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AIMS AMP Capital Industrial REIT: Rights issue.

Monday, August 23, 2010

Unlike the share placement proposed by Cambridge Industrial Trust, a rights issue allows all unit holders to participate in an enlarged capital base and to reap the rewards, if any.  So, is this rights issue beneficial to unit holders?  Let us examine the proposal.

I won't go into the full details since anyone interested enough could find all the details in the announcement at SGX.  Read it here. For anyone who is more visually inclined, presentation slides could be viewed here.

Basically, the proposal is to acquire 27 Penjuru Lane (a 30 years leasehold property starting October 2004) for S$161.0 million.  This price is about 2% below the latest valuations.  This acquisition will be funded by debt and equity.

Debt is in the form of two term loans (a 3 year term loan of S$100m and a 5 year term loan of S$100m) and a revolving credit facility of S$80m for a period of 3 years. The manager will use S$97 million to part finance the cost of the acquisition and S$175 million to refinance an existing S$175 million facility maturing in December 2012, allaying refinancing fears.  The 7 for 20 rights issue at a price of 15.5c per unit would raise a net amount of $74.8m, of which S$64.5 million will be used to part finance the acquisition.

The acquisition will contribute to a higher NPI yield.  The current portfolio has a NPI yield of 7.4% while the property to be acquired has a NPI yield of 7.7%.  Post acquisition, the NPI yield for the REIT becomes 7.5%.  Due to the rights issue, however, the NTA per unit would decline from 31c to 26c.  However, what is of more interest to unit holders is probably the DPU and how it would be impacted.

Acquiring the property in question would bump up the total cash distribution to unit holders.  However, due to the rights issue, actual DPU would decline from 0.54c per quarter to 0.52c per quarter. So, existing unit holders will see a reduction of 3.7% in yield for their current investment in the REIT.

Having said this, unlike a share placement as proposed by CIT which dilutes the shares of existing unit holders without any benefits, the rights here are offered to unit holders at only 15.5c.  On an annualised basis, these rights shares are therefore going to enjoy a yield of 13.42%. We lose some and we win some. I support this rights issue and will apply for excess rights as well.


Kyith said...

to me its a zero sum game unless you go for excess rights. in essence if you don't apply for the normal rights, you get diluted. if you do you get the same yield.

why is it that they are doing an acquisition now? has the ship steadied?

AK71 said...

Hi Drizzt,

You are right, of course. However, you have to agree that this is better compared to CIT's share placement where existing unit holders get diluted and all they could do is suck thumb. ;p

Here, unit holders could prevent their stakes from being diluted and apply for excess rights too. I hope to get some excess rights myself. ;)

Why are they doing an acquisition now? We could only guess.

Createwealth8888 said...

Right issue? Nothing more than just putting in more capital to continue the game without being diluted. Those with no capital to carry the game. Suck liao!

However, it is still better than private placement. Current holders all suck!

Anonymous said...

In the same vein, why are so many reits embarking on an acquisition spree? (MLT, ART, etc)

May you get all the excess rights u applied for =)

-Passerby B

JT said...

AK, correct me if I am wrong. But for investors who are interested to get vested, this is quite a good chance. Say getting 20 lots @ 22c closing price today will be entitled to 7 lots of rights @ 15.5c. This translates to average cost of 20.3c and 10.2% yield with 0.52c per quarter. The cost is still lower than the theoretical XR price of 21.1c. So isn't this actually better for existing shareholders, unless XR price drops to below 20c?

Kyith said...

the positives are that they are refinancing their debt at lower interest.

AK71 said...

Hi CW,

I am not sure I agree with you that the current holders "all suck". I believe in investing for an attractive yield and by subscribing to the rights, I am getting more of the same. So, to me, I am still putting my money to work harder rather than leaving it in the bank.

AK71 said...

Hi Passerby B,

I am not smart enough to know why REITs are on an acquisition spree. I only do what I have to do to protect my interests. I hope I will get some excess rights too. Thanks! :)

AK71 said...

Hi JT,

You are spot on. :) I do believe that you have cracked this right issue and arrived at a most logical conclusion.

I paid 20.5c to 22c per unit and for me, with the rights issue, my yield will average 10.2% to 10.8%. Very respectable, if I do say so myself. My current yield is 9.8% to 10.4%. So, this rights issue and acquisition is good for current unit holders. :)

AK71 said...

Hi Drizzt,

Yes, refinancing the loan due on 2012 at a lower interest rate is definitely a big plus. This, hopefully, will translate into higher DPU in time. :)

left_ray said...

Not long ago, the market was not kind to companies that is raising money through rights issue. I remember Genting's rights was at puny 0.005 cents, but look at it now, its share price is staggering 1.6. Now I look back, it was a weird time. I anticipated a crisis that is longer than the one we just had and in Singapore, it seem it never came. I don't mind rights issue, but some are doing one too many times. To me, it just mean the company is ill-prepared with its expanding plan or not very good at its finances. In future, REIT management should be more responsible by shedding more light on its expanding plans and foretell unit holders when they need money. This way unit holders can get be better prepared. By the way, CIT price is holding up pretty well, but AIMS drops a bit. Isn't that weird? Then again, it also make sense. With rights issue, people can buy rights and apply it at lower price. But whose share is more diluted?

AK71 said...

Hi left_ray,

I think the speed of the economic recovery took many by surprise. So many were so bearish and refused to believe in the recovery. In fact, some still don't.

As for REITs telling unit holders in advance if they would need more funds in future, I think it is pretty much a given that all REITs would need more funds in future unless they keep the status quo and do not plan to grow. Personally, I believe that if we are invested in REITs, we should simply be prepared for rights issue. :)

As for the short term price movements of units in CIT and AIMS, it would take a very smart person to explain them. I don't think I am that person.

I prefer AIMS to CIT because of its stronger fundamentals. I prefer AIMS' rights issue to CIT's private placement because it is more equitable and, in fact, bumps up the yield for existing unitholders who choose to take part in the exercise. Whether the market agrees with me or not is another matter. ;)

Anonymous said...

I think it is foolish to not anticipate a rights issue from a company whose capital structure prevents it from retaining its own income. If you like property but prefer to invest in a Trust which doesn't depend solely on debt and new equity, there are a few property development trust listed here like Ai-Trust, Indiabulls and newly listed TCT. TCT only pays out 50% of its net are retained to fund its development project.

A rights issue isn't bad per se since it gives unitholder a chance to increase their shareholdings at a cheaper price and increase their overall yield as well. I dont think there is any other way to increase a REIT yield besides through a series of M&A + Debt followed by new equity fund raising haha !


AK71 said...

Hi Nick,

Thanks for sharing your thoughts. :)

I have set aside the funds for the rights issue. Mouth watering, almost. ;p

Raelynn said...

how do i apply for the rights issue and excess rights??

AK71 said...

Hi Raelynn,

If you are a current unit holder, you will be receiving details on how to apply for the rights. Don't worry. :)

Below is a brief outline to avoid keeping you in suspense. ;)

You would be told how many rights you are given and would be given a choice to accept these rights or to sell them away in the open market (as nil paid rights). I think there is a one week period for you to sell if you don't want to accept the rights. If you choose to accept the rights, you will have to go to an ATM machine to pay for them before the deadline (@ 15.5c per unit). You should also see how many excess rights you want to apply for and pay at the ATM machine as well. You would be informed at a later date if you are successful in getting any excess rights (usually just to round up odd lots).

Good luck and it's good to hear from you again. :)

Raelynn said...

=) indeed, i've been busy planing my sister's wedding and now that it's over, time to start going back to the stocks again. hahaha. i am a current unit holder and i did get this booklet, but i didnt see any forms... maybe because my lots are less than 20?

AK71 said...

Hi Raelynn,

The entire exercise has to be approved by unit holders at the EGM happening next month. Not to worry. You will get more information soon after. :)

Anonymous said...

I accidentally keyed in zero rights and put in the figure under the excess rights instead. :( Does that mean I won't be getting any rights?

AK71 said...

Hi Anonymous,

This reminds me of a reader, Kingston, who had a similar experience with Healthway Medical's rights issue months ago. He only discovered it after the deadline and lost everything.

In your case, I would suggest that you take immediate action tomorrow and call the CDP and/or your broker to see how the matter could be remedied. Tomorrow (7 Oct) is the deadline for acceptance and payment of the rights. Good luck.

Please include your name or initials in future comments. Thanks.

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