If Citicore Energy REIT [CREIT pre-IPO] is just buying land with the proceeds of the IPO, won’t it take a long time to get dividends? Short answer: no. Long answer: good question, and a nice little way for me to talk a bit about how CREIT’s offering is going to be very different under the hood from all of the REITs that have come before it.
So, just to be quick about it, CREIT’s IPO plan calls for CREIT to use 100% of the proceeds to buy two parcels of land. Now, if CREIT planned to build the solar power plants itself on this land from scratch, then I’d be pretty nervous about dividends, but that’s not how it will go here. The lots that CREIT plans to buy are already owned by other companies in the Citicore group, and they already have operating solar power plants on the parcels that are generating income. CREIT plans to buy these lots from the other Citicore group companies, and then immediately begin benefiting from the lease revenue and bonus revenue as soon as the land transfer transaction is completed. There’s no wait. When the deal is completed, that will give CREIT a total of seven properties that will be generating base lease revenue and (potentially) bonus lease revenue.
That last part is the real difference-maker here. In this deal, “bonus lease revenue” (referred to as “variable rental income” in the prospectus [PDF]) is a profit-sharing right that CREIT has to 50% of the profit above the “agreed base revenue” of the power plant. So that gives CREIT investors the hard benefit of base lease revenue, plus half of any windfall revenues that the power plants might earn.
MB BOTTOM-LINE
That’s a very different setup from what we’ve seen so far from all of the commercial office lease REITs. None of our existing REITs (to my knowledge) have any kind of profit-sharing clause that would give the REIT access to a share of the tenant’s net income above a certain level, but that’s certainly the case here with CREIT.
The trick here is that investors should not consider that variable rental income to operate like a lottery ticket; if you check the financial statements, CREIT’s return on the variable rental income from its properties is very consistent, and appears to be baked into the dividend assumptions for the remainder of 2021, and for the full years of 2022 and 2023. My point here is that the current level of this variable rental income might be more of a ceiling than a floor. Major climate-related disruptions could drive this figure down, so while we aren’t concerned about lease terminations with CREIT (as we were with all of the POGO REITs), we probably have a lot more to worry about when it comes to natural disasters and the like.
That said, I haven’t done a deep enough read of the prospectus to be confident in how this might impact yields, so if there are any Barkadans out there that have a good read on this, I’d love to hear from you!
--