REET - IGR Rights Offering Results

2023-05-05 11:53:45 ET

Summary

• IGR's rights offering was oversubscribed.
• The NAV/share hit was around -3.5%.
• Sell and rebuy worked again.

Author's note: This article was released to members of CEF/ETF Income Laboratory as part of the CEF Weekly Roundup on April 24, 2023. Please check latest data before investing.

CBRE Global Real Estate Income Fund (IGR) has announced the preliminary results of its rights offering, which expired on April 6, 2023. We discussed this when it was announced in a previous CEF Weekly Roundup ( public link ).

From the press release (excerpts):

PHILADELPHIA--( BUSINESS WIRE )--The Board of Trustees (the "Board") of the CBRE Global Real Estate Income Fund (IGR) (the "Fund") today announced the preliminary results of its transferable rights offering (the "Offer") which expired on April 6, 2023 (the "Expiration Date"). The Offer entitled the rights holders to subscribe for up to 23,378,100 additional common shares of the Fund ("Common Shares"). The subscription price for the Common Shares to be issued was $5.03 per Common Share, which was determined based on a formula equal to 95% of the average of the last reported sales price of a Common Share on the NYSE on the Expiration Date and each of the four (4) immediately preceding trading days. The gross proceeds of the Offer are expected to be approximately $117.6 million (including oversubscription requests and notices of guaranteed delivery). The Offer was oversubscribed; however, the Fund will not exercise the secondary oversubscription which would have increased the number of Common Shares to be issued in the Offer. The available oversubscription shares will be allocated pro rata among those fully exercising record date shareholders who oversubscribed based on the number of rights originally issued to them by the Fund. The Common Shares subscribed for are expected to be issued on or about April 14, 2023, after completion of the pro-rata allocation of Common Shares in respect of the oversubscription privilege and receipt of all shareholder payments.

IGR is not a portfolio position, but some of our members do own this fund and Nick has previously covered this ticker for us here: IGR: Global Real Estate Fund Looking Attractive ( public link ).

This was a transferable 1-for-5 offering with a very simple subscription formula: 95% of the average closing market price of the fund in the final 5 days of the offering. What this meant is that no matter the discount of the fund at expiry, it would have always been economically beneficial to subscribe rather than not subscribe. The fund also had an over-subscription privilege which could further increase the offering by 25% at the manager's discretion, allowing them to increase share count by 25% rather than the maximum of 20% in the primary offering.

Offering oversubscribed, -3.5% NAV hit

As expected, it turned out that the offering was oversubscribed, however, the fund chose not to exercise its oversubscription privilege, which is probably a good thing for shareholders as it limited the NAV/share. Hence, the fund will increase its share count by 20% rather than 25%, if it had fully exercised its over-subscription privilege.

The final subscription price was $5.03 per share, representing 95% of the average closing price of the fund in the final 5 days until expiry. On the expiry day of April 6, 2023, IGR closed at a share price of $5.36 and a NAV of $6.35, representing a -15.59% discount. Hence, the subscription price represented a -20.79% discount to the closing NAV of IGR.

Unfortunately, such a large discount to NAV also means a large extent of dilution. This NAV/share dilution affects all shareholders, but investors can compensate for the dilution by subscribing for discounted shares, or else selling the rights on the open market (hopefully, no one allowed their rights to expire worthless!). A back-of-the-envelop calculation suggests the NAV/share hit to be -$0.22/share or -3.46%. This NAV adjustment likely took place on April 14, 2023 when the new shares were issued to investors, with the NAV dropping by -$0.30/share or -4.72% on a single day. For reference, the benchmark iShares Global REIT ETF ( REET ) declined by -1.18% that day, which accounts for the remainder of the NAV change.

Sell and rebuy works again

Overall, our suggestion to "sell and rebuy" IGR to sidestep its rights offering was proven to be correct once again:

As usual, our suggestion for those holding IGR would be to sell before the ex-rights date, and buy back after. This is especially the case for IGR which is trading at a narrower discount than its long-term averages. The 1, 3 and 5-year average discounts for IGR are -5.00%, -9.78% and -10.95% respectively. History has shown that CEFs generally suffer negative price pressure during the offering period, which is logical because there will be an imminent new supply of discounted shares available. We have previously observed that in nearly all cases, selling and rebuying a CEF undergoing a rights offering is superior to subscribing for slightly discounted shares (tax issues not considered).

We can see that thanks to IGR's expanding discount over the rights offering, its share price has significantly underperformed its NAV over this time period. As a result, selling and rebuying IGR to gain over +25% "free shares" of IGR would have generated a significantly better result than holding through the offering to subscribe for slightly discounted shares.

Going forward

Going forward, CBRE Global Real Estate Income Fund's current discount of -13.38% makes it more attractive to buy now compared to the tight discount that it was trading at before the rights offering (note: this is why it pays to pay attention to CEF corporate actions!). The 1, 3 and 5-year average discounts are -5.64%, -9.56% and -10.91% respectively, and the current 1-year z-score is -2.17. While we're not looking to add this position to our portfolios, this could be an attractive entry point for those looking for global REIT exposure.

However, it should be noted that CBRE Global Real Estate Income Fund distribution stability has been weakened by around -3.5% by the dilutive share offering.

For further details see: