I am trying to determine if offloading a small portfolio would be Accretive to earnings for a REIT... not really sure where to begin.
Are portfolio sales always all cash transactions? Are there any guides or resources I can refer to regarding accretion / dilution for portfolio sales?
Thanks!
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I would first figure out what the FFO and AFFO of the REIT is before you sold the portfolio. This should be a fairly easy exercise. Next, I would figure out what you can do with the proceeds from the sale (retire debt, buy back shares, reinvest in other assets). Remember that if you "sell" an asset for $50 million, you most likely will not get exactly $50 million. If you do an acquisition, make sure you consider whether you will have to issue more equity to fund the deal, any additional interest expenses, etc.
From there, re-run the FFO and AFFO/share data and see whether or not the sale would be Accretive or dilituve. At my REIT we do this quite frequently so let me know if you have any other questions.
For you final question, there is no one standard for portfolio sale funding. Some companies prefer all cash but most likely it will be mostly debt funded considering the lower cap rate market.
I know this won't help much from a practical perspective, but if you take a more theoretical or philosophical view, you could argue that most sales of 'non-core' assets will be dilutive to earnings. Allow me to explain...
Assuming the REIT owns fairly straight-forward income-producing assets, it's easier to use an analogy of a portfolio manager holding a diversified portfolio of bonds. Suppose that most of her bonds are low-risk (think prime cbd office assets), and investors start calling for 'back to basics' style investing, so the portfolio manager designates her junkiest bonds (think crappy apartments in "sub-prime" areas) as 'non-core' - this makes investors happy. These junk bonds are likely to be risky crap, but if they're fairly priced for this risk, then the yield will be higher than the average yield across her diversified portfolio. When she then sells a chunk of junk bonds, the average yield across her portfolio will have been reduced, so earnings drop. Unless she puts the proceeds back into something which has a yield that is at least as high or higher than the yield on the assets sold, the transaction will be "dilutive" to earnings. This should call into question the usefulness of the idea of earnings accretion/dilution in the first place, since it has no accounting for risk. Need some earnings accretion? Buy a riskier asset. Am I wrong?
Sorry for the rant. This has been bugging me for ages.
To the OP - agree w prior two posters. Your question can't be answered unless you know what they do with that money.
Architecto aut et corrupti quia. Quaerat quasi et omnis itaque fugit ea. Aut ut et qui.
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