For investors who are interested in REITs investing, either because we’ve already bought some or are keen to start buying some, we should familiarise ourselves with the process of rights issues. This is because REITs, more often than other listed securities, tend to require raising funds.
These are some reasons why:
i) Unlike other businesses, the only way a REIT can really grow new revenue streams is to purchase new properties. This requires heavy financing.
ii) REIT managers are constantly looking to add high-quality and yield-accretive properties into their portfolio. This sets them apart as a good REIT manager, as well as boosts distributions for unitholders and management fees for themselves.
iii) REITs are typically already quite highly leveraged, and additionally, the Monetary Authority of Singapore (MAS) has set a leverage cap of 45% on REITs. This means to substantially add to their property portfolio, they can’t just rely on bank loans.
iv) REITs are also obliged to pay out a minimum of 90% of its income in distributions to enjoy tax exemptions. This also means that they are unable to build up internal cash resources to invest in new properties.
Besides rights issues, internal cash and bank loans, REITs can also raise funds through new share private placements. However, this has other implications on shareholders.
What Is A Rights Issue?
As explained, a rights issue is a viable avenue for REITs to raise funds for new property investments. During a rights issue, REITs would typically already have identified a viable property investment. To pay for this they would offer new shares to existing shareholders, usually at a discount.
This way, existing shareholders are not diluted in any way, which means they own the same percentage of the company before and after the rights issue. This is also unlike a private placement, where new shares are offered to large or institutional investors, usually also at a discount to existing price, thus diluting existing shareholders’ stakes in the REIT.
In just the past two to three months, five REITs have raised funds in the market.
i) CapitaLand Commercial Trust raised $217.9 million via a private placement – to fund the purchase of a prime office property in Frankfurt Germany. It sold new units to new investors at $1.676, a discount of 3.2% to its volume weighted average price (VWAP) of $1.7306.
ii) Manulife US REIT raised US$197.2 million via a rights issue – to fund the purchase of two office properties in Washington DC and Georgia, US. It sold new units to existing investors for US$0.865, a discount of 7.9% to its VWAP of US$0.9391.
iii) Frasers Logistics and Industrial Trust raised $147.1 million via a rights issue – to fund the purchase of 21 European logistics properties in the Netherlands and Germany. It sold new units to existing investors for $0.967, a discount of 7.3% to its VWAP of $1.0433. In conjunction with this rights issue, it also raised $329.0 million via a private placement.
iv) Mapletree Logistics Trust raised $220 million via a private placement – to fund the purchase of a 50% interest in 11 logistics properties in China. It sold new units to new investors for $1.197, a discount of 2.25% of its VWAP of $1.2246.
v) Keppel DC REIT is looking to raise $303 million via a private placement – to fund the purchase of a data centre in Jurong, Singapore. It is looking to issue new units to new investors at a price of $1.353, a discount of 4.9% to its VWAP of $1.422.
As you can see, raising funds is important for REITs. While some choose to go with private placements, existing shareholders get to participate in the growth process via rights issue more. To understand what we’re in for during a rights issue, here are four things we should know.
# 1 Discount To Market Value
When REITs offer a rights issue, or even a private placement, it tends to do so at discounted prices. As you can see from the earlier examples, the discounts range from 2.25% to about 7.9% – this does not come about by chance.
A REIT which is stronger and is going to purchase good properties will not have to offer a steep discount on its existing price to receive an investment from existing or new shareholders.
During a rights issue, you will notice that new units will typically be priced within a range. Depending on how strong the REIT is in the first place, the range will give us an insight into how strong the REIT believes response for its rights issue will be.
When it finally comes to a price, we can see how strong demand has been in the market. For this reason, it may be to existing shareholders’ benefit for the REIT to offer both private placement and rights issue, as Frasers Logistics and Industrial Trust did. Large and institutional shareholders are usually better able to gauge the strength of a REIT and its acquisition than retail shareholders.
Lastly, offering a discount to existing share prices is also a good idea to get more participation from existing shareholders. Even if a strong REIT offers new shares at a similar price, existing shareholders may not want to participate as they would not be “losing out” by forgoing their allocation.
# 2 Should You Subscribe To New Units?
There are two main components to this question.
First – you should not go all in when investing in REITs as they have high propensity to call for a rights issue. If you’re fully invested, you may not have the funds to buy the new shares or you may have to sell some existing units to participate in the rights issue.
Second – and more importantly – deciding to subscribe means you do not want to be diluted as a shareholder. The discount usually incentivises existing shareholders to participate as they will be collecting more shares at a discount to its current price.
If we’re choosing not to subscribe to new units, even though they’re selling at a discount, we should really be asking ourselves why we’re holding our current units in the first place.
If we don’t really want to think about right issues, and any of the other corporation actions that REITs take, we could consider investing in REIT ETFs. They will make the decisions to subscribe for the rights as well as pay for it without requiring any actions on our part.
# 3 Renounceable Or Non-Renounceable Rights?
There are two types of rights issues – renounceable and non-renounceable.
Renounceable rights mean that you can sell off your entitled rights on the market if you do not want to purchase it. The person who buys your rights will be able to pay for the rights and receive the units in the REIT.
Obviously, non-renounceable rights mean that you can’t do this, and your rights will expire if you do not subscribe to it.
# 4 How Many New Shares You’re Entitled To
When there’s a rights issue – you will be informed how many shares you’re able to purchase. This is a percentage of your current shareholdings. In the case of Manulife US REIT, it offered 22-for-100, which means we’re able to purchase 22 shares for every 100 shares we already have.
This is usually a function of how much the REIT is hoping to raise more than anything else.
# 5 Excess Rights
During a rights issue, we are also able to subscribe for excess rights.
For the Frasers Logistics and Industrial Trust rights issue, where it was offering 10-for-100 (a very favourable number for investors as they won’t be left with odd lots), existing investors are only allotted 10 shares for every 100 shares they own.
We can choose to subscribe for more units beyond our allocation. If we want 20 or even 200 shares for every 100 shares we own, we simply have to apply for excess rights when we’re paying for our allotments.
Typically, we do not receive our entire desired excess rights so a strategy is to apply for more than we want. Of course, we are taking the risk of receiving our entire application if the rights issue is poorly received from the market.
# 6 How To Pay For Our Rights Issue?
We can pay for our excess rights at relevant ATMs in Singapore or via ibanking. This is a convenient and easy method to pay for our rights issue.
# 7 What If We’re Not Shareholders?
If we aren’t shareholders, we can still participate in a rights issue by buying up the units in the REIT before the cut off date. Rights issues are usually announced in advanced and investors are able to do this to participate in a rights issue even if we’re not investors at the point the announcement was made.
# 8 What If We Don’t Think Share Prices Will Move Positively?
Another scenario could be that existing shareholders want to be invested but do not think share prices will move positively in the short-term because of the rights issue.
We can simply choose to sell off our shareholdings and buy back after the rights issue. If we are right, we can purchase shares at a lower price. Of course, we’re running the risk of a positive market reaction which would mean we lost out on both the potential increase in unit prices as well as the fact that we now have to purchase at higher prices if we still want to own the REIT.