Nil-paid rights and excess rights. (Case study: My strategy in IREIT's 45 for 100 rights issue.)

IREIT's 45 for 100 rights issue is priced at $0.468 per rights unit. Links to the full details of the rights issue have been provided at the end of this blog post. 

So, I will only blog about the more interesting bits and my strategy.





As I am investing for income, I am first and foremost interested in the DPU, post acquisition. It is important to note that the DPU hardly improves, post acquisition.

An important consideration in IREIT's case is the foreign exchange rate, specifically, between the EURO and the Singapore Dollar.

In my last blog post on IREIT in February this year, the exchange rate was 1 Euro to S$1.54. Now, it is 1 Euro to S$1.50. So, the Euro has weakened a lot from 1 Euro to about S$1.70 from the middle of 2014 when IREIT had its IPO.

Read the notes. Read the details in the announcement.

Back in February, I also said that to get an 8% distribution yield, the unit price had to be 75c.
The promised 8% yield based on the IPO price of 88c per unit was no longer possible.

Based on the understanding that the DPU would hardly improve post acquisition and that the Euro has weakened since the REIT's IPO last year, if we believe that 75c per unit now is what makes investing in IREIT worthwhile, then, the theoretical ex-rights price (TERP) has to be 66c or so.





For investors who got in at the IPO price of 88c and participating in the rights issue at $0.468 per rights unit, their TERP is 75.2c, not taking into consideration any successful excess rights application. 

They, most likely, would not get an 8% distribution yield even now.

For those who have yet to invest in IREIT, however, they could get a distribution yield in excess of 8% if they play their cards right. 

This is where I talk to myself about my strategy.

This rights issue is renounceable. This means that nil-paid rights will be traded in due course and there will always be people who cannot or will not take part in rights issues. 

They could sell their nil-paid rights.





If nil-paid rights in this case should be sold at a price of 19.5c or less a piece, buying them would give me a TERP of 66.3c or less when I exercise them by paying $0.468 per rights unit. This will give me a distribution yield which I find more acceptable and, perhaps, more sustainable.

For those who don't know, nil-paid rights are bought or sold in the stock market like regular stocks. 

We could sell our rights entitlement or we could buy from someone who is selling. These are nil-paid rights.

I could also buy some IREIT units while they are still trading cum rights (CR). The motivation is not to be entitled to the rights units as they will not do anything to improve distribution yield. 

The motivation is to be eligible to apply for excess rights.

Only eligible shareholders are allowed to apply for excess rights. Application can be made at ATMs of participating banks before the closing date.





Getting more excess rights will give me a higher distribution yield. This is, of course, due to the fact that excess rights will have the highest yield. 

The cost, in this case, is only $0.468 per rights unit. The yield is estimated at 11% or so.

Specifically, my strategy is to buy enough IREIT units so that the total number of units plus my entitled rights units will allow me to get more guaranteed excess rights units. 

Guaranteed? How so?

For example, buying 2100 units would entitle me to 945 rights units. 

Unitholders with odd lots will have priority to get excess rights units which means 955 excess rights units are in the bag in this example.





The average distribution yield in this example would work out to be approximately 8.3% if the 2100 units were bought at 82c a unit, assuming that excess rights application for anything more than what was required to round up odd lots failed to be successful.

Being opportunistic, with this strategy, IREIT makes a decent enough investment for income although a gearing level of 43.7% after all this is over suggests that this might not be the last time we see some fund raising activity from IREIT.

Full details of rights issue:
1. Announcement.
2. Presentation.

Related post:
IREIT: What is a more realistic yield?

Earlier examples of rights issues:
1. First REIT: A simple way to a double digit yield.
2. AIMS AMP Capital Industrial REIT: XR.