Analysing REITS

[Qiaofeng]

Interesting report by CIMB (with special focus on their leverage and risks),

http://www.remisiers.org/cms_images/rese....11_OW.pdf

I dowloaded a copy and upload below as the reports at remisiers.org are removed after a couple of weeks,

Cheers all...

Most important part of the report is 2.2 on Banks' covenants.
Looks clear.

On Sponsors
Among qualitative considerations, the financial strength of sponsors is one of the most important, and pivotal in deciding banks covenants with the respective REITs. Recent announcements from a number of REITS after their 3Q results show that almost all the REITs under our coverage would need to repay more than 50% of their loans if their sponsors cease to own the REIT managers, and/or cease to be significant shareholders of the REIT units. Interestingly, AREIT has the lowest portion of loans at risk at only 10%.

On Covenants
We did not find any particularly demanding conditions. Generic conditions include adhering to the 60% asset leverage limit, and maintaining interest cover ratios at 1.5-2x, and LTV ratios of 60-80% for secured bank loans. None of the REITs is anywhere near breaching these covenants with their key metrics well covered beyond what is required by debt covenants.

[Musicwhiz]

Business Times - 18 Nov 2011

Reits cash calls looking more likely: CIMB

K-Reit, FCOT, ART, Suntec Reit on list; it keeps overweight call on sector

By EMILYN YAP

REAL estate investment trusts (Reits), many of which relied on rights issues or private placements to boost their balance sheets during the last financial crisis, may have to go down the same path again as the economic outlook dims.

In a report yesterday, CIMB identified K-Reit Asia, Frasers Commercial Trust (FCOT), Ascott Residence Trust (ART) and Suntec Reit as those likely to engage in equity fundraising in the near future. 'The first signs of more cash calls to come have surfaced,' said analysts Janice Ding and Tan Siew Ling.

The Reit industry is stronger than it was three years ago, they stressed. Across the sector, the proportion of short-term debt to total debt stood at 8 per cent in September, much lower than the 38 per cent in June 2008.

With reduced pressure from short term liabilities, Reits are less likely to rush into cash calls, even if the industry's average gearing did climb to 36 per cent (from 34 per cent in 2008).

But some Reits - especially those in the office sector - could be vulnerable to asset devaluation as a downturn looms.

Lower property values push up gearing ratios, and that could be more taxing on some Reits than others. According to CIMB data, K-Reit, ART and Suntec Reit had gearings of 42 per cent, 41 per cent and 42 per cent respectively at end-Sept.

Its analysts believe that the risk of a cash call is greatest for K-Reit. Its aggregate leverage remains high despite a recent rights issue to fund the purchase of Ocean Financial Centre, and 20 per cent of its debt is due for refinancing next year.

They noted that ART also has a high leverage and its European assets could see a devaluation.

But there is a smaller chance of a near-term cash call if it divests Somerset Grand Cairnhill, which has provisional approval for redevelopment into a residential and hotel project.

Suntec Reit, which also has high leverage, faces headwinds in the office sector, Ms Tan and Ms Ding said. But it may not need a cash call until it is ready to acquire Phase 2 of Marina Bay Financial Centre and its capital expenditure needs could be partly met by proceeds from selling Chijmes.

They also picked FCOT as a potential candidate for equity fundraising, given its fairly high leverage of 37 per cent and low interest coverage ratio. In addition, all of its debt is maturing next year. But it could divest KeyPoint and refinance its debt at lower interest rates.

Risks of cash calls aside, CIMB believes that Reits are still safe, maintaining its 'overweight' call on the sector.

[Contrarian]

Good article to wake up the MAS

LETTER TO THE EDITOR

Tie Reit managers' pay to DPU, valuations

AS a Reit investor, I am in full agreement with the well written and timely commentary by Wong Wei Kong 'Don't let Reits be the next wave of governance issues' (BT, Nov 15). The current code on collective investment schemes under MAS (Monetary Authority of Singapore), which regulates Reits, is not robust enough to prevent unscrupulous Reits from taking advantage of minority shareholders.

The major culprit is the incentive system for Reits which does not always align with shareholder interests. Reit managers are compensated based on value of assets and a per cent of the net property income (NPI) and gross revenues of the underlying assets. On top of this, they also get one per cent in acquisition fees even when assets are acquired from the sponsor. All of this encourages Reit managers to look for big acquisitions to increase their fees rather than looking for value creating acquisitions. However, unlike Reit managers, shareholders do not simply benefit because of a bigger asset size.

They only benefit if, post-acquisition, the distribution per unit (DPU) increases without the Reit price/valuations falling. Marginal DPU accretions are not meaningful as market prices, amid the increased risk (especially in an uncertain environment) of high cost acquisitions and/or higher leverage, lead to reduced valuations - which negate any future DPU increases.

Thus, the Reit manager gains at the expense of shareholders. Many Singapore Reits have high-quality assets with strong earning power which make good long-term investments. However, all this can come to naught if Reit managers are perceived to be behaving irresponsibly and trying to take shareholders for a ride.

I urge MAS to proactively review the incentive system for Reits and align it with shareholder interests before the whole sector gets tarnished by the actions of a few. My suggestion would be for Reit managers to get paid based on a combination of growth in DPU and market valuations of the Reit. This will align their interest with shareholders.

[Nick]

The closest example to the proposed fee model is MIIF where Management base fees are pegged to this formula -

[ Market Capitalization + Net Debt at Fund Level (or deduct Net Cash at Fund Level) ] x 0.015%

I don't think it has made much difference to shareholders but then again they didn't suffer rights issue hmm. Management fee is low when price is low so less likely for Managers to do something foolish. But then again, market capitalization can be boosted by equity fund raising.

I would think pegging it to the absolute DPU would be a good move and with performance fees tied to market price. Rights/placements have to be DPU accretive or else there will be a reduction in fees since DPU will drop. Cancel the acquisition/divestment fee especially if the asset was from a related party. The only REIT which had maintained annual DPU growth is FCT (6 years) and if we were to include DPU growth (if you had subscribed for rights), First REIT comes to mind. But, will REIT Managers agree to work with such a framework ?

[Jared Seah]

If I am a business owner or business insider with vested interest, I wonder whether I would wake up every day to find new ways or vehicles to help "freeloaders" (shareholders) become rich? Or would I find ways to enrich myself first, then share some of the gains as "tipping" - like the rich give to the valets who park their cars...

Why would I list my company after I have spent years of blood and sweat building it up? Let "freeloaders" share my future profits by buying-in during IPO when all is "safe and well"? Of course the only reason I would do it is...

I am a property owner. Now why would I want to inject my assets into a Trust and list it? Don't I want the rental returns all to myself?
Why a REIT and not issue bonds, preference shares, take on bank debts, etc? I am transferring/spreading risk to ...... and get management fees in return instead of paying intests. Hmm...

If I am a independant REIT manager, why shouldn't I follow Hedge fund managers who set their own rules of compensation? Investors who don't like it can walk away and invest in low cost index funds... I "smart", but the REIT manager not stupid too.

Of course it's nothing wrong to be in a workers' union to demand better pay and benefits from business owners. I belong to the generation of job-hopping Singaporeans in the late 80s and 90s. I prefer to switch companies

[yeokiwi]

If I am a business owner or business insider with vested interest, I wonder whether I would wake up every day to find new ways or vehicles to help "freeloaders" (shareholders) become rich? Or would I find ways to enrich myself first, then share some of the gains as "tipping" - like the rich give to the valets who park their cars...

Why would I list my company after I have spent years of blood and sweat building it up? Let "freeloaders" share my future profits by buying-in during IPO when all is "safe and well"? Of course the only reason I would do it is...

I am a property owner. Now why would I want to inject my assets into a Trust and list it? Don't I want the rental returns all to myself?
Why a REIT and not issue bonds, preference shares, take on bank debts, etc? I am transferring/spreading risk to ...... and get management fees in return instead of paying intests. Hmm...

If I am a independant REIT manager, why shouldn't I follow Hedge fund managers who set their own rules of compensation? Investors who don't like it can walk away and invest in low cost index funds... I "smart", but the REIT manager not stupid too.

Of course it's nothing wrong to be in a workers' union to demand better pay and benefits from business owners. I belong to the generation of job-hopping Singaporeans in the late 80s and 90s. I prefer to switch companies

SGX is the regulator of listed REITs. It has to sort of balancing the needs of both the investors and the listed REITs. The SGX exchange will not want to be known throughout the world for helping the listed REITs to shortchange the investors. On the other hand, if the rules are too strict, it may scare away those that wish to list their properties in SGX.

I am a property owner. Now why would I want to inject my assets into a Trust and list it? Don't I want the rental returns all to myself?

Well, the owner will like to realise the value of their properties. Normally, the stock market gives them the best price.
We always see REITs buying properties but we seldom see REITs selling properties. That shows that the REITs are paying probably the highest price for the acquired properties.
After getting the money from the listing, the owner can reinvest the $$$ for new properties or other investments with higher returns.

[Qiaofeng]

Published November 22, 2011

MAS weighs in on Reit sector debate
By JAMIE LEE


(SINGAPORE) The Monetary Authority of Singapore (MAS) may offer more regulatory guidance to the real estate investment trust (Reit) industry in efforts to boost corporate governance standards, it said yesterday.


MAS did not highlight specific companies but was responding to criticism that current rules governing the Reit sector fail to protect the interests of minority shareholders.

Central to this brewing debate is the $1.57 billion sale of Keppel Land's entire stake in Ocean Financial Centre to K-Reit Asia - a plan that was criticised by shareholders for both the timing and price. The deal was approved but through a show of hands at the shareholders' meeting - a voting system that the Singapore Exchange (SGX) is proposing to ban.

Under a show-of-hands system, each person gets a single vote regardless of the number of shares he holds. The alternative of poll voting gives each shareholder voting rights according to the size of his shareholding.

'The current code on collective investment schemes under MAS, which regulates Reits, is not robust enough to prevent unscrupulous Reits from taking advantage of minority shareholders,' said reader Bobby Jayaraman in a letter to The Business Times on Nov 16.

'The major culprit is the incentive system for Reits, which does not always align with shareholder interests,' he added.

Rather that be compensated based on factors such as the value of assets, net property income and acquisition fees, Reit managers should be paid based on a combination of growth in distribution per unit and market valuation of the Reit, said Mr Jayaraman.

In response, MAS director of communications Angelina Fernandez said in a letter: 'MAS will consider issuing further guidance to the industry as part of our ongoing effort to enhance corporate governance in Reits and other listed entities.'

The regulator reminded companies and boards to uphold high corporate governance standards. 'Corporate governance rules and guidelines cannot envisage all possible circumstances,' Ms Fernandez said.

'When observing such rules and guidelines, companies and their boards must always bear in mind the interests of shareholders or unitholders; and not take an overly technical approach,' she added.

MAS highlighted current rules that are in place to safeguard investor interest when it comes to interested party transactions. For example, transactions that represent at least 5 per cent of the Reit's net asset value are subject to voting by independent unitholders, and two independent valuations have to be obtained - one for the Reit manager, and another for the sponsor.

Limits are also set on the sale and purchase prices, and acquisition fees paid to the manager are in the form of units that can be sold only after a year.


BT
___________________

My Thots....

1) For those who spoke up during the EGM, the efforts did not go to waste, the media picked it up. That generated discussion thru letters to the forum of the biz dailies and has now evoked a response from the MAS.

2) The reply:-
'MAS will consider issuing further guidance to the industry as part of our ongoing effort to enhance corporate governance in Reits and other listed entities.'

3) I hope to see further tweaking of the incentive scheme for Reits and Biz Trusts(which escaped discussion, this round).

4) Reits, as an asset class has been tried and tested out in many global exchanges. For those listed on SGX to stand out and be the " investment choice" of IIs (Institutional Investors), regionally and globally, the standard of corporate governance is of prime importance. As erudite shareholders in a value investing forum, we should not belittle our views and our ability to influence changes to the SGX ecosystem.

5) "They only benefit if, post-acquisition, the distribution per unit (DPU) increases without the Reit price/valuations falling. Marginal DPU accretions are not meaningful as market prices, amid the increased risk (especially in an uncertain environment) of high cost acquisitions and/or higher leverage, lead to reduced valuations - which negate any future DPU increases."


Cheers all.

see blog

[Jared Seah]

Bobby Jayaraman saw through the difference between words written on water - oops paper - and real actions.

http://www.businesstimes.com.sg/sub/view...09,00.html?

Spirit of the law is different from letter of the law...

Self-preservation may be safer than expecting others will bail us out - unless of course you are "too big to fail" - lucky you!

LOL!

[Qiaofeng]

For those interested....

Published November 23, 2011

LETTER TO THE EDITOR
MAS rules do little to align Reit management and shareholder interests


I THANK Angelina Fernandez of the MAS for responding to my suggestions on Reit manager incentives in her letter, 'Rules protect investors' stake in interested party deals in Reits: MAS' (BT, Nov 22).


Most investors are well aware that there are rules such as the ones mentioned in her letter regarding IPT transactions to protect shareholders. However, while these rules look good on paper, in practice they do little to align Reit management and shareholder interests. Let me elaborate on some points raised in the letter:


Independent valuations - these valuations merely summarise the current state of the market and are usually backward looking. They do not take into account potential changes and risks to the commercial property market. A vivid example of this is when CapitaMall Trust acquired Atrium in May 2008, by which time the first tremors of the subprime crisis were already present and well recognised by investors. Yet, the independent valuers ignored the potential risks and gave a peak market valuation of $850 million to Atrium. Three years after, the market valuation of Atrium is significantly less. Bottomline-valuers compensated by the Reit cannot be expected to look after shareholder interests. The stock market is a far better arbiter of valuations.


Voting by unit-holders - in my experience attending AGMs, most unit-holders who come to these meetings are not sophisticated enough to understand the value creating potential of acquisitions. They simply trust the management to do the right thing and can be taken advantage of. Unless voting by poll is made compulsory, this rule has limited use.


Acquisition fees: It does not matter much whether Reit managers are paid in cash or units. The point is that new units issued dilute existing shareholders' stake in the Reit.

The letter states that 'corporate governance rules and guidelines cannot envisage all possible circumstances'. True, but we are talking about a core issue here, which is that the current incentive system does not truly align Reit management and shareholders' interests and unless this is done in a robust way, other peripheral rules have little meaning.

It is worth asking: If Reit managers were paid on the basis of distribution per unit and market valuation growth, would K-Reit have bulldozed its way through the Ocean Financial Centre (OFC) acquisition like they have done?

The day K-Reit announced the OFC acquisition, its stock price fell close to 10 per cent and has continued sliding. Yet, its Reit manager will take home significantly increased management fees while shareholders would have lost a good chunk of their capital even as they bear significantly more risk in the form of higher leverage and potential property devaluations given the uncertain environment.

Bobby Jayaraman
Singapore


______________
See blog

[Qiaofeng]

Self-preservation may be safer than expecting others will bail us out.

I have often used the word SGX ecosystem in my posts--- not for want of a fancy word.
If U look deeply into the nature of things, unless U invest entirely out of the SGX listedcos. U are affected by the SGX ecosystem.

An "ecosystem" implies that the "organisms" in the ecosystem are interlinked and inter-dependent. Minority shareholders, retail shareholders, IIs (Institutional Investors), Majority shareholder, SGX (itself i.e regulatory and non-regulatory components), MAS, Fundmanagers, Reserach Analysts, Brokerages and even the biz media are all interlinked and inter-dependent.

Take away all the plankton, the anchovies and the sharks and whales will die off.

So as U have propounded, nobody owes anybody a "free lunch".

But, if each and everyone of the "organisms" in the ecosystem are acutely aware of their inter-dependence, then they will seek to understand how the ecosystem works and to preserve the "balance".

Bobby Jayaraman, whom was widely quoted at the start of this thread thru his article on Reits, in "Pulses" could be vested in KReitAsia altho he did not speak during the EGM. I have seen him actively speaking at other Reits AGM tho.

His letters to the BT, should, IMHO, be seen as someone with vested interest, seeking to preserve this ecosystem.
One of the key points made in his letters, is that "interests" must be aligned thru appropriate incentives and rules and regulations; w/o which the ecosystem will NOT work. Put simply, the sharks will eat up all the anchovies and whatever.

If U are an "organism" in the ecosystem, self preservation means U will want to do what it takes, so as NOT to endanger and destroy the ecosystem. Not just for minority shareholders, but also for the majority shareholders and MAS/SGX too!!

Shareholder "Activism" is a "label" coined by the media and to some it connotes a political slant. That is unfortunate, as in a forum like Valuebuddies, we should be concerned about the SGX ecosystem. Ur investments will tank if the SGX ecosystem tanks.
I would prefer the term creating "Awareness" rather than "Activism" to describe the efforts by those highlighting Corporate Governance issues.

My1cGibberish