Case study of failed reit

[Greenrookie]

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.

Thanks muck,

the scary thing after digging out the numbers is, in a event whereby banks themselves are in trouble (or hesitant to lend), no numbers offer safety, except perhaps a big sponsor that is strong and with a big stake.

Look at the numbers, and working backwards, they have total assets of about 500 million, if properties are able to sold at 90% valuation, that will be 450 million - liabilitiles 224 million, that will be 276 million left. minus off the admin cost, it is still better to liquid the company. (They will get back far more than market price) people were taking about getting nothing back... that means they are talking about fire-sale of only 50-60% of valuation of properties. (Due to the GFC situation, and the fear, maybe no one will buy even at 80% discount??) Maybe they are projecting the operating falls in revenue (like what nick points out, but at the year where they are going through the restructuring, there is no fall in NPI, and valuation fall is really insignificant, 1-5% and some properties had gains in their valuation, except the last one which had an 20% drop in value)
If price is 20 cents, rights issue will be as diliutive as the Aims offer anyway, no wonder the shareholder LL(pardon my language.. )

My moral of story??? I think we cannot expect market mechanism to work properly in crisis, numbers like properties values, etc, cannot be discounted enough... No wonder those who are rich can get richer during crisis, imagine, the banks took over and selll at 60% discount, I am sure there will be buyers laughing all the way to the banks
Me? Always have a war chest to scope during a crisis, dun over invest during "normal times", secruity can be deceving.

[swakoo]

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.

Prudent reits can spread out their debt maturity and refinancing profile so that the debt to refinance in any one year is equal to or less than the annual distributable income. In this way, in time of difficulties, instead of distributing the income, it can instead be used to pay off that year's debt to refinance.

There is nothing in the regulations that prevent this from being done. This implies of course that the reit probably needs to have a relatively modest gearing level, which is also a marker of a prudent reit. And higher interest expense due to longer maturities to offset the lowering of risks. But it can be done if the reit manager is prudent.

An example of a reit doing this has been mentioned before at previous posting http://www.valuebuddies.com/thread-422-p...l#pid45327

[KopiKat]

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.

Prudent reits can spread out their debt maturity and refinancing profile so that the debt to refinance in any one year is equal to or less than the annual distributable income. In this way, in time of difficulties, instead of distributing the income, it can instead be used to pay off that year's debt to refinance.

There is nothing in the regulations that prevent this from being done. This implies of course that the reit probably needs to have a relatively modest gearing level, which is also a marker of a prudent reit. And higher interest expense due to longer maturities to offset the lowering of risks. But it can be done if the reit manager is prudent.

An example of a reit doing this has been mentioned before at previous posting http://www.valuebuddies.com/thread-422-p...l#pid45327

If A-REIT were to do that, does it mean they'd suffer the "penalty" of having to pay tax for their earnings for that year?

[cfa]

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.

Prudent reits can spread out their debt maturity and refinancing profile so that the debt to refinance in any one year is equal to or less than the annual distributable income. In this way, in time of difficulties, instead of distributing the income, it can instead be used to pay off that year's debt to refinance.

There is nothing in the regulations that prevent this from being done. This implies of course that the reit probably needs to have a relatively modest gearing level, which is also a marker of a prudent reit. And higher interest expense due to longer maturities to offset the lowering of risks. But it can be done if the reit manager is prudent.

An example of a reit doing this has been mentioned before at previous posting http://www.valuebuddies.com/thread-422-p...l#pid45327

Is there a regulation that reit must payout at least 90% of the distributable income ?
90% payout is just to qualify for the tax incentive, but not a compulsion.

[swakoo]

If A-REIT were to do that, does it mean they'd suffer the "penalty" of having to pay tax for their earnings for that year?

They would in effect be using gross rental income to pay off the debt due (which is a cost of operation) as well as other expenses before it even turns into distributable income. So guess no but I am not a tax expert.

---

Is there a regulation that reit must payout at least 90% of the distributable income ?
90% payout is just to qualify for the tax incentive, but not a compulsion.

Yes it is compulsory under the regulations, in order to be listed as a reit and enjoy tax exemption.

[KopiKat]

If A-REIT were to do that, does it mean they'd suffer the "penalty" of having to pay tax for their earnings for that year?

They would in effect be using gross rental income to pay off the debt due (which is a cost of operation) as well as other expenses before it even turns into distributable income. So guess no but I am not a tax expert.

Hmm.. you must be assuming that at the PBT level, it'd be zero anyway and it doesn't matter whether they'd be taxed or not. Not a tax expert either but I think Debt repayment wouldn't qualify as an Expense and is likely still taxable.

I was also looking thro' your other A-REIT presentations (for Dec-12) link (Lazy to check latest ones for Jun-13), At the NPI level, what you said is true ie. enough to pay for any 1 year of debts due (none more than $400Mil). But, looking at 'Amount Available for Distribution' (pg9), it's not true ($281.7m for FY11/12). Further, if they do have to pay tax (plus assuming what I think is true that Debt Repayment is not considered a tax deductible expense), the amount available will be lower. So, not exactly enough... but yes, it'd still be better than many other REITs...

[swakoo]

Hmm.. you must be assuming that at the PBT level, it'd be zero anyway and it doesn't matter whether they'd be taxed or not. Not a tax expert either but I think Debt repayment wouldn't qualify as an Expense and is likely still taxable.

I was also looking thro' your other A-REIT presentations (for Dec-12) link (Lazy to check latest ones for Jun-13), At the NPI level, what you said is true ie. enough to pay for any 1 year of debts due (none more than $400Mil). But, looking at 'Amount Available for Distribution' (pg9), it's not true ($281.7m for FY11/12). Further, if they do have to pay tax (plus assuming what I think is true that Debt Repayment is not considered a tax deductible expense), the amount available will be lower. So, not exactly enough... but yes, it'd still be better than many other REITs...

Notice that interest expense and other borrowing costs are deducted from income before tax is applied (pg 6) but again am no tax expert.

If we annualise 3Q FY12/13 distributable income, it's about $320 mil. Still not 400 but should adequately cover most years of refinancing except 2.

[freedom]

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.

Prudent reits can spread out their debt maturity and refinancing profile so that the debt to refinance in any one year is equal to or less than the annual distributable income. In this way, in time of difficulties, instead of distributing the income, it can instead be used to pay off that year's debt to refinance.

There is nothing in the regulations that prevent this from being done. This implies of course that the reit probably needs to have a relatively modest gearing level, which is also a marker of a prudent reit. And higher interest expense due to longer maturities to offset the lowering of risks. But it can be done if the reit manager is prudent.

An example of a reit doing this has been mentioned before at previous posting http://www.valuebuddies.com/thread-422-p...l#pid45327

in that case, A REIT will not operate as a REIT to enjoy tax incentives, more like a business trust or ordinary company.

[KopiKat]

Hmm.. you must be assuming that at the PBT level, it'd be zero anyway and it doesn't matter whether they'd be taxed or not. Not a tax expert either but I think Debt repayment wouldn't qualify as an Expense and is likely still taxable.

I was also looking thro' your other A-REIT presentations (for Dec-12) link (Lazy to check latest ones for Jun-13), At the NPI level, what you said is true ie. enough to pay for any 1 year of debts due (none more than $400Mil). But, looking at 'Amount Available for Distribution' (pg9), it's not true ($281.7m for FY11/12). Further, if they do have to pay tax (plus assuming what I think is true that Debt Repayment is not considered a tax deductible expense), the amount available will be lower. So, not exactly enough... but yes, it'd still be better than many other REITs...

Notice that interest expense and other borrowing costs are deducted from income before tax is applied (pg 6) but again am no tax expert.

If we annualise 3Q FY12/13 distributable income, it's about $320 mil. Still not 400 but should adequately cover most years of refinancing except 2.

It goes back to my original question of whether this $320m will be taxed at the Corporate Tax rate of (17% ?). If yes, then there'll be larger amount of shortfalls. Not perfect, but still better than most, I guess.