You will be able to work out what a rights issue does to your holding and choose a response.
A letter arrives from CDP with a form and an offer document thicker than most annual reports. Your REIT is offering you two new units for every ten you hold, at a price below today's. There is a deadline a few weeks away, and the form mentions excess units, nil-paid rights and something called TERP. Many people put it aside, miss the deadline, and only later find out what that cost them.
This lesson explains what you are being offered and what each choice does to your holding.
In a rights issue, a REIT or company offers its existing holders the right to buy new units in a fixed ratio to what they already own, such as two new units for every ten held, at a price usually set below the current market price. Every holder gets the same offer in proportion to their holding, so each can keep their share of the REIT if they pay up.
A rights issue can be renounceable. That means the rights themselves can be sold. For a period, the rights trade on SGX as nil-paid rights, separately from the units. If you do not want to subscribe, you can sell your rights to someone who does and keep the cash.
A preferential offering is similar in that it offers new units to existing holders in proportion to their holdings, at a set price. The difference is that it is usually non-renounceable. You cannot sell the entitlement. Your choice is to subscribe or let it lapse, and if it lapses you receive nothing for it. S-REITs often use preferential offerings, sometimes alongside a placement to institutions, which lesson 7.3, Placements and dilution, covers.
The offer document states which kind it is, the ratio, the issue price, the timetable and how to accept.
When new units are issued below the market price, the price of all units tends to fall towards a blend of the old price and the issue price. The theoretical ex-rights price, TERP, is that blend, weighted by the number of units at each price.
Using made-up figures, say the units trade at S$1.00 and the REIT offers 2 new units for every 10 held, at S$0.85. For every 10 old units worth S$1.00 each, 2 new ones come in at S$0.85. TERP is the total value, 10 times S$1.00 plus 2 times S$0.85, which is S$11.70, divided by the 12 units. That gives S$0.975.
TERP is theoretical. The actual price after the rights go ex will be moved by other news and by what the market thinks of the deal. But TERP tells you roughly where the units should land if nothing else changes, and it lets you compare your choices.
Stay with the made-up example. You hold 10,000 units worth S$10,000 before the rights issue. You are entitled to 2,000 new units at S$0.85, which would cost S$1,700.
If you subscribe, you pay S$1,700 and hold 12,000 units. At the TERP of S$0.975, they are worth S$11,700. That is your S$10,000 plus the S$1,700 you paid in. You have kept your share of the REIT.
If you sell the rights, you keep 10,000 units, now worth S$9,750 at TERP. Each right is worth, in theory, the TERP minus the issue price, S$0.975 minus S$0.85, which is S$0.125. Your 2,000 rights are worth about S$250. S$9,750 plus S$250 is S$10,000. You have kept your value in a smaller share of the REIT. In practice, rights often trade a little below their theoretical value, and selling them costs brokerage, so you may get somewhat less.
If you let the rights lapse, you keep 10,000 units worth S$9,750 and receive nothing for the rights. You have lost about S$250, the value the new units at a discount took from the old ones. With a preferential offering that cannot be sold, subscribing and lapsing are the only two choices, so lapsing always gives that value up.
The arithmetic shows that ignoring the letter is the one choice that reliably costs you money. Between subscribing and selling, the arithmetic is nearly even. The decision depends on other things.
Do you want more of this REIT? That depends on what lesson 7.1, Why REITs keep raising money, taught you to read: what the money is for, the effect on DPU and gearing, and whether you believe it. Do you have the cash, and would it break the sub-sector limits you set in lesson 6.5? And for a rights issue, how much are the rights trading for?
The offer document also lets you apply for excess units, those that other holders did not take up. How excess units are allotted is set out in the offer document, so read that section before you count on getting them.
In the activity you will work through a different made-up rights issue, calculating TERP and the value of your holding under each of the three choices, so the numbers are familiar before a real letter arrives.
Using a made-up rights issue, calculate TERP and the value of your holding if you subscribe, sell the rights or let them lapse.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).