 |
  DRIP, DRIP, DRIP ... Super DRIP Super DRIPs provide REITs with features not found in conventional dividend reinvestment plans, including control over how much capital comes in to the plan. by Barry Vinocur |
A common belief held that if the rate payer, etc., was also an individual shareholder, that individual would likely be more supportive of corporate policy, practice, and management. In addition, many of those DRIP issuers enjoyed government-regulated, quasi-monopoly status. This was yet another reason to offer a benefit to shareholders/customers that was likely to foster customer/shareholder support.
Since DRIPs appeared on the scene—AT&T was the first household name to offer one in 1973—companies offering DRIPs have incorporated features that allow shareholders to reinvest dividends at discounted share prices (then, 5%) from the prevailing market—meant to encourage participation, no doubt—as well as the opportunity for shareholders to remit cash subscriptions toward the acquisition of additional shares if they desired, thereby avoiding traditional brokerage commissions.
Today, fewer companies with DRIPs offer the option of buying discounted shares. (Those that do, generally do so at levels ranging between 2% and 3%.) At the same time, more companies are opening their plans to first time buyers, not just existing shareholders. From a technical perspective, DRIP companies periodically determine whether share issuance will be satisfied by drawing stock from a shelf offering (newly created capital) or via open market transactions (recycled capital).
Several years ago, after investors became generally aware of DRIPs, something curious happened, "DRIPmania" ensued. Today a number of publications, including the Hammond, Indiana-based newsletter, The DRIP Investor, and The Moneypaper, based in Mamaroneck, New York, publish extensive information on DRIPs, including a listing of companies offering them. The American Association of Individual Investors, based in Chicago, published its sixth annual guide to dividend reinvestment plans in the June 1998 issue of the AAII Journal.
Investor interest in DRIPs has helped to fuel an even broader interest in the programs. In the early 1990s, many bank holding companies juiced their discounted DRIPs. As a result, they were able to raise substantial sums of new equity capital quietly, cost effectively and, most importantly, opportunistically.
For those companies implementing a state-of-the-art DRIP, or so-called Super DRIP, the opportunity to issue large sums of new equity capital have become greatly enhanced. Issuing companies have the ability to offer common stock both on the retail and wholesale levels.
Super DRIPs provide companies with numerous additional features beyond the scope of the conventional DRIP, such as periodically varying the discount level from 0% to 3% (a mechanism that controls the inflow of new capital), incorporating price supports where stock will not be issued through the DRIP on the cheap (via a threshold provision), and limiting how much capital any one investor/shareholder can invest via a DRIP.
A super DRIP shelf registration usually covers issuing up to 10% of the then underlying company's issued and outstanding common stock. It is not inconceivable that a company might exhaust such a shelf within one year (whereupon the company might file for a new DRIP shelf). The power of these plans, however, remains completely vested with the financial management team of the DRIP-issuing company.
One of the most frequently asked questions about DRIPs is: Why aren't more companies offering them? Company CEOs without a DRIP often ask why their investment bankers haven't suggested starting a DRIP. A possible answer is: Because a DRIP is typically viewed as a shareholder benefit product, many investment bankers expect the discussion to take place between a company's investor/shareholder relations department and, generally, that company's transfer agent.
CRIIMI MAE |
Put another way, if a company prefers raising capital quietly, less expensively, in bite size pieces and to take advantage of dollar-price averaging, while maintaining a shareholder benefit and expanding its retail shareholder base (by selling stock to first time investors, too), then super DRIPs may be the solution.
Made to Order
Because REITs have an almost never-ending need to raise equity capital—a result of the requirement that they distribute 95% of their otherwise taxable income to maintain their tax-favored status—REIT CEOs and CFOs should leave no stone unturned in their search for sources of capital. Moreover, establishing a super DRIP in no way detracts from, or makes it more difficult to, tap other sources of equity capital.
In fact, during January 1998, one large REIT raised approximately $10 million through its newly launched super DRIP (prospectus dated December 1997), and then immediately floated a traditional follow-on $200 million equity offering. The spread/discount pricing differential was approximately 300 basis points; the super DRIP was less expensive. Since raising new equity capital via its super DRIP, the REIT noted above, has tapped the DRIP market several more times, being opportunistic with respect to the prices at which it was willing to offer new equity and further cutting the discount.
Why aren't more REITs offering these plans to their shareholders and new investors? There are several reasons, including that REITs cannot offer a DRIP until they are at least one-year-old, which probably accounts for why so few office REITs, for instance, currently offer DRIPs. (A partial listing of REITs offering DRIPs can be found below, and a table listing companies with super DRIPs appears on this page.)
A number of recently minted REITs, including Equity Office, one of several REITs launched by Chicago financier Sam Zell, have indicated their intention to offer a DRIP as soon as they are able to file a shelf registration, which, as noted, coincides with a company's one-year anniversary.
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Having a super DRIP in place does not obligate a REIT to issue new common equity wholesale, unless it needs/desires to do so. Typically, companies with a super DRIP will always encourage retail dividend reinvestment and nominal voluntary cash subscriptions irrespective of its underlying market price. However, the company determines at each interval, usually monthly, whether or not it wants to raise new equity.
Based upon a previously determined calendar of events, the company sets the variable factors for a particular month. These are the market factors that determine whether the company will accept wholesale participation. These factors include (1) the establishment of the discount available to those investors/shareholders who seek to make substantial voluntary cash subscriptions above the prospectus stated maximums, and (2) the minimum share price at which the company is willing to offer new stock. Neither of these variables is permanent, and they are ordinarily changed in the subsequent month.
Usually, the variable information is available via some sort of phone mail message to the calling investor/shareholder. (Therefore, physical prospectus supplements are not necessary.) Upon retrieving this information, the investor/shareholder then decides whether or not to participate.
For example: REIT "x" may have established $30/share as its minimum price threshold when its stock is trading around $31 and a discount level of 2%. The investor/shareholder submits a request (via fax) to the company seeking relief from the DRIP prospectus' maximum voluntary cash contribution (which is, generally, $3,000 or $5,000 per shareholder, per month). The investor/shareholder might request a subscription of $3 million that month. The company then compiles these waiver request forms and independently determines who, and for how much each, participates. This process is completely discrete (with company "x's" reasoning fully disclosed within the terms of the prospectus). The investor/shareholder is then advised of the company's decision, again via fax, and subsequently he submits his cash contribution to the company's DRIP transfer agent. The funds remain in escrow until the end of the ensuing, elongated pricing (valuation) period (usually 10 trading days). At the conclusion of this period, the investor/shareholder receives his stock and the company receives its new capital, provided that all the days conformed to the previously established minimum price threshold. (Otherwise, a pro rata refund might occur.)
This whole process is analogous to an equity MTN (medium-term note) shelf program with a reverse inquiry feature. Here, the company shelves equity and awaits the market to call. If the need and desire are present, and the market conditions are acceptable, the company stands prepared to issue bite-sized pieces of capital. Obviously, the amount of new capital the company may raise in a month is a function of market conditions, its share price, and its average daily float. This process may be repeated at each interval that the company determines.
|