2 words of utmost importance here: Benchmark and ‘the Best’.

Where to benchmark? Answer: US – the bellwether of global economy

Who to benchmark? Answer: Warren Buffett & Berkshire Hathaway – legendary

Follow the 3 lessons below in sequence to grasp the idea why REIT, as an asset class, is so powerful throughout multiple cycles of economic ups and downs

Lesson 1: Even world’s best investor had deteriorating performance over time due to high ‘competition’ & information ‘liberalization’

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Lesson 2: The second best asset class to closely match the world’s best investor investment return for the past 20+ years

Note: concepts covered in these lessons still apply, but refer to the updated tables below

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Lesson 3: To complete Lesson 2, we analyzed how had other asset classes performed in the same duration

NOTE: Up-to-date data for the above is available when you schedule a 1on1 consultation call with me ~ I’ll show you everything up to most recent full financial year

I’ll share with the rest of the REIT Method community on how you can do the due diligence yourself, not only for this AmFirst REIT, but for other REIT rights issue as well.  Bear in mind that AmFIRST rights issue is the first for any M-REIT, so it is worth studying this although it is a bit outdated

In case you are not aware,  AM Ara (property manager) has proposed renounceable rights issue of 3 new units for every 5 existing units held under an investor’s portfolio.

In layman terms, for every 500 shares (5 lots) of AmFirst REIT you currently have, you are entitled to buy additional 300 (3 lots) shares, at a subscription price of RM 0.85/share in mid July.

Is this a good thing? To answer this, lets take a look at 2 things below.

The purpose of this rights issue

The REIT manager stated that it wants to grow its portfolio by investing in more properties in high-growth areas such as Penang, Melaka and Johor. Apparently, they are now moving their focus from KL/Klang Valley to other places where asking prices and rental yields are more reasonable. Scope and size of the the properties is still under wraps, as they claimed they are still doing some “due dilligence” exercise.

Read: AA – Asset Acquisition Effort, one of the criteria of active asset management we want to see in a REIT, as stated in Module 3.

Its current Gearing Ratio

To quote Transformers the movie, there is always more than meets the eyes.

Let’s do a quick check into its latest quarterly financial statements, and look at the gearing ratio.

It is at 45.9 percent, up from 38.9% from the same quarter last year.

Reason of the increase in gearing: New Property Acquisition of Prima 9 and Prima 10 at Cyberjaya, both are relatively new office buildings. It is normal to see gearing shoot up after acquiring new assets.

Bonus point#1 to note: Both commercial office buildings are 100% tenanted as of the time of this writing.

Bonus point#2 to note: One of the major tenants is Hewlett-Packard, a MNC (multinational company). Established MNC are normally quality tenants known for long lease.

Even though the manager said the right issue is for asset growth, its equally, if not more, important aim is to pare down the gearing ratio to below 30 percent.

Why is this so?

There is no way AmFirst can acquire new properties this year with only less than 5 percent margin before hitting the 50% gearing ratio upper limit. Besides that, reducing the gearing will indirectly result in interest (over its borrowings) savings as well.

This is prudent capital management in strengthening the REIT’s balance sheet via capital raising. The property manager is doing the right thing.

Conclusion: With all the info we know so far, subscribing to this rights issue is recommended.

This article does NOT form part of the contract in whatsoever way if any. We are solely sharing our own personal opinions on this particular investment opportunity base on our best knowledge on this matter which may be limited in certain aspects that we are not aware of at the time of this article was posted.
We make no warranty or representation about the content of on this tutorial although we try to provide the most accurate info available to us. It is your responsibility to independently confirm its accuracy & completeness. Any projections, opinions, assumptions or estimates used are for example only & do not represent the current or future performance of the REIT. If you have questions or concerns regarding this issue conduct further inspections by a qualified professional.
The information provided on or within this website or in documents available herein is for assistance only and is not intended to be and must not be taken alone as the basis for an investment decision. Each recipient of this information should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities offered hereby, and should consult its own legal counsel and financial, accounting, regulatory and tax advisors to determine the consequences of such an investment.
In short, we shouldn’t be blamed for any of your investment loss.

 

A member,Tze Lin, asked the following question, in response to AmFirst REIT Rights Issue 2012

Is there any impact to an existing Amfist investor(unit holder) if he/ she decides not to subscribe to the right issues. Impact in the sense of dilution of shareholding, or diminution in share value?

Here is an insightfully simplified way to look at Rights Issue.

Assume LCF Corporation has 1000 shares outstanding with an asset base of $1000. NAV/share = $1. For simplicity sake, assume its current stock price is also trading at its $1.

Unit holder Tze Lin owns 200 shares in LCF Corporation.  Therefore, her asset value is $200 and she has 20% stake in LCF Corporation.

LCF Corporation then announces a 1 for 1 rights issue with a subscription price of $0.50 each.

Layman terms: Unit holder is eligible to purchase 1 additional shares at the price of  $ 0.50, for every share currently held under her portfolio.

The rights issue is a discount to the current market rate because its rights price is lower than its NAV/unit.

After the rights issue (assuming rights issue is fully subscribed), LCF Corporation would have 2000 total shares outstanding with an total asset value of $1500. NAV/share is now at $0.75.

If Tze Lin subscribes fully to her entitlement, Tze Lin will need to invest an additional $100 lump sum ($0.50 x 200 entitled rights). Tze Lin will now own 400 shares in LCF Corporation. Her ownership remains at 20% of the total corporation while her asset value is at $300.

However, if Tze Lin chooses to forfeit her rights, now she will only have 13.33% stake ($(200/1500), reduction from 20%) while her asset value still stands at $200 (13.33% x $1500, no change).

So we can see that in this scenario, Tze Lin does not really suffer any loss in absolute monetary terms.

In other words, there is NO dilution in share value.

However, there is indeed a dilution in Tze Lin shareholding in LCF Corporation.

Does the reduction in a company stake matter to you?

Yes if you sitting in the Board of Director who need to hold the power in decision making.

Minority shareholder aka man in the street like you and me?

I don’t think so 🙂

In response to lesson – To subscribe or not to subscribe, that is the question, REITMethod member, CK Lau, has this to say:

 

But the “Mr. Market” will cost in the reduce NAV/share which is now 0.75 into their buying price and the trading share price will “slowly” adjusted to 0.75 instead of 1.00… then Tze lin would have suffer a paper lost 25%….

 

Unfortunately, for Tze Lin, that is likely to happen in the short term if she allows her rights entitlement to expire.

In fact, there is this LIMITED TIME FRAME before your rights issue option-to-subscribe period expire.

If you DO NOT act wisely within that stipulated time, you will SUFFER PAPER LOSS in your invested stocks after Rights Issue, should you need to liquidate your positions.

Even if you decide NOT to do anything, you might be Caught Off Guard by the drop in your invested stock price even the Market is Up and the fundamentals are intact.

 

After the rights issue, the theoretical stock price will drop to $ 0.75. However, nobody knows this for sure actually, and even if it drops, it might rise again in the future to a level where Tze Lin no longer suffers any paper loss.

Another thing is…

Although the stock price is not likely to change immediately following the new rights issue, it will change as the rights expiration date approaches.

Anyway.

You can BUY or SELL the rights shares

Here I explain more in detail using a video, especially the BUY part, which is more complex.

 

 

Updated: Sept 2019 – How to Subscribe to Rights Issues fully online

 

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Sell all the rights shares

Tze Lin can sell his 200 entitlement shares at the price of, say,  $ 0.25/unit. She will gain $ 50.

After the ex-date when the share price does fall to $ 0.75,  her existing 200 shares will be valued at  $ 150, which is lower than her initial investment capital of $ 200.

However, since she already gains $ 50 from the sale of rights, in the end she does not gain or lose money from the rights issue ($ 150 + $ 50 = $ 200).

 

Sell partially the rights shares

This is to cover for the subscription of the other part of the rights.

Say, if the entitlement shares are sell-able at $ 0.25/unit, Tze Lin can sell 140 out of the 200 entitlement shares, which will net her $ 35.

Then, she could use the capital raised ($ 35) to purchase the remainder 60 entitlement shares, for a total cost of $ 30 ($ 0.50 x 60), with $ 5 extra to cover for the transaction fees.