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First REIT: Rights issue.

Thursday, November 11, 2010


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.

22 comments:

Anonymous said...

Thank you AK. My thoughts exactly.

Lets see how much excess (above rounding up) that we can tikam for.

Huat ah.

SnOOpy168

AK71 said...

Hi SnOOpy168,

This rights issue might be an opportunity for unitholders to make some money. :)

Anonymous said...

when do we need to fork out $ for the rights? is it upon lodgement of the proxy form or after the nil paid rights trading ends?

AK71 said...

Hi Anonymous,

I believe we can accept and pay for the rights once trading of nil-paid rights starts on 8 Dec. It is just a guess.

The time-table did not state the last date for acceptance and payment of rights.

This is the indicative time-table:

XR date
- 1 Dec 10

Nil paid rights starts trading
- 8 Dec 10

Nil paid rights stops trading
- 16 Dec 10

Close of rights issue
- 22 Dec 10

Issue of rights units
- 30 Dec 10

Ken said...

Hi AK71

A query: based on ur example on a unitholder buying up 4 lots @ 95c n entitled 5 lots rights issue @ 50c, wouldn't the unitholder needs to fork out $2.5 k before he is entitled to own n able to trade the rights issue? No? Then how would he not fork out any extra money for this?

And his total investment outlay wld be 95c x 4 lots + 50c x 5 lots = $6300... correct?

Pls correct me if I'm wrong. Thanks!

AK71 said...

Hi Ken,

If someone buys 4 lots at 95c/unit, he would fork out $3,800. He would be given 5 lots of nil-paid rights. These are free which he could sell in the market when nil-paid rights start trading on 8 Dec, if he so chooses.

If he chooses to keep these rights, he would have to pay 50c/unit = $2,500. In such a case, his total investment is $6,300.

Each lot would cost him $700 (70c/unit), without taking in transaction charges. Estimated annualised DPU at 6.4c in 2011 means a yield of 9.14%. :)

Ken said...

Ah! Thanks for that..

In other words, all the free rights given to the unitholder sold at the market price before the end of the rights trading period would have gone towards reducing a portion of initlal outlay, assuming unitholder doesnt take option to purchase.. Correct?
Does this concept explained works the same for all rights issue?

But alternatively, a non unitholder can also buy the mother shares during the same trading period which may be expected to fall save the mother shares may not fall below 70c, right?

AK71 said...

Hi Ken,

Yes, selling the nil-paid rights is something like a return of capital to the investor.

No, not all rights issue are like this one. Look at the recent one by Cambridge Industrial Trust, for example.

CIT: Equity fund raising again.

Yes, one could choose to buy into First REIT once it goes XR. The price is expected to be 70c, the TERP, but this is theoretical. One would not know for sure how much it would trade at once it goes XR. :)

Ken said...

Thanks AK71 for ur clear explanation..
Last qn, if I were to buy mother shares today, how and when would I be informed on my entitlement on the rights issue?
And (1) if i buy the rights issues, am I only able to pay for the rights issue at local banks ATM? (2) if I decide not to buy, then how do I sell my entitlement on hand?

AK71 said...

Hi Ken,

Your last question is technically a few questions in one. It is like trying to phrase a last wish to a Genie carefully to get as much as possible. Haha.. ;p

A few days after XR (1 Dec), you will get a package from the CDP to say how many nil-paid rights you are getting.

You could pay for the rights at ATMs of participating banks or buy a cashier's order and drop off the acceptance form/envelope. Detailed instructions would be given to you in the package from CDP mentioned in para 1.

If you decide not to accept and pay for the rights given to you, you could sell them when nil-paid rights start trading on 8 Dec in the stock market just like any other shares.

OK, I am going back into my lamp. ;)

Ken said...

Thank you. I cramped a few so as not to trouble you again. Otherwise, maybe you can share where did you obtain these specific information on the rights issues from, so I would read it up myself.

AK71 said...

Hi Ken,

No trouble. I'm happy to share. :)

All announcements pertaining to shares traded on the SGX could be found on SGX's website. I am attaching the link below for your easy reference.

Welcome to SGX

Good luck and visit often. :)

Anonymous said...

Hi AK71,

Thks for the analysis n comments - very useful. I hold some FR shares and is a novice with rgds to rights issue subscription. As I will be overseas next few weeks and intend to subscribe for all my rights do I:
1) do nothing with the nil pd rights allocated to me in my CDP account and
2) go to ATM on or after the 17th Dec to pay for my rights issue entitlement.

I agree the fundamentals look good and the rerating of I'sia is another plus. My personal risk is increasing my stake further by taking up my rights given that my exposure is pretty large -just to share, not to boast. Thks once a again! kingFisher.

AK71 said...

Hi kingFisher,

You have a large position in First REIT? You are in the money, I believe. Congratulation. :)

If you are worried that your exposure to this REIT might be too big, you could always sell your nil-paid rights when they start trading. Just have to give your broker a call or go online when you are overseas, I guess.

You could also accept and pay for your rights units anytime when the nil-paid rights are trading, I guess. Last day of trading being 16 Dec. Then, sell the rights units on or after 30 Dec. Could be higher than 70c/unit.

Now, the indicative time table by First REIT did not give a deadline for the acceptance and payment of your rights units. So, I am not sure when is the deadline but the close of rights issue is on 22 Dec.

Anonymous said...

Hi AK71,
I had FR since IPO. Ideally I would like to fully subscribe to my rights entitlement as I prefer not to have any dilution esp div. But from a risk management stand point it is probably unwise. Sigh- it is sayang to sell away a good counter. Thks for highlighting that I can reduced my holdings risk by 1) selling some shares now; 2) sell some nil pd rights or 3) sell some shares after I have paid for my new rights shares. I suppose I have to appoint someone to pay for my rights while I'm away. Hope you get more FR in the mkt - maybe crossed from my sale...just kidding!! Cheers, kingFisher

AK71 said...

Hi kingFisher,

Yes, this is a well managed REIT and the returns have been very good. :)

If you are willing to sell your stake to me now at 92.5c/unit, I would buy from you. Hahaha. ;)

Anonymous said...

The rights are in CDP A/C today.

Lets see how much excess we can cheong for.

Huat ah everyone.

SnOOpy168

AK71 said...

Hi SnOOpy168,

I hope we get as many excess rights as we could apply for. Good luck to us all. :)

Anonymous said...

I would like to invest in this reit. Can i still go in and buy this share? what price would you recommend and what will be the yield like?

Thanks.
Karen

AK71 said...

Hi Karen,

I cannot recommend any specific entry prices although I believe anything under 70c is attractive.

Buying at 67c, the 200dMA support, for example, would have a yield of 9.55% based on the 2011 DPU guidance of 6.4c by the REIT's management. If you think that this is good enough for you, then, 67c is a good entry price for you. :)

Anonymous said...

After a very very long wait.

It is ........ (drums please)

** Guess the formula time **

In the CDP today, I had received:

Rights Allocated: 13750

EXCESS Rights Applied : 6250

** Actual results **

Allocated rights : 13750
Rounding up : 250
"Bonus" Excess: 2000

Good, good.

SnOOpy168

AK71 said...

Hi SnOOpy168,

2 lots of excess rights means an instant gain of $200x2. Nice. Congratulations! :)

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