You will work through a full rights issue decision with made-up figures.
The worst time to learn how a rights issue works is the week the form is due. Darren decided to practise on a made-up case first, with every number written out, so that when a real offer arrived he would spend his time on the judgement and not on the arithmetic.
This exercise is that practice. It takes about twenty-five minutes and uses only made-up figures, so you can check every step.
Here is the case. You hold 8,000 units in a made-up S-REIT that trades at S$1.20. Your holding is worth S$9,600.
The REIT announces a renounceable rights issue of 1 new unit for every 4 held, at S$0.96 per unit. That is a 20% discount to the current price. The circular says the money will fund most of the purchase of a logistics property, with the rest from new debt. It claims a DPU increase of 1.5% on a pro forma basis and says gearing will fall slightly after the deal. Excess units may be applied for, and the circular sets out how they will be allotted.
Start with TERP, using the method from lesson 7.2, Rights issues, preferential offerings and TERP. For every 4 old units at S$1.20 there is 1 new unit at S$0.96. That is S$4.80 plus S$0.96, which is S$5.76, for 5 units. TERP is S$5.76 divided by 5, or S$1.152.
Your entitlement is 8,000 divided by 4, which is 2,000 new units. Subscribing to all of them costs 2,000 times S$0.96, which is S$1,920.
Now work out your position under each choice, at TERP.
If you subscribe, you hold 10,000 units worth S$11,520. That equals your original S$9,600 plus the S$1,920 you paid.
If you sell the rights, you keep 8,000 units worth S$9,216. Each right is worth about S$1.152 minus S$0.96, which is S$0.192, so your 2,000 rights are worth about S$384. Together that is S$9,600, your starting value. In practice you may get a little less for the rights after brokerage and market pricing.
If you let them lapse, you keep 8,000 units worth S$9,216 and nothing for the rights. You are down S$384, which is 4% of your starting value.
Write all three in a small table: units held, cash paid or received, and value at TERP.
The arithmetic tells you lapsing is costly. It does not tell you whether to subscribe or sell. For that, read the deal.
Using lesson 7.1, Why REITs keep raising money, note the stated use of proceeds: an acquisition, not debt repayment. That makes it a raising to grow.
Using lesson 7.3, Placements and dilution, test the 1.5% DPU claim. Find the circular's assumed property yield and cost of debt. Compare the cost of debt with the REIT's current average from its latest results. If the circular assumes cheaper debt than the REIT pays today, the accretion may not survive.
Check the gearing claim against the limits you recorded in lesson 4.4, How MAS regulates S-REITs.
And check who is selling the property. If it is the sponsor, look at the independent valuations and the independent adviser's opinion in the circular, as lesson 4.4 described. Your structure map from lesson 4.5 tells you how the manager is paid on acquisitions.
If you want more units than your entitlement, you can apply for excess units. Read the allotment rules in the circular. Excess units are usually allotted only from what other holders did not take up, and the circular sets out who gets priority, so an application is not a guarantee.
Then check your own limits. Would subscribing, or applying for excess, push this REIT or its sub-sector above the limits you set in lesson 6.5, Map the sub-sectors you hold? Do you have the S$1,920 in cash without touching your emergency fund?
Write a one-line decision: subscribe, sell the rights, or let them lapse. Lapsing should need a very good reason, since it is the one choice that gives value away. Then write two or three sentences of reasons, drawn from steps 2 and 3.
Last, write what would change your mind. For example: if the circular's cost of debt assumption is more than a percentage point below the REIT's current average, you would sell the rights in place of subscribing. That line turns a decision into a rule you can test.
A finished worksheet has TERP, your entitlement and cost, a three-row table of the choices with values at TERP, notes on the use of proceeds and the DPU, gearing and seller checks, your excess and limits check, a one-line decision with reasons, and the condition that would change it.
Work through the case yourself before you look back at the numbers above, and see whether your decision holds when you write down what would change it.
Complete the rights issue worksheet with made-up figures and write a subscribe, sell or lapse decision with your reasons.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).