Case study of failed reit

[cfa]

everything else being equal, being a company, has the flexibility to cut dividends and repay the debt, that's the real capital management. not keeping rolling over the debt or incurring more debt, praying that every refinance will be successful.

REIT inherently is a bad capital structure everything else being equal. It's unbalanced by distributing 90% of income required by regulations to be tax efficient, but not being ensured to be able to refinance in the time of difficulties by regulations.

Prudent reits can spread out their debt maturity and refinancing profile so that the debt to refinance in any one year is equal to or less than the annual distributable income. In this way, in time of difficulties, instead of distributing the income, it can instead be used to pay off that year's debt to refinance.

There is nothing in the regulations that prevent this from being done. This implies of course that the reit probably needs to have a relatively modest gearing level, which is also a marker of a prudent reit. And higher interest expense due to longer maturities to offset the lowering of risks. But it can be done if the reit manager is prudent.

An example of a reit doing this has been mentioned before at previous posting http://www.valuebuddies.com/thread-422-p...l#pid45327

Is there a regulation that reit must payout at least 90% of the distributable income ?
90% payout is just to qualify for the tax incentive, but not a compulsion.