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27-11-2017, 05:51 PM
REITs are pretty much a "take it or leave it" investment case. This is mainly due to the special features of the REIT structure, namely the requirement to distribute most of the cash earnings to the unitholders, the need to obtain unitholder approval to change the fee structure, and the underlying assets being real estate which has a low return on capital.
This means that a change of control via an acquisition of a large minority stake is normally uneconomic: most of the cash is leaked to OPMI, you can't increase your fees without OPMI approval, and you can't juice up returns sufficiently because the underlying assets are low-return.
The effect is that incumbent REIT managers are in an excellent position to abuse unitholders. To date most REIT managers have been careful about the extent of the abuse as they know that if the REIT is punished too hard, it will trade at a large discount and it cannot raise money any more. So usually there is some meat left on the table so that the deal is (eventually) DPU-accretive.
Sabana is perhaps the exception that proves the rule as the deals were extremely DPU-negative over the long term. The abuse has been so large and so sustained that there is little hope of saving the REIT in its current form.
In some ways it resembles the "Dead Man Fund" run by William A. Steadman, described here:
https://longreads.com/2017/11/09/amerito...-steadman/
Essentially Steadman managed the funds so poorly that investors lost almost all their money. He had a captive board of trustees who did nothing while he churned the accounts and destroyed capital. But many investors stayed, because they were dead and couldn't redeem. To make things worse, since the dead investors' accounts were "inactive" they did not get account statements, so heirs didn't even know the accounts existed, and Steadman continued to drain the accounts.
The regulators? The SEC realized something was wrong as early as 1971, but it was only in 2012 that it shut the business down - 15 years after Steadman himself died. His daughter took over in 1998, but she didn't do any better - the funds lost 99% of their value under her watch.
Moral(s) of the story:
1. Principal-agent conflict: if the agent is unethical enough you will lose a lot of money. A Russian proverb made popular by Ronald Reagan: trust but verify.
2. Don't expect the government to protect you. By the time the bad guy is stopped, the damage has been done.
As usual, YMMV.
This means that a change of control via an acquisition of a large minority stake is normally uneconomic: most of the cash is leaked to OPMI, you can't increase your fees without OPMI approval, and you can't juice up returns sufficiently because the underlying assets are low-return.
The effect is that incumbent REIT managers are in an excellent position to abuse unitholders. To date most REIT managers have been careful about the extent of the abuse as they know that if the REIT is punished too hard, it will trade at a large discount and it cannot raise money any more. So usually there is some meat left on the table so that the deal is (eventually) DPU-accretive.
Sabana is perhaps the exception that proves the rule as the deals were extremely DPU-negative over the long term. The abuse has been so large and so sustained that there is little hope of saving the REIT in its current form.
In some ways it resembles the "Dead Man Fund" run by William A. Steadman, described here:
https://longreads.com/2017/11/09/amerito...-steadman/
Essentially Steadman managed the funds so poorly that investors lost almost all their money. He had a captive board of trustees who did nothing while he churned the accounts and destroyed capital. But many investors stayed, because they were dead and couldn't redeem. To make things worse, since the dead investors' accounts were "inactive" they did not get account statements, so heirs didn't even know the accounts existed, and Steadman continued to drain the accounts.
The regulators? The SEC realized something was wrong as early as 1971, but it was only in 2012 that it shut the business down - 15 years after Steadman himself died. His daughter took over in 1998, but she didn't do any better - the funds lost 99% of their value under her watch.
Moral(s) of the story:
1. Principal-agent conflict: if the agent is unethical enough you will lose a lot of money. A Russian proverb made popular by Ronald Reagan: trust but verify.
2. Don't expect the government to protect you. By the time the bad guy is stopped, the damage has been done.
As usual, YMMV.
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I do not give stock tips. So please do not ask, because you shall not receive.
I do not give stock tips. So please do not ask, because you shall not receive.
