04/2021
The key to “Making Your Millions in REITs”, my recent published book lies not so much as having good REITs that can deliver multifold returns for the smart and savvy REIT investor, but more so on how to avoid the Value Traps that can drain the money, time and psychographics of an investor.
Let me illustrate with Cromwell European REIT, a REIT that we had warned about since its IPO in November 2017 at €0.55, in our past investment articles since its IPO as well as detailed in my book at €0.45.
Table 1 – Cromwell’s share price has wallowed below its IPO price €0.55 ever since and ended February 2021 at €0.46. The share price briefly exceeded its IPO price of €0.55 on only 2 short occasions in the past 3 years 4 months since its listing. A Value Trap?
Cromwell has just raised another $160.79 million via a private placement of 232.558 million shares at €0.43 on Wed 25th Feb 2021. As highlighted in my book, media interviews and previous detailed research, what is notable on the pricing of this placement is –
1. A staggering discount of 10.8% discount to the VWAP of €0.482 on preceding market day on 24 Feb 2021
2. A whopping discount of 10.42% to the previous market day closing price of €0.48 on 24 Feb 2021
3. Post the Covid-19 Pandemic, REITs like FCT, Ascendas REIT, MIT, MLT, Capitaland China Trust and Keppel REIT also did private placements at sizes and value much higher than Cromwell’s. However, none had to offer price discount of more than 10%, be it to the VWAP or the previous market day closing prices.
As highlighted in my book and taught in our REIT investment classes in the past 3 decades, our research has shown that –
1. REITs that have resort to private placements at sharp discounts to raise funds have not performed well. Going forward, they are unlikely to perform well either.
2. Cromwell shareholders who were not offered placements at the private placement price would have seen their share price drop and not benefiting from their REIT positions.
Cromwell had previously failed to IPO in 2017 as it then proposed IPO portfolio consisted of several Polish assets that were considered riskier than its blended portfolio which included offices and warehouses in Germany, Netherlands, Denmark, Finland and Italy. Cromwell then subsequently did not include the Polish assets in the subsequent re-submission for its IPO which enabled them to list on November 2017 at €0.55. I have previously warned in my various media interviews not to subscribe to Cromwell IPO.
Prior to this private placement, Cromwell undertook a massive 328.086 million private placement of shares to raise €150 million to fund these acquisitions on 21 Jun 2019. Minority shareholders who were not offered the private placement at €0.46 would have been diluted as the private placement price was at a large discount of 9.6% (by far the largest discount compared to all other REIT private placements in 2019) to its then Volume Weighted Average Price (VWAP) of €0.5091 for the preceding market day on 20 Jun 2019. This discount is even wider at 11.7% to the VWAP of 0.5209 including married trades done on 20 Jun 2019.
The 21 Jun 2019 acquisition and fund raising was Cromwell’s 5th and 2nd respectively after its listing in November 2017. By all accounts, Cromwell has grown its portfolio size since IPO to 103 properties worth €2.042 billion upon the completion of the acquisition verses 74 properties worth €1.354 billion at IPO. This is a whopping 51% growth in less than two years! The pertinent question to the smart and sharp REIT investor should be - Have the benefits of the acquisitions filter down to the DPU where he/she can then benefit? Also, the share price has a very high correlation with the DPU trend. While the share price can act like a voting machine in the short-run, it will act as a weighing machine for the merits of the growth strategy that a REIT has undertaken in the long-run.
Table 2 - Cromwell has grown its portfolio size since IPO to 103 properties worth €2.042 billion upon the completion of the acquisition as at end-2019 vs 74 properties worth €1.354 billion at IPO
Hardly has the dust settled from the last purchase before another begins. For the sagacious REIT investor, it is vital to assess each acquisition to see if indeed the various acquisitions enhance DPU as what the REIT’s pre-acquisition presentation deck had guided. Investors should specifically look out to what extend do the acquisitions enhance DPU. In Cromwell’s case, investors really need to more a lot of homework.
Cromwell’s share price has wallowed below its IPO price €0.55 ever since and ended February 2021 at €0.46. The share price briefly exceeded its €0.55 on 30 Nov 2017, for about only a month in 2Q2018. It then briefly traded above its IPO price again in 1Q2020 before plunging down to less than €0.30 during the Covid-19 crisis sell-off. Thus, it has traded below its IPO price for almost the rest of the 3 years 4 months (from IPO till end-March 2021) since its listing on November 2017.
It is therefore apparent that –
2018
1. Cromwell shares have underperformed in 2018 when the REIT market went through a consolidation period arising from 3 Federal Reserve interest rates increases.
2019
2. Cromwell shares have failed to perform even in 2019 and early-2020 when the FTSE REIT Index soared from 777.45 in December 2018 to 921.02 in February 2020, a whopping gain of 143.57 points or 18.47% over a 14-month period.
During & Post-Covid 2020 till Mar 2021
3. Post-Covid 19 Pandemic sell-off, Cromwell shares continued to wallow at 17.3% below its IPO price of 3 years 4 months ago based on the closing price of €0.455 at end-March 2021.
Is Cromwell the only REIT that is a Value Trap? What other REITs are Value Traps that can drain the money, time and psychographics of an investor.
For outperformance, the smart and sharp REIT investor should always be watchful of REITs that will underperform over specific periods of time as long-term underperformance can result in a huge deterioration in terminal wealth. For more of which REITs that a sagacious REIT investor should have and should not have in their investment portfolios, do join us on our next upcoming class entitled “SEPERATING THE SHEEP FROM THE GOAT IN S-REITS” on 10 April 2021. SIGN UP HERE to enjoy the Early Bird Discount. Side-stepping the Value Trap in REITs is probably more important than knowing which REITs to pick in Making your millions in REITs. Join us.
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