Work through a full rights issue decision using made-up figures.
Darren decided to practise on a made-up rights issue before a real one arrived. He wrote out every number, so that when a real offer came he could spend his time on the judgement instead of the arithmetic.
The worst time to learn how a rights issue works is the week the form is due. The case below uses only made-up figures, so you can check every step, and working through it takes about twenty-five minutes.
You hold 8,000 units in a made-up S-REIT. The market price is S$1.20, so your holding is worth S$9,600 (8,000 x S$1.20). The REIT announces a renounceable rights issue of 1 new unit for every 4 held. The issue price is S$0.96 per unit, a 20% discount to the current price.
The circular says the money will fund most of the purchase of a logistics property, and new debt will cover the rest. It claims a DPU increase of 1.5% on a pro forma basis and says gearing will fall slightly after the deal. Holders may apply for excess units, and the circular sets out how they will be allotted.
Start with the TERP (theoretical ex-rights price), using the method from Lesson 7.2, Rights issues, preferential offerings and TERP. Add the value of the old units at market price to the cost of the new units at the issue price, then divide by the total number of units. Here, 4 old units at S$1.20 come to S$4.80. Add 1 new unit at S$0.96 and you get S$5.76 for 5 units. S$5.76 / 5 = S$1.152.
Your entitlement is the number of new units you are offered under the ratio. Here it is 8,000 / 4 = 2,000 new units. Subscribing in full costs 2,000 x S$0.96 = S$1,920.
Now work out your position at TERP under each choice. If you subscribe, you hold 10,000 units worth S$11,520, which equals your 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 - S$0.96 = S$0.192, so 2,000 rights bring in about S$384, and S$9,216 + S$384 = 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 the rights lapse, you keep 8,000 units worth S$9,216 and receive nothing for the rights. That is a loss of S$384, or 4% of your starting value.
Put all three choices in a small table on your worksheet, with columns for units held, cash paid or received, and value at TERP. The arithmetic shows that lapsing is costly, but to choose between subscribing and selling you have to read the deal, starting with the claims in the circular.
Note the stated use of proceeds and classify the raising, as you did in Lesson 7.1, Why REITs keep raising money. The proceeds fund an acquisition rather than debt repayment, so this is a raising to grow.
Test the DPU claim with the approach from Lesson 7.3, Placements and dilution. Find the circular's assumed property yield and cost of debt. Then compare that cost of debt with the REIT's current average cost of debt from its latest results. If the circular assumes cheaper debt than the REIT pays today, the 1.5% accretion may not survive.
Check the gearing claim against the MAS limits you recorded in Lesson 4.4, How MAS regulates S-REITs. Then check who is selling the property. If the seller is the sponsor, look for the two independent valuations in the circular, which Lesson 4.4 also describes, and note whether the deal goes to a vote by independent unitholders. MAS sets these rules, so check its guidance for how they currently apply. Your structure map from Lesson 4.5 shows how the manager is paid on acquisitions, so note what the manager earns from this purchase.
If you want more than your entitlement, read the circular's allotment rules for excess units. Excess units are usually allotted only from units other holders did not take up, and the circular sets out who gets priority, so an excess application may not be filled.
Next, check whether subscribing or applying for excess would push the REIT or its sub-sector above the limits you set in Lesson 6.5, Map the sub-sectors you hold. Then check that you have 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, because it is the one choice that gives value away. Under your decision, write two or three sentences of reasons drawn from your reading of the claims and your check of excess units and limits.
Then write what would change your mind. Putting it down as a condition you can test turns your decision into a rule you can check against the circular, for example that your decision changes if the circular's cost of debt assumption is more than a percentage point below the REIT's current average.
A finished worksheet contains:
TERP entitlement and cost a three-row table of the choices with values at TERP notes on use of proceeds, DPU, gearing and seller checks the excess units and limits check a one-line decision with reasons the condition that would change the decision
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.
Fill in the rights issue worksheet with made-up figures. Then decide to subscribe, sell or let the rights lapse, and write down why.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).