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Old 15-11-2012, 07:16 PM   #1
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The Reit myth busted

Found this article on a forum and not sure how true it is, so read this with a pinch of salt and do your own evaluation and make ur own judgement.

Maybe some lau jiaos can come forth and share their view on this so newbies like us can be enlightened

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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Old 15-11-2012, 07:43 PM   #2
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The zombie article with zombie ideas returns! Please see the discussion in the thread below, and check before creating new ones.

http://forums.hardwarezone.com.sg/st...d-3502199.html
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Old 15-11-2012, 07:52 PM   #3
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This article again. Hahahhahaha!

Maybe I should show the writer (Teh Hooi Ling) my portfolio.

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Old 15-11-2012, 08:16 PM   #4
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This article again. Hahahhahaha!

Maybe I should show the writer (Teh Hooi Ling) my portfolio.

i will remember this post.
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Old 15-11-2012, 08:41 PM   #5
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not the first time listering to this
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Old 15-11-2012, 08:41 PM   #6
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i will remember this post.
Interpretation: When (if?) the REIT party crash, he will dig this out and dance on DW's grave.

Just joking.
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Old 15-11-2012, 08:48 PM   #7
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My apologies
didn't search through the forum for old posted articles.
So now we know this whole write up is a bull and doesn't hold
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Old 15-11-2012, 09:13 PM   #8
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Interpretation: When (if?) the REIT party crash, he will dig this out and dance on DW's grave.

Just joking.
I get that sense too, but of course now that you have written it in black and white he will just deny it

Bonds are also at nosebleed levels, but when they fall, as they will eventually, no one will say that bonds as an asset class are discredited.

Frankly, so what if REITs crash a bit? They have done a bit too well recently. As an asset class they have already more than proven their merits. A crash is an opportunity to buy more.
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Old 15-11-2012, 09:42 PM   #9
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thats why always must have the extra cash in case of the rights issues, which is quite frequent..
i think the "One had a few rounds of private placement of new units which diluted the stake of existing unitholders somewhat. " refers to suntec reit.
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Old 15-11-2012, 09:44 PM   #10
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not the first time listering to this
Lol not the first time seeing DWs portfolio too!
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Old 15-11-2012, 09:49 PM   #11
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Lol this REITs thing again... So govt keep increasing the retirement age to lock in your CPF for a longer time, should we have an article on that too?
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Old 15-11-2012, 10:48 PM   #12
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thats why always must have the extra cash in case of the rights issues, which is quite frequent..
i think the "One had a few rounds of private placement of new units which diluted the stake of existing unitholders somewhat. " refers to suntec reit.
The problem of dilution is technically correct but not meaningful to most investors. It only matters if you are a big institutional investor or a family trying to control the family business and you have to retain x% of it.

Rather than worry about how you used to own 0.0005% and now you own 0.0004%, most investors should care about (1) return and (2) risk, because those affect whether your money comes back to you and how much. A REIT manager should be able to grow its assets (so every unit is worth more) and its distributions (so that there is cash flow for unitholders and yield is maintained), while keeping the assets' valuation up and its tenants happy. As for risks, some REITs were severely affected by the problem of refinancing debt during the global financial crisis, but most got through it safely. REITs are risky like stocks are risky; be aware of the risks but do not think there are only risks, no rewards.

Ask the people who 8 years ago invested in Suntec REIT's IPO in Dec 2004, price $1. Without participating in any rights issues - because Suntec has never had a rights issue - they have received about 72 cents of distributions altogether since then, and the last traded price was $1.525 (NAV is about $1.969). Rather than dismiss a particular REIT or an entire asset class with theoretical arguments like those in "The REIT myth busted," work through the numbers.

It is true that Suntec REIT has had a few rounds of private placements. People talk about placements diluting current unitholders but forget what they are for. They are to finance yield-accretive acquisitions, like the MBFC acquisition for Suntec. Arguably they might have done even better if Suntec had chosen to do a rights issue for that.
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Old 16-11-2012, 12:28 AM   #13
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Thumbs up

I decided to look at the oldest and still the biggest REIT listed in Singapore: CapitaMall Trust.

That crap article above talks about CMT's repeated "rights issues" in 2003-2005. Technically, they were preferential offerings or non-renounceable rights issues. Unitholders are given the chance to subscribe to new units but they cannot sell the rights to do so to others, as in a normal rights issue.

Actually, if you go through their IR announcements, the reality was "worse": there were numerous other rounds of private and public offerings through placements and ATMs. The prices were $1.07, $1.33, $1.62, $2.35, $2.30. That was one crazy era of equity raising, but it was also when CMT acquired key properties like Plaza Sing, Bugis Junction and Raffles City.

Suppose you bought 1 lot of CMT from the IPO in Jul 2002 at 96 cents per unit, and did absolutely nothing with it for 10+ years. You don't participate in any rights issue, placement or offering. For your $960 outlay, you get a total of $1050 in distributions, and your 1 lot is now worth $2060. That's a nice return in either money terms or percentages or even property terms: you didn't fork out a cent to buy Raffles City, but now you own it.

(By the way, note that CMT's units in issue has grown from 738m after the IPO to about 3,331m today, so this super-passive investor who initially owned 0.00014% of CMT now owns only 0.00003%. The horror!)

Ironically, if the IPO investor did participate in the $1.07, $1.33, $2.35 and $0.82 rights issues, he would have gotten even better returns. Put in more money, get even more out of it - work it out for yourself if you don't believe me. The writer cannot see the numbers staring back at her in the face because of her deeply muddled thinking that rights issues are somehow compulsory and people "give back" their distributions.
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Last edited by lzydata; 16-11-2012 at 12:31 AM..
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Old 16-11-2012, 07:44 AM   #14
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Who want see mine and Paul's sgx stmt?
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Old 16-11-2012, 08:59 AM   #15
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Who want see mine and Paul's sgx stmt?
You know what, that would be fun to see!
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