The Expanded First Reit Post Rights Issue and Acquisitions

First Reit has announced its proposed acquisitions of 2 Jakarta hospitals, and 5 for 4 rights issue on 9 Nov 2010, followed by more details on 11 Nov 2010. I have come across a couple of blog articles with the analysis of the rights issue and acquisitions in details, and have provided the links under the "Related Links" section below. I shall not be going through the numbers in details here, but will be taking a broader view of the whole exercise and also some additional points. Before that, for those who are new to First Reit, following are some background information.

Background
First Reit is a healthcare reit which has a portfolio of mainly hospitals and a hotel in Indonesia. It also owns some nursing homes and a hospital in Singapore. Its sponsor is the Lippo Group, which also co-sponsored the LippoMaple Indonesia Trust, an Indonesian retail reit, with Mapletree Pte Ltd, a fully owned subsidiary of Temasek Holdings. Following is a brief description of the Lippo Group:

"The Lippo Group is a major Indonesian conglomerate founded by its Chairman, Dr. Mochtar Riady in the 1950s. It consists of private and public companies in China mainland, Hong Kong and Macau; Indonesia, Philippines, Singapore and South Korea with US$11 billion in assets. Lippo Group has over 15 public-listed companies in different parts of Asia including Hong Kong, Indonesia and Singapore."

Developments Since 2009
First Reit has been rather quiet for the past 2 years. Other than some asset enhancement works, it has not undertaken any major moves such as acquisition of new properties that would have made significant impact on its DPU. Thus its DPU has been rather stable from quarter to quarter around 1.9 cents since 2009. Its stock price has also not been moving up as quickly as most of the other s-reits, and because of that its dividend yield has consistently been one of the top among the s-reits. Recently its share price has seen a very impressive surge, closing at a all time high of 0.980 cents on 8 Nov 2010, just a day before the release of the acquisitions and rights issue announcement. On 9 Nov 2010, the reit announced the proposed acquisitions of 2 Jakarta hospitals as well as a 5 for 4 rights issue. The details can be found under the "Related Posts" below.

What is the effect of the acquisition and rights exercise?
At first glance the whole exercise does not seem to be very favourable for the reit. The 5 for 4 rights issue is going to more than double the share base, and at a relatively cheap price of S$0.50. The gearing as at 30 Sep 2010 was 16.5%, which is at a very low level. Doesn't it make more sense to finance the acquisitions primarily by debt, with a smaller scale rights issue or private placement that is going to have less impact on the share base?

If we take a closer look at the total asset value of the reit as at 30 Sep 2010, we will find that there is very little room for the reit to borrow much without hitting the gearing limit. The total asset is only S$346.1m. To my knowledge, at the time of this writing First Reit does not having a rating by Fitch, Moody's or S&P, which means that it can only gear up to 35%. So financing primarily by debt will leave the reit with less choices as acquisition targets, as it can only look for acquisitions of smaller scale. Furthermore, even a smaller scale acquisition can easily drive up its gearing close to the gearing limit because of its low asset base.

The management may have wanted to make use of the recent positive reaction to equity raising exercises like rights issue, private placement and IPOs to undertake a larger scale equity raising, so that it will pave the way for future expansion plans. According to the press release on 11 Nov 2010. post acquisition and rights issue, the projected gearing is still at a low level of 17.25%. Though the gearing has not changed much from 16.5% before the exercise, the asset base is going to be almost doubled to S$603.4m, which is going to make a difference to the absolute amount of debt the reit can incur before hitting the gearing limit. This will allow the reit to have more choices to make further acquisitions, thus helping it to achieve its target of having a portfolio size of S$1 billion in the next two to three years.

DPU Post Exercise
The projected annual DPU post exercise is 6.40 Singapore cents. Based on the DPU of 1.94 Singapore cents for the quarter ending 30 Sep 2010, the annualized DPU before the exercise is 7.76 Singapore cents. Whichever way you may want to calculate and compare the yield before and after the exercise, whether it is by TERP or by using the last closing price before announcement of the rights issue, the absolute amount of distribution you are going to received per unit is going to be reduced. So for existing unit holders you must keep a close tab on the schedule for rights issue, and not forget to either sell the rights, exercise the rights, or partially sell and partially exercise the rights before the deadline in order not to lose out on anything.

Related Links

• http://singaporeanstocksinvestor.blogspot.com/2010/11/first-reit-rights-issue.html
• http://www.investmentmoats.com/money-management/reit/first-reit-announces-acquisition-and-rights-issue/

Related Posts

• First Reit - Follow up details of the proposed acquisition and rights issue - 10 NOV 2010
• First Reit - proposed acquisitions and rights issue - 9 NOV 2010
• All about REIT - Rights Issue Part 2: What happens during a Rights Issue 
• All about REIT - Rights Issue Part 1: Terms and Definition