[flyersummer]

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.

[flyersummer]

Heng Suntec Reits did not betray its shareholders by using Rights issue. Else my IPO share will be in negative territory.

Suntec reits have been quite good to its shareholders already as compare to CMT and K-Reits.

[hoks]

Shouldn't the writer also add up the total number of cmt shares Ms R would hv accumulated thru the rights issues n how much they r worth? I suppose it's still net positive.

[chensing]

hoks wrote:

Shouldn't the writer also add up the total number of cmt shares Ms R would hv accumulated thru the rights issues n how much they r worth? I suppose it's still net positive.

http://www.sharejunction.com/shareju...picTitle=REITS

Long term.buy and hold doesn't hold...got profit must take lah

[OddEye]

Next time if see gearing ratio above 40% should prepare to sell liaoz even if at a loss.

That's why there should be regulation as to how many cash calls they make within a few years so as to prevent them from making so much rights issue.

They should also reward those reits with lower gearing ratio to have more room for organic growth such as less dividends payout ratio to income.

[lzydata]

Obviously after you subscribe to rights issues you own more of the REIT. Provided the rights issues are done at attractive prices and the manager invests the money well, the investor gets good returns. It's amazing that an article with such rubbish logic can also make it into the Business Times

For those who still don't understand, see
http://singaporeanstocksinvestor.blo...ngaporean.html

[gundamz]

lzydata wrote:

Obviously after you subscribe to rights issues you own more of the REIT. Provided the rights issues are done at attractive prices and the manager invests the money well, the investor gets good returns. It's amazing that an article with such rubbish logic can also make it into the Business Times

you own more of the shares? really?

then we are not losing out ,actually ?

[MikeDirnt78]

flyersummer wrote:

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.

actually i wanted to do a total return of the reits but was a bit lazy. there are a few points to take note.

1) though i agree that some reits have taken back more cash than the dividends paid out, but if look at the total return, most of the reits are giving net positive total returns. in other words, the bulk of the returns from reits are the capital gains. interesting right? this is a contrary of what one's expectation of passive income from reits.

2) im not sure how accurate are the calculations being carried out. if you look at frasers commercial, there is definitely a capital outlay. it was formerly allco reit. so the total return of frasers commercial is wrong.

[Jarlaxle]

lzydata wrote:

Obviously after you subscribe to rights issues you own more of the REIT. Provided the rights issues are done at attractive prices and the manager invests the money well, the investor gets good returns. It's amazing that an article with such rubbish logic can also make it into the Business Times

For those who still don't understand, see
http://singaporeanstocksinvestor.blo...ngaporean.html

[OddEye]

If REITs is not passive income as what they claim, they should not advertise themselves as a good way to earn passive income.
As for the capital gains part of REIT, I highly doubt investors have gained much in their capital when it comes to investing in reit. After all reit is never a form of investment for capital gain, just look at the price fluctuation.
If REITs fail in delivering what they promise, might as well put money on dividend stocks

[MikeDirnt78]

OddEye wrote:

As for the capital gains part of REIT, I highly doubt investors have gained much in their capital when it comes to investing in reit. After all reit is never a form of investment for capital gain, just look at the price fluctuation.
If REITs fail in delivering what they promise, might as well put money on dividend stocks

you are looking at the short term price fluctuations. the capital gain is computed from IPO till today.

[lasnoblur]

gd article.

Thanks for sharing.

flyersummer wrote:

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.

[holysmokes]

The BT article isn't balanced, probably by intention. It should also show what happens to the dividends if an investor does not participate in the rights issues. i.e. sell away all the nil-paid rights.

Drawing from the analogy from blogger AK71, it would mean the son does not want to put in more money to buy the additional property. In this case, will he continue getting the same rental in dollar value? If yes, then he is no worse off, vice-versa.

The BT article gives me the impression that it is a forgone conclusion. i.e. if you don't exercise your rights, you will surely get less dividend in absolute dollar value as the years go by.

This could well be the case. But it's not explicitly proven in the article. That's why I feel it's not balanced.

This is where investors need to decide for themselves if a rights issue is distribution yield accretive. I find AK71's article an easy to read concept primer for this topic.

P.S. Any kind soul can compile the figures for not taking up the rights issue?

[evolute8]

i'll read it tonight on my desktop.

[holysmokes]

Click to my table (image).

Ok, so I simply can't help myself but to waste the last 45mins doing this.

I've done up a dividend table for CMT. This is based on the dividend history stated in CMT web page. I'm going to assume the DPUs stated are not adjusted for rights issue since it's not stated on the page. The chart presented depends on this assumption.

I've grouped the dividends annually by payment date. If an investor had bought 1000 CMT shares from IPO, and never subscribe to rights issues, the min. he/she collected is $63.50 in 2007.

The BT article wrote for the example of Ms Retiree subscribing to CMT rights all the way, she gets "a net outflow of $284 per lot".

However, it fails to say that if she simply does nothing, she would have collected $851.80 in cash so far. This doesn't include proceeds from selling off her nil-paid rights. Her capital put in is $960. She has almost doubled her retirement money over 10 years!

Hence, I conclude that the BT article creates a completely wrong impression. It is not a balanced presentation.

Pls point out if I'm reading this wrongly. After all, I'm just an investor.