Analysing REITS

[ghchua]

Hi weijian/CY09,

It is not only about AUM. When you divest assets, your income drops since the property is no longer in the REIT to collect rental. That being the case, DPU will also drop correspondingly, all else being equal. So, how are you going to explain to your unitholders that your DPU is dropping? Remember that a REIT is set up in order to pay almost all of their profits out as distribution to unitholders. The name of the game is to hold minimal cash and use leverage to invest almost all their available funds into properties to generate "passive" income for unitholders.

Of course, you can say that you will top up the DPU gap with divestment gains. But how long are you going to top up the gap? Unless you can increase rentals on the rest of the properties to fill it up or else it will run out one day. So, most REITs will not divest assets in a big way, unless being forced to do so.

What CY09 had suggested will not work for most REITs. Yes, they can try to read the market and divest some properties during market high cycles, but it will not be done in a big way and in the greater scheme of things, will not move the needle much as REITs will still stay invested.