REITs and rights issues: A zero sum game?

There has been a deluge of articles on REITs recently and my own blog posts on the subject have attracted many comments although not as many as the blog post in which I revealed my total passive income from S-REITs for the first nine months of this year. ;p

I received comments from a reader, Chopra, regarding my simplistic analogy given in "REITS and rights issues: A Singaporean tale." Read it here.

Hi Chopra,

I did say my analogy is a simplistic one. It was partly a tongue in cheek blog post in response to the rather simplistic picture of REITs painted by certain critics.

Of course, there are other factors to be considered in rights issues before we could make an informed decision on whether they are good, neutral or bad for the different types of investors involved.

To have a blanket statement that REITs will take back all the income distributed to unitholders through rights issues is not only misinformed, it is misleading. That is the primary reason why the article came under fire.

Saying that rights issues are zero sum games is just another way of saying the same thing. So, I cannot agree with you. Some rights issues are beneficial to unitholders and some are not. Just compare the rights issue of First REIT with that of CitySpring Infrastructure Trust not too long ago. You will see what I mean.

Generalisations are often convenient but they are also often inaccurate.

We must realise that REITs give out at least 90% of their income to unitholders. So, they need to leverage up or raise funds through equities to grow. Whether these activities are carried out sensibly is another question but anyone unhappy with such a model should give REITs a wide berth.

I won't go into how much it would cost an investor to take part in each rights issue or to sell their nil-paid rights. I would also not look at the frequency of rights issues. It is like looking at the trees and not the forest. In fact, I do not mind frequent rights issues if they should be consistently or mostly beneficial for me as a unitholder.

Finally, I won't compare REITs and blue chips. They satisfy different investors with different objectives.

Personally, investing in certain REITs has been very rewarding for me. I am also vested in a few blue chips. Certainly, not all REITs are bad and not all blue chips are good. Would I compare their performance against one another? I could compare apples and oranges but I won't. I enjoy both.

Bought Hyflux and AIMS AMP Capital Industrial REIT.

My overnight buy order for Hyflux at $1.20 was filled. Looking at the daily chart, it is immediately clear why I put in a buy order at that level. It is support. Even with a confirmation of a reversal signal, we want to buy as close to support as possible. Of course, luck plays a part because in very bullish circumstances, price could have gapped up and gone higher.

A white hammer was formed again today as price moved marginally higher on the back of lower volume. It was a weak white candle day. Bulls seemed to be rather cautious as the weekend is always a wild card. If nothing untoward happens this weekend, price could resume its upward climb. Immediate resistance is at $1.28 in such an instance.

It would be interesting to see if price could rise as high as $1.39 which is where the declining 50dMA is approximating. Of course, in another few sessions, the 50dMA would be lower and a gap filling at $1.365 could prove to be a rather strong resistance.

Today, I also bought more AIMS AMP Capital Industrial REIT at 95c. This means a pre-consolidation price of 19c per unit. For long time unitholders, it would immediately look cheap. At that price, we are looking at a distribution yield of 10.5%. The fundamentals of the REIT have not deteriorated. Well, not that I know of. So, the weakness provided me a chance to increase exposure to the REIT.

Regular readers might remember that I divested a significant portion of my investment in this REIT and moved the funds to Sabana REIT to have equal weightage in these two industrial properties S-REITs. The only way to entice me to increase my investment in this REIT once more is to offer a meaningfully higher distribution yield, everything else remaining equal, and that happened today. So, you would see me accumulating on further weakness. 90c next?

Technnically, despite a spike in volume as price gapped down today, all that was formed at the end of the day was a doji. To me, that is an encouraging sign for long holders.

Julius Baer downgrades Hyflux to hold and cut its target price to $1.30 from $2.30. “We believe that Hyflux will face challenges in winning projects to catalyse its share price due to its current stretched balance sheet,” Julius Baer said in a report.

Friday, 02 December 2011

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