The Direct Costs of A-REIT IPOs

1
The Direct Costs of A-REIT IPOs

• Bill Dimovski
• Deakin University Australia

2
IPO Equity Capital Raising

• From 1994 to 2013 over A15 billion was raised by
  A-REIT IPOs.
• This is around the same as the IPO capital raised
  by the resources sector.
• Also about one third of that raised by all
  industrial IPOs over this same time period.

3
Costs of Capital Raising

• Direct costs underwriting, legal, accounting,
  valuation, listing, printing, distribution,
  advertising costs
• Indirect costs underpricing (and management
  time)

4
Underpricing Costs - Industrial Mining Company
IPOs

• United States
• Ibbotson, Sindelar and Ritter 1960-2014 study
  shows average underpricing of 16.9
• Australia
• Lee, Taylor and Walter, Dimovski and Brooks 1976
  - 2004 - around 22
• Other Countries
• Turkey 9.7,
• UK 16 ,
• Finland 16.9,
• Greece 50.8,
• Japan 41.7,
• Italy 15.2,
• Germany 24.2,
• China 118
• Saudi Arabia 239.8

5
Underpricing and REIT IPOs

• United States
• Wang, Chan and Gau (1992) 1971-88 negative 2.82
  underpricing (loss)
• Ling and Ryngaert (1997) 1991-94, 3.6
  underpricing
• Bairagi and Dimovski (2011) 1996-2010, 3.18
  underpricing
• Europe
• Brounen and Eichholtz (2001) investigate 83
  European property share IPOs during 1990 to 2000.
  They find a first day return of 3.43 .
• Sahi and Lee (2001) 48 UK property investment
  companies 1986-1995 4
• Australia
• Dimovski and Brooks (2006b) 58 LPT IPOs report
  ave 2.6 return
• Japanese REITs 2001 to 2006 ave. 0.51 return

6
Costs of Raising Capital Literature

• Lee, Lochhead, Ritter and Zhao (1996) - 1767 US
  Industrial Coy IPOs during 1990 to 1994 - ave.
  total direct costs of 11 Economies of scale
  reported (No REITs)
• Chen and Wu (2002) 281 Hong Kong IPOs during
  1991 to 1996 - ave. total direct costs of 10.44
• Kooli and Suret (2002) - 224 Canadian and 1188 US
  IPOs - ave. total direct costs of 14.39 for
  Canadian firms and 10.44 for US firms.
• REITs
• Dimovski (2006) total direct costs 6.6
• Bairagi and Dimovski (2012) total direct costs
  8.3

7
Underwriting Cost Literature

• Chen and Ritter (2000) - US IPOs US20m -80m
  have underwriter fees cluster at 7.
• Butler and Hwang (2003) HK IPOs uwriter fees
  cluster at 2.5
• Torstila (2001) European IPOs uwriter fees
  cluster at 3.75 (tech IPOs at 6)
• How and Yeo (2000) Australian industrial coy
  IPOs uwriter fees ave. 3.68 but range from 1 to
  8.
• REITs
• Japanese REITs average 3.74.
• US REITs Chen and Lu (2006) - 6.6, Bairagi
  and Dimovski (2012) 6.5
• Aust REITs 3.3 - companies dont have to use
  underwriters to list they can simply use
  stockbrokers to market the issue.

8
Why investigate the direct costs of A-REIT IPOs?

• The average underwritten IPO raised around 221m
  (Not underwritten n14 44M)
• The average total direct costs for underwritten
  were around 5.88 (not underwritten 8.19)
• The average underwriting costs 3.2 (stockbroker
  costs 4.1)
• Since these costs are substantial costs to A-REIT
  IPO issuers it is important to try to identify
  factors that influence these costs.

9

 Panel A Underwritten IPOs N Mean SD Min Max
PERCTOTCOST () 73 5.881 2.549 1.620 12.060
UWRITPERC () 73 3.188 1.278 0.916 6.400
PROCEEDS (AMILL) 73 221,831 272,090 5,940 2,000,000
LNPROCEEDS 73 11.845 1.003 8.689 14.509
STAPLED 73 0.219 0.417 0 1
RETAIL 73 0.205 0.407 0 1
OFFICE 73 0.260 0.442 0 1
ACCOUNTANT 73 0.877 0.331 0 1
INSTITUT 73 0.452 0.501 0 1
DIVYLD () 71 8.946 1.196 0.050 12.040
NAISSPRI 73 0.951 0.110 0.830 1.100
DEBTTOEQ 72 0.467 0.081 0.200 0.650
ISSUE9499 73 0.452 0.501 0 1
ISSUE2010ON 73 0.068 0.254 0 1
10
 Panel B Stockbroker (not Underwritten) IPOs N Mean SD Min Max
PERCTOTCOST () 14 8.193 4.469 3.610 16.710
STOCKPERC () 14 4.100 0.801 3.000 5.000
PROCEEDS (AMILL) 14 44,097 57,033 3,000 225,000
LNPROCEEDS 14 10.161 1.094 8.006 12.324
STAPLED 14 0.071 0.267 0 1
RETAIL 14 0.071 0.267 0 1
OFFICE 14 0.071 0.267 0 1
ACCOUNTANT 14 0.050 0.030 0 1
INSTITUT 14 0.571 0.514 0 1
DIVYLD () 13 8.176 2.683 0.000 11.100
NAISSPRI 14 0.947 0.038 0.870 1.02
DEBTTOEQ 13 0.453 0.082 0.270 0.570
ISSUE9499 14 0.286 0.469 0 1
ISSUE2010ON 14 0.071 0.267 0 1
11
Data

• Direct costs data is derived from the
  prospectuses in Connect 4 Prospectuses and
  DatAnalysis databases.

12
The Models for Factors Influencing Direct Costs
(Table 2)

• PERCTOTCOST (or UWRITPERC ) ß0
  ß1LNPROCEEDS ß2STAPLED ß3RETAIL
  ß4OFFICE ß5ACCOUNTANT ß6INSTITUT ß7DIVYLD
  ß8NAISSPRI ß9DEBTTOEQ ß10ISSUE9499
  ß11ISSUE2010ON ß12UWRITBROKPERC
  ß13UWRITTEN ?

13
Results and conclusions from models

• Clear evidence of economies of scale the higher
  the proceeds raised the lower the PERCTOTCOST and
  uwriting costs
• Greater institutional involvement involvement
  identified in prospectus lower uwriting costs
• For the 73 uwritten IPOs those that offered
  stapled securities and had higher net asset to
  issue price ratios had lower total direct issue
  cost percentages
• When we control for issue size, the total costs
  for the underwritten IPOs were not significantly
  different to those who simply used a stockbroker
  to market the issue.