EREIT plans to raise at least S$300m through a private placement and preferential offering to repay debt while waiting for future acquisitions, redevelopments, or AEIs. The private placement will aim to raise at least S$150m at a discounted issue price of S$0.33-0.335 per share. The non-renounceable preferential offering will also aim to raise at least S$150m at a discounted price of 0.5cts below the private placement price.
The private placement is fully underwritten. ESR and LOGOS Group, the sponsors, will subscribe to its provisional allotments of the preferential offering and any additional preferential offering units up to a total of S$150m.
The net proceeds from the equity raising will be used to repay debt temporarily until future growth opportunities arise, which will reduce gearing to 38.0% from 41.8%. According to EREIT, the pro-forma NAV will decrease from 36.4 cts to 35.9 cts.
Bad market timing and tight discount, but thankfully its fully underwritten
When Link REIT was rushing to do rights issue, I was quite negative due to the large discounts of the issued rights price. This is an inopportune moment and unfavourable market environment to conduct an equity fundraising effort, and unitholders are likely to be reluctant to provide additional capital.
In the case for ESR REIT, the discount is even smaller! After accounting for the Advanced Distribution of 0.426 – 0.47 cents, the adjusted discount is less than 1.5cents or less than 5% for the Preferential offering! I am not sure how would such price entice unitholders to subscribe the Pref Offerings, but in any case, the Sponsors and banks are fully underwriting the whole equity fund raising so unitholders need not force themselves to subscribe. Since the discount is so tight, there will be less dilution as well.
However, there will be negative carry.
Since the EFR is not accompanied with any acquisition, there will be a negative carry and immediate DPU dilution from the market. Also, based on Page 12 of ESR REIT’s announcement, the underwriting fees and expenses are not cheap: 7mil SGD when the banks only underwrite 150mil of placement!
Overall, I am not excited for ESR REIT at all. Even its cousin REIT such as Sabana REIT is much better, with potential third-party interest for partial buyout. It makes little sense for any investors to subscribe the preferential offering. You can even opt for DRP if you just want to save brokerage fees.
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