K-REIT Asia is going to find it a bit tough to raise the money it needs. The real estate investment trust (Reit) is looking to raise up to $700 million in a rights issue, in part to repay some of the $942 million bridging loan it took from Keppel Corp when it purchased its one-third stake in One Raffles Quay last year. The trust indicated in a recent circular to shareholders that it intends to price the new units at up to 20 per cent discount to the market price. However, K-Reit is seeking to issue only 420 million new shares. The limit is in place to ensure that at least 10 per cent of the total issued units are held by the public after the rights issue.Keppel Corp and sponsor Keppel Land, who together own 72.7 per cent of K-Reit, have both given irrevocable undertakings to take up their respective allocations of the rights units. Both companies will also make applications for excess rights units that are not subscribed - essentially underwriting the fund-raising exercise. The 420 million share cap ensures that in the worst-case scenario where no other shareholder subscribes to the rights units, KepCorp and KepLand will still end up with less than 90 per cent - allowing K-Reit to avoid delisting.
While the circular helps to allay some concerns in the market with regard to potential delisting and consolidation by parent KepLand, there is a shortfall between how much the trust is hoping to raise (up to $700 million) and how much it could actually raise from a rights issue of 420 million shares.
In the circular, K-Reit used $1.20 (20 per cent off the market price of $1.50) for illustrative purpose. Assuming a rights issue of three new units for every two existing units, K-Reit will be issuing 372.1 million rights units and raising about $446.5 million in gross proceeds. K-Reit will come close to raising $700 million only in the highly unlikely scenario that it issues 413.5 million rights units on a five-for-three basis at $1.68 apiece, which will give it gross proceeds of $694.6 million.
For this to happen, the prevailing market price will have to be $2.10 - assuming a rights issue price which is at a 20 per cent discount to the market price.
K-Reit’s stock closed at $1.47 last Thursday, the last day of trading before the extended weekend break. Analysts believe that it is unlikely that the stock price will cross the $2.00 mark over the next few months amid a generally sluggish market. K-Reit said in its circular that the entire exercise is expected to be completed no later than mid-May.
Looking at the expected shortfall between what the Reit hopes to raise and what it probably could raise, it wouldn’t be wrong to assume that K-Reit might have to look at additional sources of funding. However, it is unclear what K-Reit plans to do if the rights issue falls short of the amount it needs. K-Reit said in its circular that, given current market conditions, a rights issue is the ‘most appropriate’ method of raising equity.
Raising funds from other sources will undoubtedly be hard in a squeezed credit market. Industry players have pointed out that the two upcoming integrated resorts (IRs) have mopped up much of the credit available in the market, making it much harder for smaller players to get loans and refinance debt. Also interesting is the fact that K-Reit seems to be looking to parent companies KepCorp and KepLand to tide it over the current financial crunch. If minority shareholders choose not to take up their rights units, KepCorp and KepLand are ready to step in, even though this might mean that K-Reit could suffer from poor liquidity and low trading volumes in the future.
Buying up all unwanted units will also raise KepLand’s stake in K-Reit. KepLand has said it intends to go asset light by divesting all its investment properties . By increasing its stake in the Reit, it is doing the opposite. Perhaps then it is time for KepLand to reconsider plans to keep K-Reit listed; going private will probably allow K-Reit to raise funds more easily in a tight credit market.
As for K-Reit, the rights issue will lower its gearing from the present 53.9 per cent (which is approaching the maximum allowable limit of 60 per cent) to 32.7 per cent - assuming the trust issues 372.1 million rights units at $1.20 each. But raising funds for future acquisitions may continue to be a problem if the Reit has to go back to the market once again.
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