Regular readers know that I much prefer rights issues compared to share placements as long as the funds raised go towards increasing income for unit holders. Rights issues allow all unit holders to participate in the enlarged capital base of the entity and to share in the benefits, ideally.
The last time AIMS AMP Capital Industrial REIT had a rights issue was in 2010. At that time, it was a 7 for 20 rights issue at a price of 15.5c per unit (post consolidation would translate to 77.5c a unit today). It was a pretty straightforward proposal back then because the funds raised was for the purchase of a property.
We could compare the NPI yield of the property to be purchased and the existing NPI yield of the REIT's portfolio and decide if it was a good idea. If the NPI yield of the property to be purchased was higher than the NPI yield of the existing portfolio, which it was back then, quite simply, we have a green light.
However, there is always the question of price. Yes, the price has to be right, as always.
The 7 for 40 rights issue which is now being proposed by AIMS AMP Capital Industrial REIT is at a price of $1.08 per rights unit. At the closing price of $1.415 per unit today, a theoretical ex-rights price (TERP) of $1.365 has been calculated.
So, buying at $1.08 represents a discount to the TERP. This is more important than the discount to the closing price. Why? We want to be forward looking since we are investing for the future and not in the past.
Imagine that after the rights issue, given the increased number of units in issue, each unit should proportionally be trading at $1.365 if all else remain equal. If we were then offered to buy more units at $1.08 per unit, would we bite? Of course, we would. That represents a discount of about 20% from the future market price, in theory.
Now that we have resolved the issue of price, we come to another important consideration and that is one of value.
Value could be enhanced but value could also be destroyed. I said that the rights issue of 2010 was pretty straightforward. It was to buy a yield accretive property. The rights issue this time is not as straightforward.
80% of the funds raised will go towards:
1. AEIs which include re-developments to possibly max out plot ratios.
2. Development projects (or green field projects, I suppose).
3. Third party acquisitions (i.e. completed properties).
20% of the funds will go towards:
4. Paying down borrowings.
5. Working capital.
6. Payment of fees related to the rights issue.
This is where I see a bit of a problem. I like the fact that 80% of the funds raised will go towards measures which would possibly improve income and, ideally, distributions for unit holders. However, the lack of details make it impossible to calculate the benefits from the proposed rights issue. So, we really must have faith in the managers to do the right things.
In an earlier decision to add to my long position in Croesus Retail Trust, I decided to reduce my investment in Sabana REIT while keeping my investment in AIMS AMP Capital Industrial REIT intact because I felt that the latter was a better investment with a stronger management who have their interests more aligned with unit holders'. Following that line of reasoning, I will take up my allotment of rights units and also apply for excess rights.
When the nil paid rights start trading, unit holders have the option of selling them away if they do not wish to fork out money. A fair price for the nil-paid rights would be, assuming market price stays at $1.415 a unit, $1.365 - $1.08 = $0.285. This more than compensates for the 15% dilution which a unit holder who does not wish to subscribe to the rights issue would have to suffer.
If you have never encountered a rights issue before, it could be a good idea for you to read some of my older blog posts on past rights issues. See related posts below. Nice little activity for the weekend.
See presentation slides: here.
Related posts:
1. AIMS AMP Capital Industrial REIT: Rights issue.
2. First REIT: Rights issue.
3. LMIR: Proposed 1 for 1 rights issue.