Wednesday, May 9, 2018

How To Play Fraser Logistics Trust (FLT) Rights Issuance

This is a continuation from the previous post where FLT decides to venture into their Germany and Dutch acquisitions.

After the EGM was conducted and approved on the 9th May, they quickly came up with the details of the $476m equity fund raising activities which includes a private placement and a non-renounceable preferential offerings to existing unitholders.

The private placement is issued at 345.8m new units at an issue higher end price of $0.987 each to raise gross proceeds of $332.7m. The private placement result shows that it was 3.9 times oversubscribed which saw strong participation channel from institutional investors.

In addition, there is a non-renounceable preferential offering of 152.2m new units on the basis of 1 for every 10 existing units in FLT held at an issue price of between $0.942 and $0.967 each. The likelihood is we will see it ended up at the higher end of $0.967, and this is the part which will concern unitholders like us more.

I'll give a general rundown of how my usual approach for applying for rights on reits, and then I will focus for FLT specifically.

There are generally 3 levels that you have to watch out for when a Reit announces rights or preferential offerings that will concern and impact you as unitholders.

First Level - The general occurrence is that when Reits first announce their plans on placement or rights, the share price would usually drop. This is because the placement or rights tend to be offered at a discount to the latest traded price. Since the details of the offerings are not yet announced, we won't know what the Theoretical Ex-Rights Price (TERP) is. The market will be volatile in this case speculating the details of the offerings.

Second Level - This is when more details on the offerings are revealed and released to public and the market starts computing the TERP to see if the acquisitions are yield accretive. If yes (and also depending on how much accretive it is), you can be sure that they will rebound strongly following the announcement. If it is found not to be yield accretive, then the share price would go down up to near the TERP support.

We are currently at this level for FLT.

Third Level - The third level is usually reserved for renounceable rights where the rights are transferable and can be bought and sold in the market. The rights are trading typically for someone who wants to dispose their entitled rights or someone who wants to get into the shares by buying the rights from the market.

This third level is not applicable for FLT case as the offerings are non-renounceable.



Then you have three groups of people typically in this sort of environment: 

1.) People who are currently holding the existing mother shares (like me). 

In my case, I am holding 110,000 + 35,000 (my family) shares and thus will be entitled for the rights for 14,500 shares at probably $0.967. This means I need to get ready a cash minimally of $14,021.50 if I want to subscribe to all the rights. It is also important to note that since this is a non-renounceable rights, that means that my stakes will be diluted if I do not subscribe to the rights. So die die I need to find $14,021.50 worth of funds.

In the usual case scenario, I'd also apply for excess units just in case there are extra that some people are forgoing the rights. However, since this is a non-renounceable rights and people cannot trade this on the market, it is unlikely that they will not subscribe to this unless they do not understand the offerings. I'll still try my luck but I doubt we'll get much out from it since everyone would be subscribing (look at this more like a forced offering to participate).

2.) People who are not holding the mother shares but want to get some of the actions. 

In this case, you have a few options you can take. 

The first is buying the mother share before it goes ex-rights and you will be entitled to the rights just like me. Then you can follow my first option above.

The second is simply buying the mother shares right after the whole episode is concluded and done with. That should set the tone how "low" they would go in this particular exercise. For a strong Reit, this usually does not work as the share price would rebound back to where they are before the offering. I used to try this option with my sabana and lmirt experiment in the past and was very successful.

The buying of rights in the market is usually also an option but it would not be applicable for FLT case.

3.) People who wants to participate but don't have enough funds to do subscribe.

This may sound hilarious but I've seen people who goes all in on Reits and has not enough funds when the Reits call for equity fundraising.

Since the case for FLT is non-renounceable, you are not able to sell the rights on the market which means you will be diluted if you don't subscribe.

What you can do is to "swallow the tail", a term used by philosopher in the past where you can sell part of your current holdings, get some funds out from it, and use the funds to subscribe to the rights offerings for the leftover units.

This may still work well and most importantly, you will not get diluted impact.

Summary

The key timeline to watch is the between the 23rd May and 1st June, where you can apply for the preferential offering either on the atm or your internet banking. There's still a lot of time left, so you can take your time to bid. I usually go towards till the last few days before I apply for my rights.

There will be an advance distribution from the period of 1 April until 21st May (the listing of new units of private placement) which they decide to give out 0.69 cents to existing unitholders, so do factor that in your consideration.

And of course, for whatever strange reason, the share price has rebounded strongly to pre-announcement of $1.09, which means the TERP will get even higher than predicted. Assuming it closed today at $1.09, and factoring ex-dividend of 3.61 cents + advance distribution of 0.69 cents, the ex-CD + ex-rights price would be at $1.047.

The TERP based on the enlarged unit base would be at around $1.031, which means it is still a solid discount to get the rights which is offered at $0.967.



Thanks for reading.

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20 comments:

  1. Hi Brian,

    Can you explain what it meant by the terms ex-rights and ex-CD? I have heard of the terms ex-dividend but despite googling, I have no idea what ex-rights and ex-CD mean?

    Thank you! =)

    ReplyDelete
    Replies
    1. Hi Dividend Investor

      For FLT it is a bit unique because they are paying out the dividends and advance distribution plus rights entitlement together which will go ex on 16th May together.

      Delete
    2. Hi Dividend Investor,

      Given that 16th May is the XR (ex rights) and XD (ex dividends) date, it means that buyer will not be entitled to the rights and dividends from this date onwards while seller will be entitled to both rights and dividends. It acts like a cut off date.

      Delete
  2. Hi Brian,

    Can you explain what it meant by the terms ex-rights and ex-CD? I have heard of the terms ex-dividend but despite googling, I have no idea what ex-rights and ex-CD mean?

    Thank you! =)

    ReplyDelete
  3. Hey B, when is the last date you can purchase new shares to be eligible for the rights? T+3. So.. tues?

    Book closing fri 23may 5pm

    ReplyDelete
    Replies
    1. Hi Anonymous

      To qualify, you need to purchase before the 16th May, when it goes ex dividend for the advance distribution.

      Delete
  4. Hi B do u know why they are giving the extra 0.69 cent div? Seems like bait to push price up so that TERP won't go below $1

    ReplyDelete
    Replies
    1. Hi Kevin

      The advance distribution is not a bait. It is paid out to the existing unitholders before the pre-listing of the new units so it is fair for all parties.

      Delete
    2. in fact, the whole deal is not really adv. to retail investors:
      1. you hv the private placement dilution, based on B's own word, " which means it is still a solid discount to get the rights which is offered at $0.967.",ppPrice is below market, and it is dilution w/ no clear reason what is this % of pp.
      2. pp is listed earlier than rights list, giving a chance to offload on the market(if no lock-in period, sorry i didn't read circular, but just assume here)
      3. there is no chance to trade rights in the market if i'm not happy with this arrangement, but to either fork out more cash, and/or sell some of my existing holdings to avoid dilution

      i was really shocked the high % of favorable votes when attending EGM, those uncles/aunties are just there for the bento lunch box, casting their votes without even knowing the rights price.

      if i'm interested in Europe exposure, i can do it myself by purchase other European REITs.

      on the other hand, REITs mgr gets a larger portion x mgmt fee%, even the latter has no increase, he still gets a fatter pkg, he is Aussie not German, what adv he has over locals in managing this.

      Delete
  5. Hi Brian, thank you for the detailed post on the upcoming rights issuance for FLT. As a FLT shareholder myself, this will be the first rights issuance that i am participating in. Able to share the steps involved in applying for the preferential offering? Is it done through my cdp or trading account? Thank you!

    ReplyDelete
    Replies
    1. Hi Anonymous

      If you have the mother shares in cdp, you can subscribe the rights via atm from the 23rd May to 1 June, just click the number of rights you are entitled to (1 for every 10), and then they will ask if you want to apply for excess (not guarantee you will get). You can apply as much excess as you like if you think the deal is good and you have sufficient funds.

      Then after that, just sit back and wait for the results to see if you are entitled to the excess rights :)

      Delete
  6. Hi B,

    Did you manage to take part in the private placement? Any idea how one can do that?

    Personally, I feel that my share is already diluted due to the private placement. Moreover, the number of units available for private placement is more than 2 times that of the right issue.

    Adding on offering 1 unit for every 10 existing shares owned is effectively 100 units for every 1,000 units owned. That is very little!

    In short, I feel shorted changed. But there is nothing I can do. Just like Keppel DC reits... they offered only private placement. =(

    Luckily, FLT is paying out advance distribution to existing shareholders before these right issues happen.

    ReplyDelete
  7. Hi B,

    Are you still in Starhill? Looking to add?

    I remb reading somewhere in your blog that you looking to divest? Any views of its recent result?

    Tks!

    ReplyDelete
  8. HI B,

    I am new to REIT, your blog is very useful for the newbie to understand the process and logic of this kind of offer.
    I have a question on how you derive the $1.047? Does it due to dividend pay out which affect the price downward?
    "Assuming it closed today at $1.09, and factoring ex-dividend of 3.61 cents + advance distribution of 0.69 cents, the ex-CD + ex-rights price would be at $1.047."
    Thanks.

    ReplyDelete




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  12. Bro. Will they send us the rights offering before the actual day? My first time being offered rights.

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