This article was 6 years ago, re post for sharing and learning

The Reit myth busted

Whatever Reits pay out in dividends, they will take back a few years later in the form of rights issues

By TEH HOOI LING
SENIOR CORRESPONDENT

THE high yields of real estate investment trusts (Reits) are tempting. And indeed, they have been touted as a relatively safe and stable instrument to own if one is looking for a steady stream of income. As such, many investors see Reits as a good asset class to have in one's retirement accounts.

But you know what? That Reits are good income-yielding instruments is but a myth. The thing is, whatever they pay out in dividends, they will take back - all and more - a few years later in the form of rights issues.

Here's what I found. Of the 17 Reits which have a listing history of at least four years on the Singapore Exchange, only three have not had any cash calls or secondary equity raising. The remaining 13 have had cash calls, and many had raised cash multiple times. One had a few rounds of private placement of new units which diluted the stake of existing unitholders somewhat.

For many of these Reits, the cash called back far exceeded the cash received. So, the myth of Reits as almost comparable to a fixed income instrument is really busted.

Take CapitaMall Trust (CMT) which was listed in July 2002. Assuming that Ms Retiree bought one lot or 1,000 units at the initial public offering (IPO) for a total sum of $960. For the whole of 2003, she received $57 in dividends. However in that year, CMT also had a one-for-10 rights issue. To subscribe for her entitlement, Ms Retiree would have to cough out $107.

In 2004, she would received $89 for the total number of CMT units she owned. That year, CMT had another rights issue, also one-for-10. The exercise price was higher at $1.62. To subscribe, Ms Retiree would have to fork out $178.

In 2005, CMT again had another fund raising exercise via rights issue. Ms R would pocket $124 in dividends but in that same year, had to return $282 back to the Reit.

In the next three years - 2006 to 2008 - Ms Retiree felt rich and happy. She merrily banked in her quarterly distributions which amounted to $404 for her holdings of CMT. Her one lot, after three rights issues, had grown to 1,331 units.

In the following year, another $175 was distributed. But CMT wasn't going to let Ms R be happy for long. It launched a big one - a 9-for10 rights issue. To fully subscribe for her entitlement, Ms R had to empty her bank account of a whopping $982.

And you know what, the cash call came in March 2009, when the Straits Times Index fell below 1,600 points, and many retirees were dismayed to see their investment portfolios plunge by half or more. Many fret if they would have enough left in the pot to sustain their lifestyle. Having to cough up more money for a Reit was the last thing that they wanted to do!

Negative cash flow

And here's the final tally. Since its IPO until today, a holder of one lot of CMT would have received $1,264 in cash distributions. However, in all, he or she had to return $1,549 back to the Reit so as to subscribe to their entitlement of new issues. That's a net outflow of $284 per lot.

It's the same story with K-Reit Asia, Capitacommercial Trust, Frasers Commercial Trust, Mapletree Logistics, First Reit, Lippo Malls Indo Retail Trust, AIMS AMP CAP and Saizen REIT in that what was taken back from investors was more than what was given out.

K-Reit has been one of the most aggressive fund raising Reits. Had you started with just one lot when it was listed in April 2006, you would have to dish out $8,399 to subscribe to your rights issue. Distributions amounted to $1,110, resulting in a net outflow of $7,289.

For Reits with at least four years of track record, only Fraser Centrepoint, Parkway Life and CapitaRetail China have not had any cash calls.

Instead of a rights issue, Suntec Reit raised funds by issuing new units to some institutional investors at a slight discount. Existing unitholders don't have to cough out additional cash, but they would have their share of earnings diluted somewhat.

Misalignment of interests

Reits are managed by managers, and managers are paid based on the size of the portfolio that they manage. So the incentive is for the managers to continue to raise money and expand the portfolio size. Sometimes this is not done in the best interest of unitholders.

The most recent controversy was over K-Reit's purchase of Ocean Financial Centre (OFC) from its sponsor Keppel Land. K-Reit has launched a 17-for-20 rights issue to pay for the purchase which was deemed by the market to be expensive at a time of uncertain outlook and when office rental is expected to ease.

BT reader Bobby Jayaraman argued that rather than 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.

'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 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,' he wrote to BT.

Misalignment of interests aside, there are also unitholders who clamour for growth.

But while Reits may not be the perfect income yielding instrument that they are made out to be, they have proven their capacity for capital appreciation. Relative to the capital ploughed in, CapitaMall Trust has rewarded its unitholders with a return of 127 per cent. Most Reits have yielded positive total returns.

Instead of buying Reits for yields, some savvy investors only buy them when they see those with good quality assets trade at sharp discounts to their book value. For example in the first half of 2009, CMT was trading at 50 per cent its book value. Today, it is not as cheap. At $1.755, CMT is now trading at 13 per cent premium to its net asset value of $1.55. Hence, valuation metrics which apply to a typical asset heavy stock would apply to Reits as well.

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33 comments
PomeloFarmer

this reit reporting season more than half the reits reported lower DPU... post GFC the decade of ultra low rates has benefited reits a lot as they could borrow cheaply and their assets valued a super low cap rates with inflated NAV

PomeloFarmer

recently reits keep on rights issue again, I believe when rates goes higher many reits will have problems renewing debt
now they can borrow at 3% or 4% cheap cheap, but when rates goes up higher they will have to borrow at 5% or 6% which doesnt make senses, so they would raise equity instead
more rights issue and more placement to be seen in reits from 2018 to 2020...

psychology_of_trading

REITS carry a simple contagion risk.
If you borrow money to buy your flat / condo, the bank will expect you to pay down your capital over 25 years.
But for REITS, what happens? If your cashflow payment is structured like a REIT, you do not pay down your capital, but the mortgage gets constantly refinance, rolled forward. So someone keeps paying the interest rate forward and the capital is not paid. If UOB or a retail bank does not allow this when you buy a flat, do you think this kind of debt structuring is right? #foodforthought #REIT #reits
Once again, another strange financial product that the powers allowed and get passed on to retailers. The benefit is to the general economy again, banks can leand money, money supply increases, more sophisticated products, more highly paid professionals and asset managers, and increase contagion risk of implosion.

PomeloFarmer

Reply to @psychology_of_trading : when rates goes higher and reits have to borrow at 5% or 6% the house of cards will collapse like what we saw in 2008 when rates when above 5%, reits fell over 50% and had to do massive equity raising

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BobTravels

Provided the cash calls are DPU accretive and the new funds increase the NAV of the enterprise I do not see the problem.

It is not obligatory to take up the rights, and although some capital gain will not be achieved as new units are always sold at a discount, as long as ultimately the future DPU is as a minimum stable and hopefully increases after the funds have been deployed, then a unit holder is not disadvantaged by rights issues.

Generally the unit price recovers fairly quickly from the discounted rights issue.

The unit holder is simply left with a smaller piece of a bigger pie.

By increasing the size of the REIT with good management it will often make the cost of borrowing capital cheaper and cause the DPU to be more stable.

Naturally, as in all cases when taking a share in a company, we are reliant on a competent management. And, as always, if we are unhappy with the management's performance, sell the shares.

PomeloFarmer

Reply to @BobTravels : recently CMT overpaid for westgate at price of 4.3% yield and also likely will rights issue
so glad that i sold off at 2.20 and not look back

PomeloFarmer

reits meltdown has begun!!!!!!!!!!!!

8fac7b3427a98360be861c1931ae2543a8f2b116
benjaminyyfli

Reply to @HappilyRetired : Good luck to us. Cheers!

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PomeloFarmer

Not all reits are the same also
There are badly managaned reits like
Sabana reit
Starhill global

Poorly managed reits sees fall in dpu and nav

ninjaboi

Reply to @HappilyRetired : yes agree....i think cache reit is one of the badly managed reit

PomeloFarmer

Dont forget nowadays a lot of placement that dilutes share holders
Some reits got drip, they dont even pay out cash but instead pay in shares

No doubt that reits make good returns
Historical returns of reits are 8%

6% from dividends 2% from growth in nav/dpu

But cash flow wise it may look different

Ccm

@marubozu
any comments on this article?

bostonlee

Reply to @gingwien : Thanks, your explanation has re-affirm my initial view.

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Hanzo

Abit not realistic, i can don’t subscribe to rights. And I don’t buy stocks with only dividends in mind. I also look at value. Long post short, you’ll complaining about those particular stock you mention LOL

PomeloFarmer

Reply to @Hanzo : Just posting and sharing
I never complain about anything cause i not vested in reits lol

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Spinning_Top

Thanks for posting...totally forgotten about this article.
AK and Teh Hooi Ling are my idols..

HomeMaker

Reply to @Spinning_Top : How diplomatic! A true gentleman

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