Analysing REITS

[swakoo]

Many of CMT's rights issues were optional for unitholders to subscribe to. These were yield accretive too. Hence unitholders could simply ignore these rights issues and yet enjoy yield accretion. Some of the other reits' rights issues also fall into this category. Ms Teh seems to have ignored this in the analysis in her article.

The reits to look out for are really the serial mandatory rights issuers, usually renounceable, usually dilutive though sometimes accretive but usually with financial engineering eg. income support.

[Temperament]

i treat every stock the "same" - Entry price is very important. When to sell is a bit difficult for i may become greedy at times. For REITS, i treat the "guarantee" DPU as a bonus. But some other stocks i bought at 2008/2009 prices, as a result that give me such a high dividend yields now, i am so reluctant to sell them. Nevertheless i will sell them when the next bull market arrives. Of course these stocks should rise with the market as they are blue chips.

And for me, the good time to buy REIT is when it has a right issue call - not sell them. Ha! Ha!

EG. CMT's right issues 2008 or 2009(i don't bother to confimed) not only i subscribed for my rights, i subscribed for excess rights too. But of course not for every reit. Because i dared to subscribe, i managed to sell some with profit. Even today prices, if i sell them, i still have profit. No, no, i am waiting for right issues calling not selling them now. Meanwhile, enjoy their DPU. Ha! Ha!
If i sound like a simpleton investing, yes may be i am. But hey it works for me. i don't know about you.

[Nick]

Do other countries REITs (like those in USA and Japan) also practise aggressive equity fund raising via rights issue or is this a uniquely singapore reit thing ?

[KopiKat]

Many of CMT's rights issues were optional for unitholders to subscribe to. These were yield accretive too. Hence unitholders could simply ignore these rights issues and yet enjoy yield accretion. Some of the other reits' rights issues also fall into this category. Ms Teh seems to have ignored this in the analysis in her article.

I have yet to come across any REITs' rights issue which is not "optional" (I take it that you mean the right not to subscribe). The problem is, Rights are always issued at a discount to the existing share price. If you don't subscribe, you'll lose out as the share price will adjust downwards, towards it's TERP, come xri.

For those who do not want to end up with more of the same shares, the smart thing to do is to sell the rights (unless it drops to a price where transaction cost is more than your total Gross Sales Proceeds). Another alternative (which I usually use) is to sell the main shares when it goes xri (proceeds received will be able to fund for the rights). At the same time, subscribe for the rights + some excess (this usually lowers your average cost).

Another alternative is to immediately sell off the shares the moment they announce a rights issue, especially such a massive one like K-REIT (on hindsight) and in times of economic uncertainty.

[Temperament]

Recently, i bought LMIR NIL PAID RTS. When i subscribed for the rights, i did not apply for excess rights. Can anyone share whether i am allowed to subscribe to excess rights by just owning NIL PAID RTS.(i don't own any mother share)? Anyone has any experience?

Thanks.

[swakoo]

Many of CMT's rights issues were optional for unitholders to subscribe to. These were yield accretive too. Hence unitholders could simply ignore these rights issues and yet enjoy yield accretion. Some of the other reits' rights issues also fall into this category. Ms Teh seems to have ignored this in the analysis in her article.

I have yet to come across any REITs' rights issue which is not "optional" (I take it that you mean the right not to subscribe). The problem is, Rights are always issued at a discount to the existing share price. If you don't subscribe, you'll lose out as the share price will adjust downwards, towards it's TERP, come xri.

Sorry, poor choice of words on my part. What I meant is:

"Optional": existing reit units are yield accretive without unitholder having to take up the rights, hence can ignore. (Rights issue may destabilise prices due to increase in supply but it is not necessarily always downward eg. some of CMT's past rights issue of this type.)

"Mandatory": existing reit units are diluted if unitholder does not take up the rights, sometimes existing units are diluted even if unitholder does take up the rights. So "mandatory" for existing unitholder to take action ie. accept or sell rights or existing units or a combo. Maybe I should call this type of rights issue "red flag" rights issue instead?

[Temperament]

Rights issue are either "renounceable" or "non-renounceable"
Renounceable allows you to sell it as NIL PAID RIGHTS if you do not want to subscribe.
Non-renounceable is if you don't subscribe, your current holding will be diluted. You are not allowed to sell or transfer. Sometimes, if i think the stock which has Non-Renounceable rights issue, is of inferior quality, yet i am not willing to sell now, i just let my Non-Renounceable rights lapse. Chiat Lux.

[wsreader]

Mapletree Industrial Trust raised capital by non-renounceable preferential offering (together with private placement) but the information was not captured in the BT's tabulation. The reporter seems to only track cash calls via rights issues for the report.

[Musicwhiz]

Business Times - 01 Dec 2011

Examining the house that Reits built

Recent property deals rekindle debate over fees, independence, minority protection

By JAMIE LEE

(SINGAPORE) Calls for reform in the real estate investment trusts (Reits) market here have taken on fresh urgency, as questions resurface about the possible conflict of interest when Reits acquire assets from their sponsors.

This comes after the Monetary Authority of Singapore (MAS) said last week it may offer more regulatory guidance to the industry and urged boards not to take 'an overly technical approach' in following governance rules.

The spotlight has swung sharply on the manager/ trustee model and fee structure that Reits operate under, as well as whether there is enough independence on Reits' boards.

The murmurs grew louder after the sale of Keppel Land's 87.5 per cent stake in Ocean Financial Centre to K-Reit Asia for $1.57 billion was approved last month at the shareholders' meetings, despite criticism from minority unitholders over the price and timing.

Singapore and Hong Kong Reits tend to use the manager/trustee model, which has the Reit manager appointed by the sponsor - and often the controlling shareholder - of the property trust. The directors of the Reit manager are also appointed by the sponsor. Reits are managed by the managers, and managers are paid according to the size of the portfolio they take care of.

An earlier report by CFA Institute had already highlighted that one way to better protect Reit unitholders is to ensure most directors on the boards of Reit managers are independent. It noted that the inter- relatedness between the sponsor and the manager increases the risk that they would act in their own interest, at the expense of minority unitholders.

The bulk of Reits do not have independent directors making up the majority of their board, though this is in line with the practice of most listed firms here.

'The conflict of interest can be avoided if the sponsor appoints a Reit manager that is not related to the sponsor or its group of companies,' Lee Kha Loon, head of the Standards and Financial Market Integrity division of CFA Institute for the Asia-Pacific region, told BT in an interview.

The other option is to use a corporation model that has investors voting for the appointment of the directors, including independent directors - a practice that is more common in Australia, he added.

Mak Yuen Teen, associate professor at NUS Business School, called the governance of Reits 'problematic', since the board of directors is the board of the Reit manager and owes fiduciary duties to the manager, not the unitholders.

Under recent revisions of the Code of Corporate Governance, a director is not independent if he is or has been directly associated with a substantial shareholder of the company in the current or any of the past three financial years.

Professor Mak noted that K-Reit manager's chairman Tsui Kai Chong is classified as an independent director, though he has been an independent director of Keppel Land since 2001. Another K-Reit independent director, Lee Ai Ming, is also an independent director of Keppel Land.

At Reits such as CapitaMall Trust, CapitaCommercial Trust and CDL Hospitality Trusts, the chairmen - who have links to the sponsor - are not labelled independent.

BT reader Bobby Jayaraman recently wrote that Reit managers should be paid based on a combination of growth in distribution per unit and market valuation of the Reit.

He argued that current rules are 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,' he added.

Mr Lee noted that in Singapore, the fee structures of S-Reits are skewed towards performance fees paid based on net property income. Of the 22 S-Reits that the CFA Institute reviewed in January, 64 per cent of them used this approach.

'This excludes interest charges; therefore gearing charges have not been deducted in computing performance fees for the manager,' said Mr Lee.

'A more equitable form of compensation would be a combination of factors, based on an index and growth in distribution per unit.'

Also, independent financial letters issued to minority shareholders of both Keppel Land and K-Reit do not express an opinion of future prospects, Mr Lee noted. Analysts have noted the deal came at a time when macroeconomic conditions are turning grim.

In addition, Mr Jayaraman noted that independent valuation reports - done in accordance with MAS rules to safeguard investors' interests - do not consider potential changes and risks to the commercial property market.

Mr Lee said: 'If there can be additional information that can help minority shareholders to evaluate the impact of the acquisition, it will be a research report issued by a research house. However, this will likely happen only if there is sufficient institutional ownership.'

An idea to have a tender process for such property transactions has also been mooted. One senior lawyer supported this but cautioned that sponsors could control the timing and know the information better, making it hard for third parties to have the same assessment of the values.

Reits are currently excluded from the annual ranking for the governance and transparency index, which highlights the best and the worst among listed companies in corporate governance standards, noted Prof Mak.

'They are just a completely different animal.'

[Qiaofeng]

As I have discussed in the MIIF Thread, I believe that there should be 3 metrics (more correctly 2 since one is a ratio) in the incentive scheme to align management's interest to unitholders interest.
DPU, Ratio of NAV to Mkt Cap.

For more on the above article by BT's, Jamie Lee
see blog