First REIT: Rights issue.

For a while now, there has been expectation of First REIT doing some acquisitions and in the process would have the need to raise funds. First REIT's management announced on 9 Nov 10 a 5 for 4 rights issue at 50c per unit.

The Mochtar Riady Comprehensive Cancer Centre (“MRCCC”) is being acquired from Wincatch Limited, an unrelated third party, for S$170.5 million, and Siloam Hospitals Lippo Cikarang (“SHLC”) is being acquired from the sponsor of First REIT, PT Lippo Karawaci Tbk, for S$35.0 million.Read announcement here.

Including fees and expenses, MRCCC would cost S$174.6m while SHLC would cost S$35.9m.  Total acquisition cost: S$210.5m. The rights issue would raise gross proceeds of $178.2m. First REIT would take a 4 year term loan facility of S$50m from OCBC to make up the balance.

The rights issue would more than double the number of units in issue to 624,104,000 units. So, although the NAV increases to S$474,200,000, post rights, NAV per unit would decline from 98c to 76c. Gearing level is largely unchanged and remains low as much of the funds required for the acquisitions is obtained through equity and not debt.

Of greater interest to unitholders is the distributable income which would increase 84% post acquisitions from S$20,964,000 to S$38,542,000. The annualised DPU would, however, reduce from 7.62c to 6.18c due to the larger number of units in issue. So, is this rights issue a good deal for existing unitholders? To answer this question, look to distribution yield.

The theoretical ex-rights price (TERP) is calculated to be 70c based on a CR price of 95c.  At 95c, the yield, with an annualised DPU of 7.62c is 8.02%.  At the TERP of 70c and an expected annualised DPU of 6.18c, XR, the yield is 8.83%. So, this acquisition is distribution yield accretive and is good for current unitholders.

Unitholders have the option to sell their nil-paid rights when trading starts if they do not wish to pay for them. Based on the exercise price of 50c and the TERP of 70c, we could see the selling of the nil-paid rights at 20c or so. This could be viewed as a return of capital.

Assuming that a unitholder has 4 lots in First REIT and is entitled 5 lots of rights. By selling the nil-paid rights at 20c per unit, he would get $1,000. This is the difference between the CR price of 95c and the TERP of 70c (i.e. 25c x 4,000). There is no capital gain per se. However, the distribution yield on his existing investment will actually improve from 8.02% to 8.83% without him having to cough up more funds. So, am I saying that we should sell the rights? Well, if we do not have enough funds to pay for the rights, this is not a bad idea.

Personally, I would pay for the rights. This is because the distribution yield would improve 10% from 8.02% to 8.83% with the acquisitions and rights issue. So, the additional funds I am putting in would enjoy a most attractive yield.

Furthermore, from the recent experience with the rights issue of AIMS AMP Capital Industrial REIT in which the TERP was 21c, the XR unit price ended higher and it is currently trading at 22.5c. So, with First REIT, we could see the XR price higher than the TERP of 70c. How much higher? Based on the assumption that units should trade closer to 8.02% yield, the CR yield at 95c, we could see First REIT's unit price going 10% higher to 77c, XR. Accepting and paying for the rights could, therefore, lead to capital gains.

Good luck to fellow unitholders.

See slides here.

Related post:
First REIT: This one is for keeps.