Last Friday, Link REIT announced a rights issue to raise HKD 18.8 billion for debt reduction and acquisition of more assets. Link REIT plans to offer one rights unit for every five existing units held, with a subscription price of HKD 44.20 per rights unit, which is approximately 29.6% discount from the last closing price. This was a huge negative surprise, as this is the first time Link REIT had to turn to the equity market for funding since its IPO in 2005! Previously, Link REIT has relied on the sale of assets to finance acquisitions.
Approximately 40-50% of the net proceeds generated will go towards repaying existing debt and general working capital needs, with the remaining funds earmarked for future investments with a focus on the retail, car park, office, and logistics sectors in the Asia Pacific region.
EFR Bad timing!
Given Link's large acquisitions and the rising interest rates and uncertain global economy, the rights issue appears to be a reasonable step to take given the company's high debt level. It's worth noting that Link's current borrowing cost, which is above 5%, is higher than the entry NPI yield of 4.9% for the assets in Singapore and its 4.9% FY22 dividend yield.
In my view, this is an inopportune moment and unfavourable market environment to conduct an equity fundraising effort. Unitholders are likely to be reluctant to provide additional capital to Link REIT. Thankfully the rights issue is fully underwritten by DBS, HSBC and JPM. Furthermore, if Link REIT lacked the necessary funding capacity, it should not have proceeded with the acquisition in Singapore. In this regard, Link REIT is less disciplined in acquisition compared to local SREITs such as CICT and CLAR. It went ahead with the expensive SG acquisition, showed unitholders a pro-forma assumption based on 100% debt, and then now do a EFR without disclosing the dilution.
Based on Street’s estimate, the rights issue will be 7% dilutive to its book value per share and 10% dilutive to its DPU.
Conclusion: My thoughts
Link REIT has stated that the rights issue is not directly tied to the acquisition in Singapore, but it is meant to replenish the debt capacity that was used to finance the acquisition. Thus, in a sense, the rights issue and the acquisition are indirectly connected. I do not view this action favourably for unitholders.
Post-announcement, the share price has tanked 13-15%. At this price point, Link REIT’s rights issue could be DPU Yield accretive (not DPU accretive), but such irresponsible EFR would not entice me to invest in the company, regardless of how low-priced it may be.
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