Saturday 11 March 2017

Ascott REIT Rights - Another capital-raising exercise by issuing new shares

Recently, Ascott REIT hogged the headlines in the substantial rights exercise it was offering. It was offering 29 new shares for every existing 100 shares held. The money raised would be used to fund the acquisition of 2 Germany properties with the similar name of Citadines as well as Singapore's Ascott Orchard.

The last time I was involved in this REIT was quite some time back when I was able to use Standard Chartered to "play" a few 100 shares at a time and trade on price movements. It was subsequently liquidated when Standard Chartered cut short the "no minimum commission" party. Pity, but based on management's effectiveness over the years, it was really poor as it showed that the interest of the management was not aligned to that of the shareholders. The intended target was clearly mentioned; they intend to raise the value of the Assets Under Management (AUM) to $6 billion by 2017. Even with the current acquisitions, they are short of $700 million. We would probably expect some more cash raising activities if they intend to achieve this target by end 2017.

What this is telling me is that they will probably go on a shopping spree to buy some property, whether or not it would be of interest of shareholders would be a question mark. Gearing would be reduced by this rights exercise, but it is still near to the uncomfortable 40% gearing.

Ok, so some readers must be at this point wondering why I am writing a post on this REIT, after a long hiatus from writing posts other stuff other that my monthly regular portfolio updates.

Now, fundamentally, I do not like the REIT. Or rather, I do not like how the management is running the REIT. They don't seem to have the shareholders in mind and it really shows in their actions of cash raising exercises over a short span of a few months. While they may have the giants Capitaland and Ascott backing, they seem to be a "dumping ground" for Ascott to divest their properties.

What really caught my eye was the substantial rights exercise. After the share prices reacted negatively to the announcement of the rights exercise, I bought some units during the consolidation phase at $1.115 each using the Standard Chartered Bank (SCB) platform. And then, when the units went XR yesterday, I sold all of them at a price of $1.095 each, which means I made a loss of around 2 cents excluding commissions.

From the rights exercise, I will be entitled to 29 shares for every 100 shares I hold, which means I will have to cough out more money, around 1/3 of my deployed capital to avoid the dilutive effects of the rights exercise. But that is set to change because I have already liquidated my position, albeit at a loss. But the good news is, I have the sale proceeds to apply for the rights, and it is enough for me to apply for further excess rights to up till 2 times of my entitled amount without requiring me to cough out any more capital.

So if I do my maths well, if I were to just collect my entitled rights, my average cost price would be just around the $1 region, even after accounting for the loss I made from the trade I made in the mother shares yesterday. Based on the closing price on Friday, I would be in the black of around 9 cents a piece. This is of course, assuming that the price maintains this price level until the new rights shares are issued in 31 March. However, we would have to expect some sort of "overhang" on the units, as how the analysts love to use, because of the substantial rights issue.

And if I were to apply for a further excess rights of a similar size to my entitled amount, and manage to get it, my average cost would slip to around $0.96. Because the rights issue price is $0.919, if I were to apply and get 2 times further excess rights shares equivalent to my entitled amount, the price would be further reduced to $0.94. So with every same injection of capital into the rights exercise, the cost price would decrease at a decreasing rate. But this all is based on the assumption that I get all the excess rights that I apply for, which is likely not the case.

Because I used the Standard Chartered account, the rights deadline would be shortened and I would need to inform that well in advance to ensure my instructions are executed as planned. I have experienced previous rights exercises with Standard Chartered and I have been pleased with their performance so far. Keppel DC REIT was the last one I did with SCB and I was pleased to know that I did not even have to pay for the $2 atm charge had I bought the shares into my CDP account.

This is simple to understand why. 

Standard Chartered is the designated nominee account holding all shares of parties like myself using the SCB account to buy shares. Because all the shares held by different parties using SCB is collated together in one SCB nominee account, they are able to make the rights application in a single name, which results of the $2 charge spread across the many parties using SCB, to the point that the charge is almost minimal, it is negligible! Please note that this is purely my understanding and I do not know what actually is the reason why. So I would be really grateful if there are readers who knows the inside workings of the bank to correct me if I am wrong.

Furthermore, I had used Standard Chartered because it is still the cheapest brokerage in town. This is because to minimise my average cost of each units, it is very crucial to keep fees to a minimum.

And that is it. I am now just waiting for the notice from SCB to arrive and I am probably just going to use all the sale proceeds to apply for as many rights shares as I can get.

Wish me luck!


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  2. Hi, when would we be able to exercise the rights? Thanks.

    1. Hi TFP,

      From the Ascott Reit website, it seems like the rights offer open on 17 March, which is today and we have until 31 March to apply for the rights. FYI, for SCB applicants, the period is probably much shorter.

      I have yet to receive notification from SCB yet though.