location, and is currently wholly owned by Modern Touch Investments.
Modern Touch is an associate company of Frontier Real Estate, the promoter and major unit holder in Tigere REIT.
Tigere REIT’s asset manager and trustee believe that acquiring this third property aligns well with the REIT’s investment philosophy and will be in the best interest of unit holders.
Phase 2 is being valued at US$10,825 million, whereas 100% of Modern Touch at US$11 294 810. The difference is the cash at hand worth US$602 350 and a liability accruing from tenant deposits of US$132 540.
They have set out an ambitious target to grow the REIT to US$100 million in the next five years and acquiring this property will be one of the steps towards achieving that mark.
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However other acquisitions will be necessary and possibly property value appreciation will also be required before the target can be achieved.
Tigere had previously indicated that it has pre-emptive rights to the phase 2 and essentially what it is now doing is exercising them.
Like the regional property consultant Kura Chihota once said, a REIT is a perpetually capital hungry beast, and this is mainly because it is obligated to dish out the majority of its earnings to unit holders.
In Zimbabwe, a REIT should distribute at least 80% of its earnings to unit holders and Tigere has been doing that quarterly since inception.
The hungry beast has explored various ways to acquire the asset including borrowing, rights issue and using internal financing.
It ended up settling on an asset swap, where it issues out shares to acquire the asset.
Borrowing was not going to be a feasible option in Zimbabwe right now considering that the cost of debt is very restrictive and lenders are not willing and able to extend such amount of credit.
Internal funding would have also taken forever to accumulate the required funding amount after paying dividends. Rights issue was another possibility but I suspect the swap was a cleaner way of doing it considering that the seller was comfortable of being paid in scrip.
Some of the points that have been used to justify this transaction are economies of scale and yield accretion.
Economies of scale point to the fact that purchasing this property will benefit the REIT due to
synergies from shared infrastructure and cost burden will reduce as some fixed costs will be shared.
Adding this property will allow the REIT to fully utilise some of its shared infrastructure between the properties and reduce costs. On the other hand, yield accretion on the other hand explains that purchasing this property will improve the overall yield of the REIT.
Yield is an important metric when evaluating REITs and is calculated by dividing the net income or earnings by the value of the REIT.
It tells you how much the company made in profits as a percentage of its entire value and the inverse of that then shows you how long it would take you before recouping your investment in the company using earnings.
It is also important to note that yield is calculated using either
market prices or net asset value. Tigere’s yield was being calculated on an NAV basis and one would guess that it is because the market capitalisation is in a different currency to the bulk of the net income.
However one might also argue that calculating yield on an NAV basis defeats the whole purpose of market value, especially if there is significant divergence between the two numbers.
So the dilemma of the current unit holders is whether this yield accretive transaction is enough to offset the dilution and this is a big decision for unit holders.
Looking at the numbers given in the circular, Tigere is looking to issue 351 million shares, which if the transaction goes on well, will represent 32,8% of the post transaction shares in issue.
This essentially represents the dilution in ownership for unit holders due to this transaction, but more importantly it also means that the promoters are increasing stake in the REIT.
It is important for unit holders to fully understand what dilution entails. Dilution in this case means that the unit holder’s ownership in the REIT has been reduced by the introduction of this new unit holder.
This means that your voting power has been reduced in the REIT. However the monetary value does not change, unless the market moves post transaction to reflect new information, and neither does the number of units you own in the REIT. Frankly, for unit holders of retail nature the dilution issue is neither here nor there because their individual voting rights are not sufficient to influence decisions. However, for institutional unit
holders the dilution might need to be analysed, especially for fund managers with a percentage ownership objective.
On the other hand, the circular calculations are pointing to the fact that post transaction yields will increase by 25%. What this means is that the new property being introduced into the fund has higher yields and will pull up the yields of the overall fund by 25% hence the yield accretive transaction.
It is important to reiterate that these numbers are on a NAV basis and unit holders who believe that share price is the more reflective denominator might have to explore alternative calculations.
This article will not make calculations based on market capitalisation due to the subjective nature of exchange rates. In conclusion, Tigere’s decision to do a swap is an innovative and interesting one but also begs a number of questions. Is this a reflection that the market is not liquid enough to fund the acquisition of the property?
If so how will the fund get it its US$100 million target?
Will swaps continue to be sustainable in the future and will all the following projects continue to be yield accretive, because dilution is almost certain?
Hozheri is an investment analyst with an interest in sharing opinions on capital markets performance, the economy and international trade, among other areas. He holds a B. Com in Finance and is progressing well with the CFA programme. — 0784 707 653 and Rufaro Hozheri is his username for all social media platforms.
