Case study of failed reit

[Greenrookie]

At the end of the day, there is just so much that a strong sponsor can do. It is risky to assume that a strong sponsor is equivalent to the REIT/company being safe. If a REIT has taken on too much leverage using aggressive property valuation, rights issue is still unavoidable. If you have chosen to go for that extra 50 bp of yield that comes about with riskier debt profile, then you should be prepared for what might happen. There is no free lunch in the world, though there might exist occasion where there is some mispricing.

Olam, CMT, DBS did not escape rights issuance when crisis hits.

You can have similar sponsor but very different level of management.
For e.g. compare the debt profile of CMT and CRCT as well as MLT and MIT. (the difference was much more drastic at end 2012 than at the moment)
Even First REIT and LMIR have achieved very different kind of returns despite sharing the same parentage to the Lippo Family.

2013
http://capitamall.listedcompany.com/news...29BA.1.pdf slide 23
http://crct.listedcompany.com/newsroom/2...9B99.1.pdf slide 25
http://www.mapletreeindustrialtrust.com/...eeting.pdf slide 32
http://www.mapletreelogisticstrust.com/d..._Final.pdf slide 14

2012
http://capitamall.listedcompany.com/news...DC82.1.pdf slide 15
http://crct.listedcompany.com/newsroom/2...83FE.1.pdf slide 22
http://www.mapletreeindustrialtrust.com/...eeting.pdf slide 24
http://www.mapletreelogisticstrust.com/d...-Final.pdf slide 16

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Hi Buddies,

I tried google about macauthercook industrial reits and all the info i can find are regarding the rights issues, the recap plan, etc.

I am actually trying to look for info earlier, why/how did it get into trouble? Or is it the Parent company that got into trouble, and cause the trouble to rollover to the reit?

Appreciate any links, any info any buddies might have? If it is the parent company that is in trouble, and hence the manager, why is there a need for such value destructing exercises?

Since the trustee hold the assets of the reits, and as far as I know, trustee and the sponsor/ parent company are separate identities, the how can the troubles of parents (to the extend of the stake of ownership) lead to almost insolency??

Any info on failed reit also appreciated. Trying to use these as case studies to further my knowledge and risk assessments of reits.

Moody's downgrades MI-REIT to Caa1; outlook negative
1219 words
3 June 2009
Moody's Investors Service Press Release
MOODPR
English
© 2009

Moody's Investors Service has downgraded MI-REIT's corporate family rating to Caa1 from B2. The outlook is negative.
This concludes the rating review extended on April 1, 2009.
"The downgrade reflects heightened financing pressure facing MI-REIT as a result of its funding requirement to complete its S$91 million acquisition of 4A International Business Park ("IBP") by 4Q09," says Kathleen Lee, a Moody's VP/Senior Analyst.

"The timing for securing this funding remains uncertain while the value of this asset has fallen by SGD20 million or 22%," adds Lee.
While Moody's notes that MI-REIT's S$201 million bank loan due 16 June, 2009, has been granted a 6-month extension to 31 December 2009, the loan extension also includes an event of default should MI-REIT fail to settle the 4A IBP acquisition in 4Q09. This bank loan represents 91% of MI-REIT's total debt obligations.

MI-REIT faces strained financial flexibility as all its assets are encumbered, its banking relationships are limited, while it also lacks a strong sponsor. As a result, there is substantial near-term uncertainty as to whether it will be able to secure new funding to settle the asset acquisition.

The negative outlook reflects the high level of uncertainty over the trust's ability to fully address its financing/refinancing requirements by 4Q09.

The rating could be further downgraded if MI-REIT fails to make material progress in securing definitive financing for its asset acquisition and debt maturities over the next 3-6 months.

On the other hand, the rating may experience upward pressure if MI-REIT is able to substantially address its funding needs or recapitalize its balance sheet.

The last rating action was on 1 April, 2009, when MI-REIT's rating was downgraded to B2 and Moody's continued its review for further possible downgrade.

Headquartered in Singapore, MI-REIT is a real estate investment trust ("REIT") that owns and invests in a portfolio of industrial properties. The REIT reported investment property assets of approximately S$530 million as at 31 March 2009.

Thank you very much shanrui91, for your wealth of info and sharing

[Temperament]

Not only REITS, any company may ask for new capital by rights issue. At least retail investors still have a chance to decide to subscribe or not. In fact i always think every right issue is an opportunity for me to evaluate whether the company is worth to continue to be invested. Of course nobody can be 100% sure.
The worst case is private placement by issuing bonds convertible to shares in the future to institutions. Then even the company is worth to be continued invested, your share holdings in future, are most probably being diluted liu!

[Stocker]

Why these analysts always talk as if only reits need to refinance its borrowings ?

[Greenrookie]

Actually Macauthur Industrial reit gearing is only about 38% in the late 2008, and due to lower valuation of properties (NOt significant actually, except for the last fateful acquisition of 4A International Business Park which fall 20% in value), but gearing only slightly increased to about 41%.

Only 41%, and it exploded... (scary )

Of course, there is debt concentration on a single source and refinacing on a single date, these 2 points are already addressed by reits, most have multiple sources of loans and are spread out.

But... unencumbered properties?? Their properties are encumbered, hence all the loans are secured loans before the reit exploded, and the income generating properties did not register any fall in NPI, so what are the banks afraid of ??? Stop the financing, maybe the strength of the banks is important too...

[HitandRun]

Greenrookie

If memory serves me correctly, MacarthurCook REIT didn't really blow up as in letter of demands, etc. were served to wind up the company or there were sales of distressed assets.

Do allow me to quote from AIMS website:

"MacarthurCook's fund management business was severely distressed with each of the 4 listed funds and a number of unlisted funds being starved of capital and highly leveraged with asset values decreasing."

The problem started in the parent company but had not spread to the REIT, at least not yet. I don't think that the REIT itself was in danger of imploding at that point in time although gearing was a little high. The situation could be similar to that in Forterra Trust.

So the original owners of MacarthurCook fund management decided to sell out to the AIMS group which of course took the opportunity to screw other MI shareholders in the REIT round and proper.

Based on my chats with some folks from JLW, REIT valuations turned more conservative post the GFC. The variable I remembered is that the discount rate was increased by 1-2% to 7% to 8%. My 2 cents worth.

[freedom]

But... unencumbered properties?? Their properties are encumbered, hence all the loans are secured loans before the reit exploded, and the income generating properties did not register any fall in NPI, so what are the banks afraid of ??? Stop the financing, maybe the strength of the banks is important too...

NPI was used to pay interest expense and distribution, not for repayment of debt. and NPI is really small compared to debt, so eliminating distribution does not help much.

And the valuation was perceived to continue to fall.

If you were a bank, are you willing to lend? at what price? at what LTV?

The REITs are structurally flawed with 90% of cash flow as distribution, but at crisis, they are not ensured viability. They are always subject to refinancing and valuation risk.

[Greenrookie]

But... unencumbered properties?? Their properties are encumbered, hence all the loans are secured loans before the reit exploded, and the income generating properties did not register any fall in NPI, so what are the banks afraid of ??? Stop the financing, maybe the strength of the banks is important too...

NPI was used to pay interest expense and distribution, not for repayment of debt. and NPI is really small compared to debt, so eliminating distribution does not help much.

And the valuation was perceived to continue to fall.

If you were a bank, are you willing to lend? at what price? at what LTV?

The REITs are structurally flawed with 90% of cash flow as distribution, but at crisis, they are not ensured viability. They are always subject to refinancing and valuation risk.

But the underlying properties are pledge as collaterals, and the assets are still generating decent cash flow, so the valuation should be too far off, what is the risk of default when u can recover the loan from the buildings?

[freedom]

But the underlying properties are pledge as collaterals, and the assets are still generating decent cash flow, so the valuation should be too far off, what is the risk of default when u can recover the loan from the buildings?

As I mentioned before, cash flow is used to pay interest expense and distribution. it is not for repayment of debt.

Assuming that the REIT exists til the day the properties lease ends, what would be left for the banks? NOTHING. All the cash flow goes to interest expense and distribution. In the longer term, banks won't be prudent to lend against such properties and such structure.

This is very similar to subprime lending or interest only mortgage.

[Greenrookie]

Thank you buddies,

For your sharing, I think it really opened up a lot of perspectives from the "mountain tortoise" in me. I think I will look at reits very differently now, I still think its still a cool investment, but all the nagging questions about loans, sponsor, gearing rate, creditors, land lease make more sense now, I will validate it more comprehensively now, I hope. Thank you !

[AlphaQuant]

But the underlying properties are pledge as collaterals, and the assets are still generating decent cash flow, so the valuation should be too far off, what is the risk of default when u can recover the loan from the buildings?

The GFC was an exceptional period. The Libor-OIS spread exploded (which is a measure of the rate banks were willing to lend to each other vs the overnight parking rate at the central banks) when in the past it was essentially 0. Most of the traders' books had to be remarked simply cos the discount rate for different counterparties had to be changed whereas essentially a flat curve was used in the past.

Basically, banks were reluctant to lend to other banks simply since they are not sure what other rubbish are on their books. Afterall, if Lehmans can go down, who else can't? Simply put, credit dried up and banks were more concerned about keeping all their cash i/o lending - it was all about self-preservation + shoring up capital. So it does not matter whether the REIT had good assets during the GFC (anyway there are plenty of other distressed blokes with better assets than MacArt during that period) - the primal instinct was to cease lending and shore up the balance sheets.

Moral of the story: Never put yourself in a position where you might NEED help cos noone can be trusted to help you.