2 posts ago, i set out to investigate if subscribing for excess rights, and subsequently, maintaining your cost, would result in a maintained or slightly lower yield.
So i had friends who participated and got around double the entitled rights. One had, 1062 entitled, applied 2000 in total, and got full 2000. The other had 1422 entitled applied 7000 in total, and got 2900. So i am assuming that getting 2000 shares in excess is common. This is very bad as data points but i work with what i have.
Here's the maths.
Price before annoucement: 88c
Average Price on Day after (5th Sep): 86.5c (High + Low, divide by 2)
Buying 10000 shares on Day After: 10000 x 0.865 = 8650 SGD
Rights Entitled: 1800
Excess Awarded: 2000
Total New Units: 1800 + 2000 = 3800
Cost per Unit: 63.2c
Rights Cost: 2401.60 (ATM fees excluded)
Cost Total: 8650 + 2401.60 = 11,051.60 SGD
Average Price on First Day of Trading (10th Oct): 84c (High + Low, divide by 2)
# of shares to sell back to 8650 cost: 2401.60 / 0.84 = 2859 ~ 2900 (rounded up to avoid odd lots)
Total Shares left: 10000 + 3800 - 2900 = 10900
Using latest 2Q Dividend numbers
Dividend per unit (DPU): 1.8c
Total Received on 10000 shares: 180 SGD
Original yield (annualized): 180 x 4 / 8650 = 8.3%
Diluted Dividend (assuming no increase in income): 1.8 / 1.18 = 1.525c
Total with 10900 shares: 10900 * 1.525c = 166.22 SGD
New yield (annualized): 166.22 x 4 / (11,051.60 - (2900 x 0.84)) = 7.7%
There you have it. At the same cost, there is a slight decrease in yield. Definitely better than the initial dilution.
Obviously i excluded the cost of the transactions which will impact the numbers a little bit.
Also, the whole price movement cannot be predicted. There are plenty of examples where the price did not recover like it did here between announcement date and trading date. This recovery is broad based because STI went up and even the FTSE ST REIT Index went up.
That aside, you could have gotten Cache at a cheaper price from the 2nd day after the announcement was made. So you might luck out a bit more there as well. Again, this cannot be predicted. And most importantly, the amount of excess cannot be predicted. You may not get much excess for you to make it even worthwhile to consider this move.
Final point, you may see a slightly higher DPU in the coming quarters than the one i calculated as there would be cost savings due to the paying down of debt and that might go in favor of maintaining the yield.
Like all good scientific, data-based studies, here's a conclusion. Maintaining or slightly lower yield is possible. But my personal take is this, there are far too many factors that can screw with you to even make this viable.
Showing posts with label rights. Show all posts
Showing posts with label rights. Show all posts
Tuesday, October 17, 2017
Wednesday, September 6, 2017
Rights Issue - Are they Right for You?
I honestly have been extremely lazy to write any post but work has been a bit hectic recently so that's my lousy excuse. A storm is brewing outside and i am cooped up here so why not pen something down?
There has been a series of Rights issuance this year for Singapore REITs versus 2016. Off the top of my head, i can recall Sabana having one earlier this year; Cache and Manulife just announced almost back-to-back, and of course, we have Ascott who does it almost like celebrating birthdays.
Other more established blogs will cover the whole basics of rights issue. No point talking about it here. But something pertinent popped up in conversations with my peers. Some people think that REITs are useful vehicles to use during retirement.
I disagree and i bold the highlight why i think they're not.
Against my disagreement, dividend from REITs are somewhat predictable, extremely regular and acts as a good inward cashflow for retirees. This much i agree.
Now, what do retirees have to deal with if said REIT does a rights issue like now?
You have to cough up large amount of important cash flow to subscribe if you do not wish to be diluted. Are you going to eat bread and drink plain water for 3 weeks because the money you needed for a lifestyle is now forced to be entered into an equity position?
Don't subscribe.
Fine. But then your dividend per unit drops aka you take back less dividend which then negatively affects your cash flow. How now brown cow? Of course, if this reduced dividend is still sufficient for you to get by, this would not affect you.
There are a multitude of ways to prevent this occurrence for sure. My point is, REITs are not as useful as people think they are. The same people often blindly chase after the high yields they offer. There is a reason why bonds are recommended and used for this purpose.
Not to detract from the good instrument of REITs, if you're in the wealth building stage, they make fantastic cash flow vehicles. I personally have 30odd% of my portfolio in REITs.
Throw in a spanner into the works. What if the rights issue is like the one Manulife is doing? For growth and not like what Cache is doing to improve balance sheets?
There is a possibility that even with the increased number of units, the dividend may be maintained or even grow. This is definitely good and even with the dilution, the cash flow for the retiree may maintain. Even better if you managed to subscribe and maintain the yield payout.
So, obviously i did not like the Cache rights issue. They are doing it now because the unit price is very favourable. When you have high unit price, you could raise more funds even with a steep discount for the exercise price. This is why hardly any REIT did rights issue when prices were low in Feb 2016. Sabana did it at a low probably out of a little bit of desperation.
Essentially, rights issue is just a means of fund raising. It is always cheaper to finance through a bank, ie, take on debt vs asking from the public open market. I am not based in the finance industry so people in the know can correct me on that statement.
But for Cache, this is no longer that feasible. MAS has a ruling that REITs can only leverage up to 45%. At 43.6% there is hardly any room to take on more debt. Plus, should the properties drop in valuations, which is very likely in this climate, the ratio might rise to hit the limit soon. Should that happen, a rights issue at that point in time might be extremely damaging to the value of the REIT.
I see this exercise a preemptive move to prevent that from happening. There might be some form of savings in terms of interest to be paid, but DPU will almost definitely fall on top of the negative rental reversions the sector is already facing.
It's just bad for almost everybody until they can grow again.
As a side note, none of the 3 acquisition that Sabana did the rights issue for went through. The management can say anything they want to market the rights issue so that people throw their cash in to fund the company, but end of the day, deals may still be broken.
So, to finish off this post. I am going to start an experiment. This might have been tested before and if any one could point me towards it, it would be great.
The idea came from a friend who asked if you could subscribe for excess rights, and then later sell out the excess shares you have to lock in the gain so that your position is back to the same value as before. Would that be better than not subscribing?
For example.
Pre-rights. Your cost was 50c.
Rights at 40c and you got a bit of excess rights.
Assuming it is a 50% dilution and 1000 excess is granted.
Original position was $5000. New total cost is $9400.
New cost per unit is 44.8c
If you sold back $4400 worth to return to your original exposure value, you actually have a lowered cost and a little bit of extra shares to sort of maintain your yield.
There's a lot of assumptions about price movements in that example so i shall record the findings using Cache and Manulife and see what we get at the end of both the rights exercise.
Cache
18 for 100
Original Price: 88c
Rights Price: 63.2c
TERP: 84.2c
Manulife
41 for 100
Original Price: 96.5c
Rights Price: 69.5c
TERP: 88.6c
Information above obtained directly from announcements made to SGX
I am vested in Manulife REIT and i have friends in Cache who (i'm hoping) can report back on the status of the excess allotments.
Keep Learning.
There has been a series of Rights issuance this year for Singapore REITs versus 2016. Off the top of my head, i can recall Sabana having one earlier this year; Cache and Manulife just announced almost back-to-back, and of course, we have Ascott who does it almost like celebrating birthdays.
Other more established blogs will cover the whole basics of rights issue. No point talking about it here. But something pertinent popped up in conversations with my peers. Some people think that REITs are useful vehicles to use during retirement.
I disagree and i bold the highlight why i think they're not.
Against my disagreement, dividend from REITs are somewhat predictable, extremely regular and acts as a good inward cashflow for retirees. This much i agree.
Now, what do retirees have to deal with if said REIT does a rights issue like now?
You have to cough up large amount of important cash flow to subscribe if you do not wish to be diluted. Are you going to eat bread and drink plain water for 3 weeks because the money you needed for a lifestyle is now forced to be entered into an equity position?
Don't subscribe.
Fine. But then your dividend per unit drops aka you take back less dividend which then negatively affects your cash flow. How now brown cow? Of course, if this reduced dividend is still sufficient for you to get by, this would not affect you.
There are a multitude of ways to prevent this occurrence for sure. My point is, REITs are not as useful as people think they are. The same people often blindly chase after the high yields they offer. There is a reason why bonds are recommended and used for this purpose.
Not to detract from the good instrument of REITs, if you're in the wealth building stage, they make fantastic cash flow vehicles. I personally have 30odd% of my portfolio in REITs.
Throw in a spanner into the works. What if the rights issue is like the one Manulife is doing? For growth and not like what Cache is doing to improve balance sheets?
There is a possibility that even with the increased number of units, the dividend may be maintained or even grow. This is definitely good and even with the dilution, the cash flow for the retiree may maintain. Even better if you managed to subscribe and maintain the yield payout.
So, obviously i did not like the Cache rights issue. They are doing it now because the unit price is very favourable. When you have high unit price, you could raise more funds even with a steep discount for the exercise price. This is why hardly any REIT did rights issue when prices were low in Feb 2016. Sabana did it at a low probably out of a little bit of desperation.
Essentially, rights issue is just a means of fund raising. It is always cheaper to finance through a bank, ie, take on debt vs asking from the public open market. I am not based in the finance industry so people in the know can correct me on that statement.
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| Cache Results Presentation Slide. (link) |
But for Cache, this is no longer that feasible. MAS has a ruling that REITs can only leverage up to 45%. At 43.6% there is hardly any room to take on more debt. Plus, should the properties drop in valuations, which is very likely in this climate, the ratio might rise to hit the limit soon. Should that happen, a rights issue at that point in time might be extremely damaging to the value of the REIT.
I see this exercise a preemptive move to prevent that from happening. There might be some form of savings in terms of interest to be paid, but DPU will almost definitely fall on top of the negative rental reversions the sector is already facing.
It's just bad for almost everybody until they can grow again.
As a side note, none of the 3 acquisition that Sabana did the rights issue for went through. The management can say anything they want to market the rights issue so that people throw their cash in to fund the company, but end of the day, deals may still be broken.
So, to finish off this post. I am going to start an experiment. This might have been tested before and if any one could point me towards it, it would be great.
The idea came from a friend who asked if you could subscribe for excess rights, and then later sell out the excess shares you have to lock in the gain so that your position is back to the same value as before. Would that be better than not subscribing?
For example.
Pre-rights. Your cost was 50c.
Rights at 40c and you got a bit of excess rights.
Assuming it is a 50% dilution and 1000 excess is granted.
Original position was $5000. New total cost is $9400.
New cost per unit is 44.8c
If you sold back $4400 worth to return to your original exposure value, you actually have a lowered cost and a little bit of extra shares to sort of maintain your yield.
There's a lot of assumptions about price movements in that example so i shall record the findings using Cache and Manulife and see what we get at the end of both the rights exercise.
Cache
18 for 100
Original Price: 88c
Rights Price: 63.2c
TERP: 84.2c
Manulife
41 for 100
Original Price: 96.5c
Rights Price: 69.5c
TERP: 88.6c
Information above obtained directly from announcements made to SGX
I am vested in Manulife REIT and i have friends in Cache who (i'm hoping) can report back on the status of the excess allotments.
Keep Learning.
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