snowcap Wrote:One thing I want to clarify is how do rights issues destroy value? I know they dilute the earnings over a larger number of shares, but when they issue rights at low prices and I subscribe to the rights, in the end my returns (yield) is still around 6% on total investment (initial investment + rights subscription). Compared with about 6% also before the rights issue. Am I missing something?
Let's take a look at some of the worst (IMHO) offenders:
CapitaMall Trust (CMT)
CapitaCommercial Trust (CCT)
K-REIT
CMT
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In March 2009 CMT had a 9 for 10 rights issue at $0.82. Prior to the rights issue it traded at $1.45, paying a quarterly DPU of about 3.6 cts, or 14.4 cts annualized. After the rights issue, DPU was about 2 cts per quarter or 8 cts annualized.
Suppose you owned 10 lots at $1.45. Annual DPU was 14.4 cts, so your yield was 9.9%. After the rights issue you owned 19 lots, at a weighted average cost of $1.15. Annual DPU dropped to 8 cts, your yield was now 7%.
The money raised was not put towards yield-accretive acquisitions but to pay off debt, so DPU fell. As a result, even though you got the rights at a discount, your final yield declined. So in the case of CMT the rights issue clearly destroyed value.
Unitholders who subscribed and got excess rights did relatively better because they were able to transfer value to themselves from other unitholders who gave up their rights. But in aggregate, shareholders lost out.
CCT
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In May 2009 CCT had a 1 for 1 rights issue at $0.59. Prior to the rights issue it traded at $1.06, paying a semi-annual DPU of about 5.8 cts (last 12 months was 11 cts). After the rights issue, DPU was about 3.3 cts per half-year (7 cents in the next 12 months).
Suppose you owned 10 lots at $1.06. Annual DPU was 11 cts, so your yield was 10.4%. After the rights issue you owned 20 lots, at a weighted average cost of $0.825. Annual DPU dropped to 7 cts, your yield was now 8.5%.
As with CMT, the money raised was not put towards yield-accretive acquisitions but to pay off debt, so DPU fell. As a result, even though you got the rights at a discount, your final yield declined.
So for CCT the rights issue also clearly destroyed value.
Again, unitholders who subscribed and got excess rights did relatively better, but in aggregate, unitholders lost out.
K-REIT
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In Oct 2009 K-REIT had a 1 for 1 rights issue at $0.93. Prior to the rights issue it traded at $1.18, paying a semi-annual DPU of about 5 cts (last 12 months was 10cts). After the rights issue, DPU was about 2.8 cts per half-year (5.7 cents in the next 12 months).
Suppose you owned 10 lots at $1.18. Annual DPU was 10cts, so your yield was 8.5%. After the rights issue you owned 20 lots, at a weighted average cost of $1.055. Annual DPU dropped to 5.7 cts, your yield was now 5.4%.
As with CMT and CCT, the money raised was not put towards yield-accretive acquisitions but to pay off debt, so DPU fell. As a result, even though you got the rights at a discount, your final yield declined. So for K-REIT the rights issue also clearly destroyed value.
Again, unitholders who subscribed and got excess rights did relatively better, but in aggregate, unitholders lost out.
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Does anybody see a pattern here?
As a side note, Teh Hooi Ling looked at this issue of rights issuance by the REITs some time ago. Her conclusion was that unitholders did OK as measured by
price appreciation. What was also shown by her data, but not explicitly addressed, was that REITs came to market as dividend paying instruments, but they ended up taking back all (and more) of the cash they paid out when they did rights issues.
As a result, the actual returns to REIT unitholders were essentially all capital in nature, via price appreciation. There was basically no income to speak of because it had all been reclaimed via the rights issues, EVEN THOUGH EVERY SINGLE REIT ADVERTISED ITSELF AS PAYING STEADY CASH DISTRIBUTIONS.
In Chinese we say "gua yang tou, mai gou rou" - hanging a goat's head but selling dog's meat. In English we say "bait and switch". To me this is the biggest credibility issue that Singapore REITs have as an industry - that in aggregate, they have
not in fact delivered on their claim of steady cash distributions, because all that cash (and more) got taken back via rights issues.
Temperament Wrote:No! i always love "Rights Issue". It's an opportunity for you to find out whether you should subscribe or not. Or even buy the "NIL PAID RIGHTS" if you think you can make money in the long run. I think it's better than buying "IPO" most of the times.
I do not dispute that unitholders who subscribed to excess rights could have made significant profits. But these profits came at the expense of fellow unitholders who did not take up their rights - basically, it was financial cannibalism.
As a group, the unitholders in the 3 cases above lost out in the rights issues. So who won? The REIT manager, of course. Unitholders take the risk, the REIT manager takes the reward. Nice work, if you can get it.
Homepage
PR Newswire
) and I also remember the article and research done by Teh Hooi Ling back then.