Over the past few months we have seen a wave of secondary stock offerings throughout the REIT market. This behavior is largely fueled by one or both of the following triggers which I will refer to as offering types: acquisition pipelines and opportunistic deployment.
Multiple properties within a company's niche become available at cap-rates the company deems favorable so it has an immediate need to raise capital. A lack of availability of good loans or the need to maintain certain debt to equity ratios drives a company to utilize a secondary offering. Immediacy of the requirement for money can lead to obtaining lower per-share pricing on the offering
A stock's price reaches a point which could be considered fully or even over-valued giving the company an opportunity to raise large amounts of money on a per-share basis through a secondary offering. Proceeds can still fund acquisitions, but are often used to restructure corporate debt or redeem costly preferreds.
Secondary offerings can have drastic effects on stock price and the intrinsic value of a company so it is advantageous for us as investors to know how to play offerings as they arise. We can begin our examination with a historical look at how offerings have affected stocks in the near-term and long-term.
On 11/02/11 STAG Industrial (STAG) closed on the issuance of 2.76mm shares of its 9% Series A preferred for total proceeds of $69mm. Additionally, on 5/22/12 it announced issuance of 7.25mm shares of common stock at $12.88 with 1,087,500 more at underwriter's option. Both of these offerings epitomize the acquisition pipeline type in terms of pricing and timing. Throughout early may STAG traded over $14 with a dip just before the offering to $13.77. To guarantee full placement, the offering price was further lowered to $12.88 creating a yield of 8.38 to the new purchaser%. Presumably, management would have liked to get a better price/share on this offering but their stream of acquisitions created time sensitivity. STAG's acquisitions over the past few months are massive in proportion to the company's size with many more planned for the rest of 2012.
On 6/22/12 Associated Estates Realty (AEC) completed an underwritten stock offering in which 5.5mm shares were issued to the public at a price of $14.40. Announcement of issuance so far below recent market prices sent the stock plummeting from a high of $15.29 on June 21st to a low of $14.30 on June 22nd. This massive drop was from an already discounted price as AEC traded in the $16-$17 range for much of the year. Once again the urgency created by a strong acquisition pipeline leads to issuance of stock at a certain time regardless of market price. In this case, unfortunately for AEC, the market dipped significantly shortly before issuance and it obtained a lower price per share than would be desired.
Lexington Realty Trust (LXP) closed on the issuance of 10mm shares of common stock on 5/18/11 at $9.45 per share. This is a clear case of opportunistic deployment as LXP's stock only briefly traded above this value in May of 2011. Seeing this full valuation of its stock, management had the opportunity to efficiently raise capital to greatly improve its balance sheet. Proceeds of this offering went toward paying off the balance of its credit facility. Since LXP had some loans which had variable rates based on its current debt to equity ratio, and this offering both raised equity and lowered debt (by paying off the credit facility) LXP was able to directly reduce its cost of debt.
Ashford Hospitality Trust (AHT) completed an offering of 7mm shares of common on 7/5/11 at $12.50 per share. With the price having hovered slightly higher for some time, it was difficult to see the opportunistic nature of the offering which only became evident after last summer's sell-off dropped the price to the $6 range. Whether this was foreseen by management or the timing was simply lucky is hard to determine, but participants in the offering took quite a hit. Since proceeds were used largely to pay down debt, it seems management had no pressing impetus to force an offering but rather felt it was a good opportunity.
Offerings are summarized in this table and the long term effects are elaborated on below
Date of offering
Short term effect
Long term effect*
11/02/11 and 5/22/12
Price down during offering and normalized after
Neutral to dilutive
Associated Estates Realty
Price down during offering and has yet to normalize
Lexington Realty Trust
Price up during offering and dropped significantly since
Ashford Hospitality Trust
Price steady during offering declining sharply after
*Long term effect is speculative as many factors go into determining the accretive value of an offering
In hindsight, of course, it is far easier to determine the nature of an offering, but through learning the patterns we can gain insight on future offerings as they occur. The best clues are the offering price relative to its history, (200 day moving average or 52 week high) and prevalence of recent and planned acquisitions.
Long Term Effects
STAG - With 8.38% and 9% dividend rates on the money raised, STAG's high-cap rate acquisitions are largely drowned out. Since the offering SNL has repeatedly published reduced NAV/share estimates for STAG which now rest at $14.08. With continued performance of its acquired properties, it could prove profitable, but with risk factored in, this offering will, in my opinion, have a neutral to slightly dilutive effect long-term.
AEC - While Associated Estates, like STAG, received an undesirable per-share amount on the offering, the dividend on the issued stocks equates to only a 5% cost of capital. As strong properties acquired with the money should be able to overcome this, the offering can be considered slightly accretive in the long-term.
LXP - Since Lexington received more money per share than its current stock price, the offering was arguably accretive even if it was just sitting as cash. The benefits were further realized through use of the money to improve its debt structure.
AHT - The same argument applies for Ashford with high dollars/share money used to improve debt. While it may have been hard to see at the time, this offering has become quite accretive to AHT in the long-term.
Certain patters emerge amongst the aforementioned offerings that we can take advantage of if similar situations present themselves in the future. As was the case with both STAG and AEC acquisition driven offerings may give us opportunities to pick up a stock for far cheaper than is typically available. While the window has closed on STAG, AEC remains a bargain buy. In terms of opportunistic secondary offerings history tells us it is best to not participate, but once the price drops we can glean some benefit from the long-term accretive aspects. Today, both AHT and LXP trade significantly below the price/share of their offerings so the opportunity is still available to take advantage of their long term accretive effects.
Disclosure: 2nd Market Capital and its affiliated accounts are long AEC, AHT, and LXP
Further Disclosure: This article is for informational purposes only. It is not a recommendation to buy or sell any security and is strictly the opinion of the writer.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.