KPO Analysis on Ascott Residence Trust (REIT) Rights Issue

Ascott Residence Trust (REIT) announce 29 rights units for every 100 existing units at a discounted price of $0.919 per share few weeks back to raise gross proceeds of approximately S$442.7 million. If you do not know what is a rights issue, you can read about it here. It is one of the way the company raise more fund to do all sort of things (acquire more property, expand business, pay debt, etc.).

People generally do not like rights issue because it would dilute the equity/value that belongs to existing shareholders and it feels like the company is asking for more cash/taking the dividend back. KPO is rather neutral (secretly likes it), I guess it depends on each and every individual situation. For example, rights issue would not be good for people at later stage of their life, people using CPF or people having tight cash flow.

Let's take a look at the numbers:

Latest Annual Report 2016 (’000):
Total Assets = 4,791,281
Total Liabilities = 2,109,018
Unitholders' Funds = 2,200,625
Shares Outstanding = 1,653,471

Net Asset Value (NAV) per Unit attributable to Unitholders = 1.33

My average price for Ascott REIT is $1.188 for 5000 units. There is room (~11.9%) for the share price to move nearer to its NAV and assuming DPU (Dividend Per Unit) is around $0.0743 (decided to be more conservative by using the lower DPU as estimate after dilution), I will be getting around 6.3% dividend yield.

After Rights Issue (’000):
Total Assets = 4,791,281 + 442,700 = 5,233,981
Total Liabilities = 2,109,018

Unitholders' Funds = 2,200,625 + 442,700 = 2,643,325
Shares Outstanding = 1,653,471 + 481,688 = 2,135,159 2,136,615(4)

Net Asset Value (NAV) per Unit attributable to Unitholders = 1.23

There is a fine print!

(4) Includes adjustments to include approximately 0.9 million new Units issued as payment of the acquisition fee and Manager’s management fees for the German Acquisitions. The Manager’s acquisition fee was assumed to be paid in Units based on an issue price of S$1.19 on 1 January 2016. The Units issued as payment of the Manager’s fees were assumed to be issued at the same prices as those that were actually issued as payment for management fees for the existing properties for FY2016.

Hmm. They paid themselves around S$1 million (0.9 million x 1.19) for acquiring the German asset and diluting our shares... I guess this could be the reason as to why B said they are aggressive? 

Assuming if I were to subscribe for the rights:

My new average price would be (5000*1.188 + 1450*0.919)/(5000+1450) = $1.12 with about 9.8% room for share price to hit NAV and the new dividend yield would be around 6.6%.

KPO likes to buy things that are in discount and taking free GrabShare ride in KL but the one thing KPO really like about rights issue is that I get "buy" more shares without paying any commission as well as over subscribe for more discounted shares!!

Assuming if I were to over subscribe by double of my rights:

Average Price = (5000*1.188 + 2900*0.919)/(5000+2900) = $1.09 with about 12% discount from NAV and dividend yield of 6.8%. The number gets better and better if you are given more discounted units.

Given that the current market price is at $1.065, I am sitting at a loss of -$395.62 (-6.66%) :'( I will subscribe to my rights and over subscribe by at least 2850 units to turn it green!