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Japan’s Invincible Says Dilutive Offerings Resulted in Increased Dividends (Magazine)

Japan’s Invincible Says Dilutive Offerings Resulted in Increased Dividends

REITS’ Tendency to Issue Dilutive Equity for Acquisitions Hurt Shareholders

 

Fund managers whom REIT AsiaPac Media spoke with say Invincible Investment Corporation, among others, has a track record of sponsor-driven dilutive issuances. These dilutive offerings have led to investors abandoning the J-REIT, causing the discount to NAV for the company to worsen. This, in turn, makes it more difficult for the REIT to fund future acquisitions.

One of the cheapest J-REITs, Invincible Investment Corporation’s shares trade at a 7.4% dividend yield – 350 basis points (bps) wider than the J-REITs’ average and 260 bps higher than the Hotel J-REIT average.

“The wider than average spread is in part due to concerns regarding a significant ramp up in Japan’s hotel supply. However, the bulk of the excessive risk premium for Invincible is the result of poor handling of conflicts of interest by the company’s management,” says one fund manager.

 

REIT AsiaPac asked Invincible about their dilutive offerings. Below are their comments:

As you point out, Invincible has conducted three NAV dilutive offerings in the past two years.  Consonant Investment Management (CIM), Invincible’s asset manager, believes that the last three equity offerings were positive for unitholders because it increased the quality of the portfolio, contributed to portfolio diversification and have or will increase Dividends Per Unit (DPU).   In 2017 and 2018, Invincible conducted three equity offerings increasing its unit count by 56.4%.  During this period, Invincible acquired 20 assets and disposed of 12 assets.  The impact was that simulated Net Income increased to JPY 17.9 billion or by 88.2% versus a 56.4% increase in the unit count.  These offerings resulted in a 20.6% increase in DPU, whereas if we did not do any offerings, DPU would have been flat.

Please see the below presentation that Invincible created for investors as part of the SMBC Nikko Securities Property Conference for more details:

Invincible Investment Corporation’s presentation for “Property Conference Tokyo 2018.”

The first of these three offerings in March 2017 allowed Invincible to acquire two high-quality residential assets in Tokyo, Royal Parks Tower Minami-Senju and Royal Parks Seasir Minami-Senju.  In particular, the Royal Parks Tower Minami-Senju is performing extremely well and has been a major contributor to rent growth with rents up by over 10% for new and renewal contracts over the past two years and Net Operating Income (NOI) up by over 4% each year.

During the past two offerings, Invincible acquired high-quality hotels with rental growth.  Specifically, the Sheraton Grande Tokyo Bay Hotel is a flagship hotel located next to Tokyo Disneyland, and NOI grew by 5.3% in 2018.  Furthermore, 36.6% of Invincible’s NOI comes from Tokyo hotels, which is also contributing to NOI growth. The new Minpaku regulations have taken out over half of the shadow supply which is now clearly defined as illegal. Furthermore, the Rugby World Cup and 2020 Olympics will further help Revenue-Per-Available-Room and NOI in Tokyo and other cities.

Importantly, the Westin Grand Cayman and Sunshine Suites have provided some diversification to Invincible’s NOI source and also contributed to growth as well as mitigating seasonal fluctuation.  2018 NOI is estimated to be 0.8% above initial budgeting at the time of the associated equity offering in July 2018 and is estimated to be 2.4% higher in 2019.  Overall, these offerings have allowed Invincible to assemble a more diversified, higher quality, and NOI growing portfolio totaling JPY 448 billion (acquisition base) across 132 assets.

 

Editor’s Note: The private temporary lodging, or “minpaku,” law, which came into effect June last year, requires hosts to register with the government and imposes other rules and restrictions. The new law limits home-sharing to 180 days a year and leaves the final decision-making to local governments, some of which have imposed even stricter rules to protect security.