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.