Saturday, November 9, 2013

Ascott REIT 1 for 5 rights issue

Ascott REIT has announced a 1 for 5 rights issue at $1. Based on its last done price of $1.255, the theoretical ex-rights price (terp) works out to be (5 * 1.255 + 1)/ 6 = $1.2125

The rights issue proceeds is used mainly for debt reduction. As there is no additional source of income that will result from this rights issue, the distributions per unit (dpu) will drop.

Extracted from the announcement:
The Manager intends to use the gross proceeds of approximately S$253.7 million from the Rights Issue in the following manner:
(i) approximately S$204.9 million (equivalent to approximately 80.8% of the gross proceeds) will be used to pay down Ascott REIT’s debt;
(ii) approximately S$45.0 million (equivalent to approximately 17.7% of the gross proceeds) will be used to fund capital expenditure and asset enhancement initiatives, and for general corporate and working capital purposes;
(iii) approximately S$3.1 million (equivalent to approximately 1.2% of the gross proceeds) will be used to pay for the underwriting commission ; and
(iv) approximately S$0.7 million (equivalent to approximately 0.3% of the gross proceeds) will be used to pay the estimated professional fees and expenses and other fees and expenses expected to be incurred in connection with the Rights Issue.

In the year of 2013, Ascott REIT has a total dpu of $0.08936. Based on last done price of $1.255, this works out to a yield of 7.12%. The gearing also stands at 41.1%

With the introduction of the new units, the dpu should be around 5/6 * $0.08936 = $0.074467. Using the TERP of $1.215, the yield will be around 6.14%

The indicative time table is as follows:

My thoughts:
It also seems that Mr. Market do not like this rights issue announcement. One day before this annoucement, Ascott REIT closed at $1.29. Right after the announcement, it dropped to 1.25

Even though there will be a drop in dpu, I find that this may not be a bad move. Interest rates are likely to rise in the near future and with a gearing of 41.1%, any rise in interest rate will have a significant effect on Ascott REIT. The rights issue will also increase the total units by 253,749,218 units. This will help to improve the trading liquidity of Ascott REIT.

I am already invested in Ascott REIT prior to the rights issue announcement and will be subscribing to my entitled rights with excess.

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