CapitaLand Ascott Trust Preferential Offering: What should unitholders do?

What happened?

Many Singapore REITs have launched equity fund raising or rights issues recently.

Earlier, we saw that AIMS APAC REIT completed an equity fund raising to raise about S$100 million.

CapitaLand Ascott Trust (CLAS) has also announced a preferential offering which offers unitholders the right to buy 29 new units for every 1,000 units held, at S$1.025 each.

If you are a CapitaLand Ascott Trust unitholder and wondering what you should do about the preferential offering, read on to find out!

What you need to know about CapitaLand Ascott Trust (SGX: HMN) Preferential Offering

• CLAS is offering shareholders the rights to buy 29 new units for every 1,000 units held, at S$1.025 each. 
• It will also pay a distribution of between 0.664 and 0.724 cents per unit (advance distribution), expected to be paid on 11 Oct 2023.
• Investors who own CLAS on 8 August 2023 are eligible to subscribe to the PO and to the advance distribution.
• Subscription to the rights and payment will open on 16 August and close on 24 August 2023.
• The new PO units are expected to be allotted and traded from 1 September 2023. 
• If 1 September is declared a public holiday in Singapore, the trading of the new rights units will commence on 4 September 2023. 
• Proceeds will be used for acquisition, to enhance existing assets, and to pare down debt. 

#1 - The theoretical price after the placement, PO, and distributions is between S$1.01407 to S$1.01467

CLAS recently completed a placement of 191.8m new units at S$1.043 per unit, to raise S$200m. These new units commenced trading from 14 August 2023, and are not entitled to subscribe to the preferential offer.

The new units placed out at the private placement are not entitled to the income that the REIT derived before the placement date. 

Hence, investors who owned CLAS before the placement exercise would receive an advanced distribution for the income that CLAS generated from 1 July to 13 August. Investors who bought CLAS on or before 8 August 2023 will be entitled to this distribution (known as advance distribution) of between S$0.00664 to S$0.00724 per unit, and to subscribe to the PO.

Based on the last closing price of S$1.02 on 8 August 2023, the theoretical price after the placement, PO, and the advance distribution is between S$1.01407 to S$1.01467 per unit.

#2 - The sponsor and REIT manager undertake to subscribe to their share of the PO

The Ascott Ltd and affiliated companies, and the REIT manager will subscribe for their rights allocation. Their stake in CLAS will fall to 27.89%, from 29.46% before the private placement and PO, due to dilutive impact from the private placement.

The PO is fully underwritten by Citigroup, DBS and UOB.

#3 - The rights and placement proceeds of S$300m will be used for acquisition, renovation and extension of existing assets and for debt repayment

The rights issue and the recent placement exercise would raise a total of S$300m. About S$170m will be used to partially fund the proposed acquisitions of two hotels in London, the Cavendish London and Temple Bar Hotel, and Ascott Kuningan in Jakarta. 

Another S$83m will go towards financing the proposed extension and renovation of Novotel Sydney Central, and S$20m to pay for the proposed renovation of Citadines Holborn-Covent Garden London. 

A further S$21m is slated for debt repayment, with the balance S$6m to pay the fees incurred in this fund-raising exercise.

What are the reasons to be positive on CapitaLand Ascott Trust?

#1 - Acquisitions and AEI works could improve DPS, EBITDA yield and asset value 

CLAS generated EBITDA yield of 5.0% from its assets in 1H23. Its manager believes that the acquisitions could lift DPS by 1.8%, or S$13.5mn in total distribution, as it captures the travel recovery. 

Also, it has identified one hotel in Australia and a service residence in UK for AEI. The manager believes that these works could deliver EBITDA yield of 10.6% to 11.3% on the AEI cost. 

Lastly, it expects their values to increase by S$385.5mn when they reach a steady state of operations. 

#2 - Gearing could improve to 34.8%

Gearing will rise marginally to 39.0%, from 38.6% at end June 2023, if the proposed acquisitions and AEI were carried out as planned. 

If the proceeds were used to pare down debt, gearing could improve to 34.8%. This does not take into account outstanding perpetual securities of S$400m which are classified as equity. 

#3 - Building a stable income stream from longer-stay assets

CLAS’ lodging portfolio spans across 15 countries, with presence in large domestic markets and key gateway cities. 

About 81% of its assets are hotels and service residences. It is therefore well-placed to ride on the recovery in travel demand. 

CLAS targets to build a stable stream of income from longer-stay accommodation assets, such as rental housing and student accommodation. 

These assets are likely to account for 25-30% of its portfolio in the medium term, providing greater visibility to DPS growth.

What are the risks of CapitaLand Ascott Trust?

#1 - The private placement and PO were priced at below NAV of S$1.15

CLAS’ net asset value as at 30 June 2023 was S$1.15 per share. With the issue prices of the placement and PO below this level, NAV would fall to S$1.137 per share.

What would Beansprout do?

The theoretical ex-price after the placement, preferential offering, and distributions is between S$1.01407 to S$1.01467 per unit. 

If CLAS’ share price falls below this level, it would be better off for CLAS’ unitholders who are interested to buy additional units to pick up from the market than to subscribe to the PO at S$1.025 per unit. 

The underwriting banks would then have to take up units that are not taken up by eligible unitholders. In this scenario, there might be a potential subsequent overhang to the price of CLAS. 

At the recent closing price of S$1.02, CLAS offers an annual dividend yield of 5.5%. 

This is lower than the average of 6.5% for the hospitality REIT sub-sector due to its strong sponsor and diversified asset portfolios. 

Check out Beansprout’s REIT tool to compare CapitaLand Ascott Trust with other hospitality REITs and choose the best REIT for your portfolio.

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What you need to do as a CapitaLand Ascott Trust unitholder

Entitled unitholders can:

• Accept and subscribe to your provisional entitlements 
• Apply for excess preferential offering stapled securities 

Unlike a right issue, you will not be able to trade or transfer your entitlements or your eligibility to apply for excess preferential offering stapled securities 

More details can be found in the information booklet here.