When a REIT is seeking funds, there are various avenues open to it:
- Debt
This is the most straightforward and directly results in an increase in gearing level. Recall that the subprime crisis in 2008 had resulted in the collapse of the CMBS market and caused some S-REITs to face refinancing woes (more specifically, Saizen comes to mind). Being neither a financial expert nor economist, I do not claim to understand the subprime crisis nor CMBS at all but to my simple mind, continually taking on debt can't be a good thing. - Private placement
My earliest experience of an acquisition by one of the REITs which I was holding was with FCT, Northpoint 2 & Yew Tee Point malls. FCT went the route of private placement with institutional investors. For the retail investor such as myself, what one should probably look out for is that the placement shares are not overly discounted and that the institutions to which the shares are placed out to are reputable ones. The advantage here is that the retail investor does not need to fork out any money for the acquisition(s) but faces a certain amount of dilution risk. - Bonds
Recently, CMT issued the first retail bonds by an S-REIT. This was overall 1.9 times subscribed and in particular, the public offer portion was 4 times subscribed. Going forward, tapping on the fixed income market might be an increasingly viable option for S-REITs now that a precedent has been set. - Rights issue
Possibly the most popular means of fund-raising with retail investors, this offers the chance of accumulating more units at a discounted price to the market. On the flipside, if one does not have the means of participating in the rights issue, one might face the double whammy of loss of capital (in a rights issue, the share price will drop to the TERP or thereabouts due to simple dilution) and a drop in dividend stream (again due to dilution but the extent largely depends on the purpose to which the funds are used for, ranging from acquisitions to AEI to paying down of debt, etc.)
As mentioned in the opener, I had participated in two such rights issues: First REIT and Cambridge. These two occurred in contrasting situations. For the former, I was not a unitholder and specifically bought into the counter so as to be allocated the rights units; for the latter, I had bought into the counter just before the rights issue was announced and for better or for worse, decided to simply go along with the exercise.
On hindsight now, both turned out to be profitable moves as the two counters managed to stay above the TERP after the rights units started trading pari passu. Furthermore, I tried my luck at excess rights for Cambridge in an attempt to round up my odd lots and was successful. Speaking of which, this last brings me to a final point on odd lots.
On occasion, retail investors may be stuck with odd lots in a rights issue exercise. To remedy this, there are a few possible ways:
- During the CR period, buy or sell units such that the number of lots held is a multiple of y in an x-for-y rights issue. For instance, in a 1-for-8 rights issue, one should hold 8, 16, 24, ... lots to avoid being allocated odd lots.
- During the trading period of rights, there will usually be a separate counter to trade rights, including one for odd lots denoted by a number at the end which indicates the board size. To continue with the 1-for-8 example, this will mean that there is a counter zzz 25 for trading in board sizes of 25. One thing to note though is that the overheads for trading rights can be significant since the dollar amounts will be smaller than that for trading the mother share.
- Arguably the most cost-effective and convenient way is to apply for excess rights when making the payment at the ATM for the rights units, since one will directly reap the benefits of the discounted price without going through the hassle of trading on the market.
