Case study of failed reit

[felixleong]

btw, why doesn't warren buffett invest in reits???

[Drizzt]

generally when you buy a property or buy a house for investment, usually you would take the cash flow and use it to slowly repay your debt.

But when investors purchase reits, its never about paying down debt
reits is all about growing net asset value and taking on more debt to grow DPU

as such reits is actually an asset class that is a lot riskier than what most common investors perceived

that's why banks will glady lend you $$ for 30 years to buy a house, but they will never lend to reits for that long i guess ^^

Felix, in a well meaning operator of a business trust, that may happen. REITs is really a very restrictive structure that as you said you cannot pay off. then again thats the problem. the cash flow may not be that strong compare to ships or toll roads that you can pay off yet provide a decent yield.

The US have many trusts that show they can do it.

[tonyking]

btw, why doesn't warren buffett invest in reits???

I would speculate that Warren Buffett's investing style is in the management team of the businesses, thus he focus more on great businesses with its great management team intact. Thus REIT's management are often screwed against investors, in that REIT's mgmt. team's aim is to leverage & leverage to take over more & more assets, so that they could charge higher fees via e same % but over larger assets worth. This is often at the expanse of investors, as any adverse developments (such as interest rate rise), REIT's mgmt. will only ask investors to cough up or sell cheaply (by then it will fall to be cheap) to any1 that will buy, so that e same REIT mgmt. charge a bonus for "successful exit" of businesses.

Tat's just my view... some REITs mgmt. are gd, they really seek to find good value assets that are yield accretive & plan to have sufficient leverage chips available, but still they earn more if they manage bigger assets. Tat's y Macquarie Int.Infra REIT in the end decided to sell off all businesses, as e internal review concluded that e interests of its mgmt. & investors are in conflict.

[Drizzt]

Cut the dividends to repay debt as capital management is the last thing "Top Management" wants to do. They know that once they do that it will be punished by the Market. And they definitely worry about whether Company can ask for new capital from the public investors in future by rights issue.
i think they would prefer to risk to ask for new capital by rights issue or debt instruments from anyone willing to lend.

the point is not to cut dividends to repay debt, rather than having an option to cut dividends to repay debt.

The problem with REITs is that they don't even have such option open...

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I think if we talk about extraordinary event like the GFC or likes in the future, companies generally are still safer proposition, u can easily find company with very little debt or net cash, but you won't find a REIT that is not geared, thou lippo with its many rights issues which to have gearing of below. 10percent. Granted, cash can burnt really fast, but a solid company can close down branches, become lean and survive to fight another day.

Reits does not have the option of paring down debts. When a company pay down debt, it's a good thing, if reits lower debt, throu rights or sale of assets, they usually get punished big time.

While dividend cut or stop by companies to conserve cash will incur the wrath of investors , I think investors will still prefer that then what happen to MI, super dilution by a Coporate raider/ whit knight depending who u are.

But, dun think you can find a net cash company with a solid business giving u a yield of 8 percent, except during a bad bear market.

why have to be 8%? 8% is absolutely extraordinary for well managed and well capitalized company.

If 8% is what you desire, by all means, wait for the next crisis. However, it might not happen in another 5 or 10 years.

Ya like that too restrictive lah, sgx so small how many one can find. Maybe should ask why need to be well managed, why need to be well capitalized and why need so much dividends? IMO value investors no need to buy like going for beauty campaign ...

It's about comparisons, there are a number of smaller industrial reits giving 8% yield. The spread between that and blue chips dividend companies is the extra risks that go with it. Wether 8 % fully compensate the risks is everyone call. But there is no free lunch. U want 8 or more yield now, your choices are limited. I dun think all reits yielding 8 % are bad buys even if you Acc for interest rises, weak sponsors and the likes. But it's definitely not a long term companies that warren speak about, where u but and go to sleep, and wakes up 10 years later, and voila, I have a multi baggers. Do invest in reits h need to keep both eyes open... That's why the intention o starting this thread, to understand the true risks of investing in reits in worst case screnario ... :p

Isn't that like uncomparable, between industrial reits and a blue chip company, based on dividend yield alone. They are quite likely to be very different business wise, accounting wise and probable total shareholder return wise. I dun think its just the spread. The entire 8% dividend and mkt cap is subjected to different risk and potential growth as compared to a blue chip's. For example, doesn't the yield for industrial reits contain a portion representing return of capital to shareholders? (I'm not familiar with reits so may be totally wrong...)

theoratically yes. part of it is a return of capital.

if you take a normal business, say kingsmen at 70 cent that pays 4 cents for 5.7%. its dep is matched by capex. Theoratically it can go forever. ditto starhub.

for business like ships, toll roads, buildings, they look like a return of capital + returns cause all cash flow is return to you.

as an investor, you have to differentiate that and have to think if the business can reinvest for you or you do it yourself.

the advantage of them doing it for u is that they can leverage first then pay off debt which as an individual you couldnt.

given the same thing i suppose each have its pros and cons. kingsmen and starhub is not a continous businesses. 30 years later they may not exist. but at least for a ship, you know how long you can milk it.

that is why these look like an equity bond (although bond you get your capital back 100% at the end of duration, this you get 0)

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btw, why doesn't warren buffett invest in reits???

felix i am sure if reits get mispriced enough, especially good managers like REality income (ticker:o) buffett will be in.

he does like cash flow generating things like utilities. but i think he wont in REITs, for a fundamental reason is that he doesnt want to pay out the div. as his utilities, he can capital allocate, take the cash flow pay off the debt. doubt you can do that in a reit.

[starbugs]

Ha, I was just talking about MacarthurCook and Saizen two days ago in the SoilBuild Reit forum at sgtalk.

[smallcaps]

everything else being equal, being a company, has the flexibility to cut dividends and repay the debt, that's the real capital management. not keeping rolling over the debt or incurring more debt, praying that every refinance will be successful.

REIT inherently is a bad capital structure everything else being equal. It's unbalanced by distributing 90% of income required by regulations to be tax efficient, but not being ensured to be able to refinance in the time of difficulties by regulations.

Cut the dividends to repay debt as capital management is the last thing "Top Management" wants to do. They know that once they do that it will be punished by the Market. And they definitely worry about whether Company can ask for new capital from the public investors in future by rights issue.
i think they would prefer to risk to ask for new capital by rights issue or debt instruments from anyone willing to lend.

the point is not to cut dividends to repay debt, rather than having an option to cut dividends to repay debt.

The problem with REITs is that they don't even have such option open...

---

I think if we talk about extraordinary event like the GFC or likes in the future, companies generally are still safer proposition, u can easily find company with very little debt or net cash, but you won't find a REIT that is not geared, thou lippo with its many rights issues which to have gearing of below. 10percent. Granted, cash can burnt really fast, but a solid company can close down branches, become lean and survive to fight another day.

Reits does not have the option of paring down debts. When a company pay down debt, it's a good thing, if reits lower debt, throu rights or sale of assets, they usually get punished big time.

While dividend cut or stop by companies to conserve cash will incur the wrath of investors , I think investors will still prefer that then what happen to MI, super dilution by a Coporate raider/ whit knight depending who u are.

But, dun think you can find a net cash company with a solid business giving u a yield of 8 percent, except during a bad bear market.

why have to be 8%? 8% is absolutely extraordinary for well managed and well capitalized company.

If 8% is what you desire, by all means, wait for the next crisis. However, it might not happen in another 5 or 10 years.

Ya like that too restrictive lah, sgx so small how many one can find. Maybe should ask why need to be well managed, why need to be well capitalized and why need so much dividends? IMO value investors no need to buy like going for beauty campaign ...

The wonderful thing about Value Investing is, there're many variations... If we were to follow the Buffett approach, it means waiting for the perfect pitch before swinging your bat and having a punch card that limits the number of trades in your lifetime. In such an approach, yes, it's rather restrictive and you'd need patience... most likely, more options only become available during major crisis.

However, in modern times, we also have what I'd term as the 'Fund Manager' approach (Peter Lynch, Seth Klarman, Joel Greenblatt,...) to Value Investing. Altho' it follows the original Graham teachings of 'Intrinsic Value' & 'Margin of Safety' plus long term investing, it allows for a lot more swings of the bat and a punch card with a lot more holes....

So, ya, take your pick, no restrictions... Choose one that best suits you and test out your own combo / variations...

Ya but I dun think a perfect pitch requires a perfect company, more of like a perfect investment instead. It juz need a high probability of eventually earning high return adjusted for temporal risk.

[cfa]

During the AFC , only the highly gear reits were in trouble .

[KopiKat]

During the AFC , only the highly gear reits were in trouble .

AFC was in '97 while CMT, the first SREIT was listed in Jul-02. Perhaps GFC in '08?

What's well documented was, the bigger problem faced by SREITs during GFC were not due to the gearing, but rather the use of Short Term debts instruments like CMBS. When debts were due, banks were hesitant to renew and many had to resort to value destructive rights issues. That's why nowadays, the use of MTNs, usually spread over 3-5 years is more common for SREITs.

[Nick]

I think investors should also pay attention to operational risks which could take place in long drawn out recession - falling occupancies, rental rates tapering, difficulty in finding new tenants or renewing leases, tenants defaulting etc. Hence we shouldn't assume that the REIT revenue will be constant throughout the years. I guess the skill of the property management team will be a huge factor here. I am not saying this will definitely occur during a recession - but it could happen. Personally, I thought the SREITs managed their properties' operations pretty well during the GFC.

[Muck]

macarhur cook industrial reit is a casualty of the great financial crisis. the reit was loaded with debt and unable to refinance when the debt was due.

if it happened in current environment, it should work out fine for it.

Thank you freedom, hmm...

then the second qn, given the max a reit can gear is 60%, a 1 for 1 rights issue (even if price is traded at 60% of NAV, but shouldn't be so bad right) while dilutive should have solve the problem isn't it? 50% dilution... but what i read is dilution of more than 80%...

Hmm.... existing shareholders no money??? Thats why AIM finance has a chance to raid???

Or is my line of thinking not making sense at all

This is how bad the numbers looked at the time...
As at end Mar 2009 (Source: Annual Report 2009)
- Total borrowings: S$224.4m
- Net Assets attributable to unitholders: S$289.1m
- Market Cap: S$60.2m (261.7m units @23 cents)

It's S$220m facility with National Australia Bank and Commonwealth Bank was due to expire on 18 April 2009 (Source: MI-REIT News Release 22 Oct 2008). The debt facility of S$201m (not sure why the numbers don't tally) was later extended to 31 Dec 2009 (Source: The Edge, 3 June 2009)

On top of this was an existing conditional put and call agreement to acquire Plot 4A, International Business Park, from Eurochem Corporation for a total consideration of S$91.0 million in a sale and leaseback arrangement. The agreement was to be settled in Dec 2009, and MI-REIT had not managed to source the funds for this even as late as June 2009. (Source: The Edge, 3 June 2009)

Moody's upgrades/downgrades of MI-REIT's corporate family rating (Sources: MI-REIT News Release 26 Nov 08; The Edge 3 Jun 2009; Global Credit Research 28 Dec 2009)
On 26 Nov 2008 - Downgraded to Ba2.
On 3 June 2009 - Downgraded to Caa1.
28 Dec 2009 - Upgraded to Ba2.