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On the Edge: http://www.theedgemalaysia.com/in-the-financial-daily/197658-rights-issues-by-reits-a-tough-sell.html

• Rights issues by REITs a tough sell?
  Written by Chua Sue-Ann
  Monday, 12 December 2011 11:26
  
  KUALA LUMPUR: It remains to see whether investors will warm up to recent proposals by Malaysian real estate investment trusts (REITs) to embark on rights issues for fundraising.
  
  This comes as Hektar REIT and AmFirst REIT separately proposed rights issues in recent months. The former is doing so to fund new asset acquisition while the latter is seeking to reduce its bank borrowings. CapitaMalls Malaysia Trust (CMT) also recently told The Edge Financial Daily that it is considering a rights issue to raise fresh capital.
  
  Analysts and market observers said it is generally undesirable for REITs to embark on rights issues as investors expect dividends from REITs instead of having to plough in more capital.
  
  “Effectively, they are asking investors to spend more on their stock in these uncertain market conditions,” said a property analyst.
  
  However, judging from the price performance of both Hektar REIT and AmFirst REIT, investors have not reacted negatively to the news. This, surprisingly, is in contrast to investors’ harsh treatment of Singapore-listed REITs that embarked on rights issues.
  
  According to analysts, the reason why Malaysian REITs are now turning to rights issues to raise funds, instead of the usual way of borrowing or unit placement, could be because their gearing is already near the 50% threshold (of total asset value) permitted for a REIT to borrow, or that the capital they seek to raise is larger than what can be achieved with a placement exercise.
  
  In Hektar REIT’s case, its gearing ratio is 43.4%, just below the 50% limit, based on its total debt of RM347 million and total assets of RM799.47 million as at Sept 30. AmFirst’s REIT’s gearing as at Sept 30 was 39.8% based on total borrowings of RM419.6 million and total assets of RM1.053 billion.
  
  On Dec 8, Hektar REIT proposed a renounceable rights issue to raise gross proceeds of about RM98.4 million. Proceeds from the rights issue will be used to partially fund the acquisition of two shopping malls in Kedah for RM181 million cash.
  
  Hektar REIT added that it would also obtain bank borrowings of up to RM87.1 million to purchase the assets. Note that it held cash and cash equivalents of RM21.3 million as at Sept 30.
  
  The REIT has yet to finalise the actual number of rights units and entitlement basis will be determined later based on the final issue price of the rights unit.
  
  Hektar REIT added that it will procure a written irrevocable undertaking from its substantial unitholders to fully subscribe for their entitlements, failing which underwriting arrangements would be made.
  
  AmFirst REIT’s proposed rights issue, set on a three-for-five basis, is expected to raise gross proceeds of about RM218.8 million, based on an illustrative issue price of 85 sen per unit. The proceeds are to be used to pare down borrowings.
  
  CapitalMalls Malaysia Trust, which also manages The Mines shopping mall, recently said it is also considering a rights issue to raise fresh capital.
  
  AmFirst said the rights unit issue price is expected to be fixed at a discount of no more than 20% to the theoretical ex-rights price of the unit. “The discount on the issue price of the rights unit is intended to reward unitholders for their continuous support of the fund,” AmFirst said.
  
  Thus far, investors have not reacted negatively to the REITs proposal to conduct rights issues. The unit prices of both Hektar REIT and AmFirst REIT are still traded near their peaks.
  
  “It could be because the unit prices are currently near historical highs, and more interestingly, at the current high prices they still offer rather good yields as well [Hektar REIT at 7.6% and AmFirst at 8.6% historical yield], so unitholders are happy,” said a market observer.
  
  Other than that, he explained that there is still strong demand for REITS in times of market volatility, especially among institutional shareholders.
  
  “Pavilion REIT has gained 13.6% since last week’s IPO to RM1, and the yield is now only 5.7%. So, the management of REITs thought maybe a rights issue is a good idea,” he said.
  
  The scenario is different in Singapore.
  
  K-REIT Asia, a unit of the Keppel Land group, saw its unit priced plunge 9.7% to S$0.857 sen on Oct 18 after it announced plans to raise S$976.3 million (RM2.4 billion) through a 17-for-20 rights issue. Most of the funds raised by the REIT will be used to buy a 87.5% stake in Ocean Financial Centre (OFC) from its parent Keppel Land Ltd.
  
  It was reported that investors didn’t like the pricing for the OFC deal, and the fact that it was a related party deal. It wasn’t entirely because K-REIT Asia had proposed to acquire it via rights issue funding.
  
  “At the end of the day, REIT managements have to justify why they have to do a rights issue to ask for more money from the unitholders. While institutional shareholders are okay with a rights issue, it could be a turn-off for minority shareholders,” said a market observer.

Read the following posting on M.A. Wind's Corporate Governance in Malaysia : The Reit myth busted

It's an incredibly good posting, one that deserves to be featured.

Let me reproduce the entire posting:

Very interesting article in The Business Times (Singapore) about REIT's. The rules of the MAS (Monetary Authority Singapore) do not align the interests of REIT managers and their shareholders. Shareholders like steady, large dividends. But REIT managers are paid for the amount of assets under management. So after paying out juicy dividends, they like to recoup the lost assets with rights issues, to which the shareholders have to subscribe if they don't want to get diluted (at a cheap price). Instead of receiving money in the form of dividends shareholders are actually transferring more money out in the form of rights issues.

I hope things are better in Malaysia, haven't really followed the REIT's very much. In general, this is also a very good warning against companies who often are involved in rights issues.

• Published November 26, 2011
  "Show me the money"
  
  The Reit myth busted
  Whatever Reits pay out in dividends, they will take back a few years later in the form of rights issuesBy TEH HOOI LING, SENIOR CORRESPONDENT
  
  
  THE high yields of real estate investment trusts (Reits) are tempting. And indeed, they have been touted as a relatively safe and stable instrument to own if one is looking for a steady stream of income. As such, many investors see Reits as a good asset class to have in one's retirement accounts.
  
  But you know what? That Reits are good income-yielding instruments is but a myth. The thing is, whatever they pay out in dividends, they will take back - all and more - a few years later in the form of rights issues.
  
  Here's what I found. Of the 17 Reits which have a listing history of at least four years on the Singapore Exchange, only three have not had any cash calls or secondary equity raising. The remaining 13 have had cash calls, and many had raised cash multiple times. One had a few rounds of private placement of new units which diluted the stake of existing unitholders somewhat.
  For many of these Reits, the cash called back far exceeded the cash received. So, the myth of Reits as almost comparable to a fixed income instrument is really busted.
  Take CapitaMall Trust (CMT) which was listed in July 2002. Assuming that Ms Retiree bought one lot or 1,000 units at the initial public offering (IPO) for a total sum of $960. For the whole of 2003, she received $57 in dividends. However in that year, CMT also had a one-for-10 rights issue. To subscribe for her entitlement, Ms Retiree would have to cough out $107.
  
  In 2004, she would received $89 for the total number of CMT units she owned. That year, CMT had another rights issue, also one-for-10. The exercise price was higher at $1.62. To subscribe, Ms Retiree would have to fork out $178.
  
  In 2005, CMT again had another fund raising exercise via rights issue. Ms R would pocket $124 in dividends but in that same year, had to return $282 back to the Reit.
  
  In the next three years - 2006 to 2008 - Ms Retiree felt rich and happy. She merrily banked in her quarterly distributions which amounted to $404 for her holdings of CMT. Her one lot, after three rights issues, had grown to 1,331 units.
  
  In the following year, another $175 was distributed. But CMT wasn't going to let Ms R be happy for long. It launched a big one - a 9-for10 rights issue. To fully subscribe for her entitlement, Ms R had to empty her bank account of a whopping $982.
  
  And you know what, the cash call came in March 2009, when the Straits Times Index fell below 1,600 points, and many retirees were dismayed to see their investment portfolios plunge by half or more. Many fret if they would have enough left in the pot to sustain their lifestyle. Having to cough up more money for a Reit was the last thing that they wanted to do!
  
  Negative cash flowAnd here's the final tally. Since its IPO until today, a holder of one lot of CMT would have received $1,264 in cash distributions. However, in all, he or she had to return $1,549 back to the Reit so as to subscribe to their entitlement of new issues. That's a net outflow of $284 per lot.
  It's the same story with K-Reit Asia, Capitacommercial Trust, Frasers Commercial Trust, Mapletree Logistics, First Reit, Lippo Malls Indo Retail Trust, AIMS AMP CAP and Saizen REIT in that what was taken back from investors was more than what was given out.
  
  K-Reit has been one of the most aggressive fund raising Reits. Had you started with just one lot when it was listed in April 2006, you would have to dish out $8,399 to subscribe to your rights issue. Distributions amounted to $1,110, resulting in a net outflow of $7,289.
  For Reits with at least four years of track record, only Fraser Centrepoint, Parkway Life and CapitaRetail China have not had any cash calls.
  
  Instead of a rights issue, Suntec Reit raised funds by issuing new units to some institutional investors at a slight discount. Existing unitholders don't have to cough out additional cash, but they would have their share of earnings diluted somewhat.
  
  Misalignment of interests
  Reits are managed by managers, and managers are paid based on the size of the portfolio that they manage. So the incentive is for the managers to continue to raise money and expand the portfolio size. Sometimes this is not done in the best interest of unitholders.
  The most recent controversy was over K-Reit's purchase of Ocean Financial Centre (OFC) from its sponsor Keppel Land. K-Reit has launched a 17-for-20 rights issue to pay for the purchase which was deemed by the market to be expensive at a time of uncertain outlook and when office rental is expected to ease.
  
  BT reader Bobby Jayaraman argued that rather than be compensated based on factors such as the value of assets, net property income and acquisition fees, Reit managers should be paid based on a combination of growth in distribution per unit and market valuation of the Reit.
  'If Reit managers were paid on the basis of distribution per unit and market valuation growth, would K-Reit have bulldozed its way through the OFC acquisition like they have done?
  
  'The day K-Reit announced the OFC acquisition, its stock price fell close to 10 per cent and has continued sliding. Yet, its Reit manager will take home significantly increased management fees while shareholders would have lost a good chunk of their capital even as they bear significantly more risk in the form of higher leverage and potential property devaluations given the uncertain environment,' he wrote to BT.
  
  Misalignment of interests aside, there are also unitholders who clamour for growth.
  
  But while Reits may not be the perfect income yielding instrument that they are made out to be, they have proven their capacity for capital appreciation. Relative to the capital ploughed in, CapitaMall Trust has rewarded its unitholders with a return of 127 per cent. Most Reits have yielded positive total returns.
  
  Instead of buying Reits for yields, some savvy investors only buy them when they see those with good quality assets trade at sharp discounts to their book value. For example in the first half of 2009, CMT was trading at 50 per cent its book value. Today, it is not as cheap. At $1.755, CMT is now trading at 13 per cent premium to its net asset value of $1.55.
  
  Hence, valuation metrics which apply to a typical asset heavy stock would apply to Reits as well.