Case study of failed reit

[Temperament]

i agree with felix there. in the end REITs and Business Trust the greatest edge are having managers that are great capital allocators.

it i s a necessary competency:

1) the ability to look at the environment to spot opportunities, inefficiencies
2) the ability to secure attractive financing
3) the ability to consistently think how to generate the most value
4) move past just dividend payment and AUM but think about what are the best way to bring value
5) always manage the risk, whether its currency, interest, insurance, portfolio mix, refinancing

the rest is just stuff in the shell.

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.

Cut the dividends to repay debt as capital management is the last thing "Top Management" wants to do. They know that once they do that it will be punished by the Market. And they definitely worry about whether Company can ask for new capital from the public investors in future by rights issue.
i think they would prefer to risk to ask for new capital by rights issue or debt instruments from anyone willing to lend.

[Greenrookie]

i agree with felix there. in the end REITs and Business Trust the greatest edge are having managers that are great capital allocators.

it i s a necessary competency:

1) the ability to look at the environment to spot opportunities, inefficiencies
2) the ability to secure attractive financing
3) the ability to consistently think how to generate the most value
4) move past just dividend payment and AUM but think about what are the best way to bring value
5) always manage the risk, whether its currency, interest, insurance, portfolio mix, refinancing

the rest is just stuff in the shell.

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.

Cut the dividends to repay debt as capital management is the last thing "Top Management" wants to do. They know that once they do that it will be punished by the Market. And they definitely worry about whether Company can ask for new capital from the public investors in future by rights issue.
i think they would prefer to risk to ask for new capital by rights issue or debt instruments from anyone willing to lend.

I think if we talk about extraordinary event like the GFC or likes in the future, companies generally are still safer proposition, u can easily find company with very little debt or net cash, but you won't find a REIT that is not geared, thou lippo with its many rights issues which to have gearing of below. 10percent. Granted, cash can burnt really fast, but a solid company can close down branches, become lean and survive to fight another day.

Reits does not have the option of paring down debts. When a company pay down debt, it's a good thing, if reits lower debt, throu rights or sale of assets, they usually get punished big time.

While dividend cut or stop by companies to conserve cash will incur the wrath of investors , I think investors will still prefer that then what happen to MI, super dilution by a Coporate raider/ whit knight depending who u are.

But, dun think you can find a net cash company with a solid business giving u a yield of 8 percent, except during a bad bear market.

[Nick]

I wish to point out that there is actually a REIT that has amortizing loans - Saizen REIT. There is no tax benefits in paying out 100% of its distributable income since its income are entirely foreign-sourced.

All of its loans are amortizing with maturity stretching from 2018 to 2041 - http://www.saizenreit.com.sg/images/stor...y_2013.pdf [Slide 12]

However, I think it is using its internal cash from new borrowings and warrant proceeds to repay the amortized loan principal so its like continually 'refinancing' ?

(Not Vested)

[KopiKat]

I wish to point out that there is actually a REIT that has amortizing loans - Saizen REIT. There is no tax benefits in paying out 100% of its distributable income since its income are entirely foreign-sourced.

All of its loans are amortizing with maturity stretching from 2018 to 2041 - http://www.saizenreit.com.sg/images/stor...y_2013.pdf [Slide 12]

However, I think it is using its internal cash from new borrowings and warrant proceeds to repay the amortized loan principal so its like continually 'refinancing' ?

(Not Vested)

I got a headache looking thro' their financials. I think it's just financial engineering and playing with the financial terms...

From the Dec-12 FS (pg7),

Cash deployed for loan principal repayment 2 (317,924)
2. The amount deployed for loan principal repayment comprised mainly loan principal amortisation payments. While loan principal amortisation reduces cash available for distribution, it results in savings on interest expenses going forward.

Loan principal repayment offset by capital cash resources 3 317,924
3. Loan amortisation in YTD Dec 2012 will be fully paid with capital cash resources, such as proceeds from new borrowings and/or warrant proceeds, rather than cash generated from operations. This is in line with Saizen REIT’s intention to utilise, where possible, undeployed capital cash resources to offset loan amortisation, thereby effectively making available cash from operations for distributions.

The Jun-12 FS (pg8) is even more interesting and gives me an even bigger headache trying to figure out the 'One-off borrowing Costs' on top of the 'Loan Principal Repayment'.... Don't think I fully comprehend what's happening..

[freedom]

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.

Cut the dividends to repay debt as capital management is the last thing "Top Management" wants to do. They know that once they do that it will be punished by the Market. And they definitely worry about whether Company can ask for new capital from the public investors in future by rights issue.
i think they would prefer to risk to ask for new capital by rights issue or debt instruments from anyone willing to lend.

the point is not to cut dividends to repay debt, rather than having an option to cut dividends to repay debt.

The problem with REITs is that they don't even have such option open...

---

I think if we talk about extraordinary event like the GFC or likes in the future, companies generally are still safer proposition, u can easily find company with very little debt or net cash, but you won't find a REIT that is not geared, thou lippo with its many rights issues which to have gearing of below. 10percent. Granted, cash can burnt really fast, but a solid company can close down branches, become lean and survive to fight another day.

Reits does not have the option of paring down debts. When a company pay down debt, it's a good thing, if reits lower debt, throu rights or sale of assets, they usually get punished big time.

While dividend cut or stop by companies to conserve cash will incur the wrath of investors , I think investors will still prefer that then what happen to MI, super dilution by a Coporate raider/ whit knight depending who u are.

But, dun think you can find a net cash company with a solid business giving u a yield of 8 percent, except during a bad bear market.

why have to be 8%? 8% is absolutely extraordinary for well managed and well capitalized company.

If 8% is what you desire, by all means, wait for the next crisis. However, it might not happen in another 5 or 10 years.

[smallcaps]

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.

Cut the dividends to repay debt as capital management is the last thing "Top Management" wants to do. They know that once they do that it will be punished by the Market. And they definitely worry about whether Company can ask for new capital from the public investors in future by rights issue.
i think they would prefer to risk to ask for new capital by rights issue or debt instruments from anyone willing to lend.

the point is not to cut dividends to repay debt, rather than having an option to cut dividends to repay debt.

The problem with REITs is that they don't even have such option open...

---

I think if we talk about extraordinary event like the GFC or likes in the future, companies generally are still safer proposition, u can easily find company with very little debt or net cash, but you won't find a REIT that is not geared, thou lippo with its many rights issues which to have gearing of below. 10percent. Granted, cash can burnt really fast, but a solid company can close down branches, become lean and survive to fight another day.

Reits does not have the option of paring down debts. When a company pay down debt, it's a good thing, if reits lower debt, throu rights or sale of assets, they usually get punished big time.

While dividend cut or stop by companies to conserve cash will incur the wrath of investors , I think investors will still prefer that then what happen to MI, super dilution by a Coporate raider/ whit knight depending who u are.

But, dun think you can find a net cash company with a solid business giving u a yield of 8 percent, except during a bad bear market.

why have to be 8%? 8% is absolutely extraordinary for well managed and well capitalized company.

If 8% is what you desire, by all means, wait for the next crisis. However, it might not happen in another 5 or 10 years.

Ya like that too restrictive lah, sgx so small how many one can find. Maybe should ask why need to be well managed, why need to be well capitalized and why need so much dividends? IMO value investors no need to buy like going for beauty campaign ...

[freedom]

then just buy STI ETF. no need to think, no need to analyze. ease of mind.

[Greenrookie]

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.

Cut the dividends to repay debt as capital management is the last thing "Top Management" wants to do. They know that once they do that it will be punished by the Market. And they definitely worry about whether Company can ask for new capital from the public investors in future by rights issue.
i think they would prefer to risk to ask for new capital by rights issue or debt instruments from anyone willing to lend.

the point is not to cut dividends to repay debt, rather than having an option to cut dividends to repay debt.

The problem with REITs is that they don't even have such option open...

---

I think if we talk about extraordinary event like the GFC or likes in the future, companies generally are still safer proposition, u can easily find company with very little debt or net cash, but you won't find a REIT that is not geared, thou lippo with its many rights issues which to have gearing of below. 10percent. Granted, cash can burnt really fast, but a solid company can close down branches, become lean and survive to fight another day.

Reits does not have the option of paring down debts. When a company pay down debt, it's a good thing, if reits lower debt, throu rights or sale of assets, they usually get punished big time.

While dividend cut or stop by companies to conserve cash will incur the wrath of investors , I think investors will still prefer that then what happen to MI, super dilution by a Coporate raider/ whit knight depending who u are.

But, dun think you can find a net cash company with a solid business giving u a yield of 8 percent, except during a bad bear market.

why have to be 8%? 8% is absolutely extraordinary for well managed and well capitalized company.

If 8% is what you desire, by all means, wait for the next crisis. However, it might not happen in another 5 or 10 years.

Ya like that too restrictive lah, sgx so small how many one can find. Maybe should ask why need to be well managed, why need to be well capitalized and why need so much dividends? IMO value investors no need to buy like going for beauty campaign ...

It's about comparisons, there are a number of smaller industrial reits giving 8% yield. The spread between that and blue chips dividend companies is the extra risks that go with it. Wether 8 % fully compensate the risks is everyone call. But there is no free lunch. U want 8 or more yield now, your choices are limited. I dun think all reits yielding 8 % are bad buys even if you Acc for interest rises, weak sponsors and the likes. But it's definitely not a long term companies that warren speak about, where u but and go to sleep, and wakes up 10 years later, and voila, I have a multi baggers. Do invest in reits h need to keep both eyes open... That's why the intention o starting this thread, to understand the true risks of investing in reits in worst case screnario ... :p

[KopiKat]

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.

Cut the dividends to repay debt as capital management is the last thing "Top Management" wants to do. They know that once they do that it will be punished by the Market. And they definitely worry about whether Company can ask for new capital from the public investors in future by rights issue.
i think they would prefer to risk to ask for new capital by rights issue or debt instruments from anyone willing to lend.

the point is not to cut dividends to repay debt, rather than having an option to cut dividends to repay debt.

The problem with REITs is that they don't even have such option open...

---

I think if we talk about extraordinary event like the GFC or likes in the future, companies generally are still safer proposition, u can easily find company with very little debt or net cash, but you won't find a REIT that is not geared, thou lippo with its many rights issues which to have gearing of below. 10percent. Granted, cash can burnt really fast, but a solid company can close down branches, become lean and survive to fight another day.

Reits does not have the option of paring down debts. When a company pay down debt, it's a good thing, if reits lower debt, throu rights or sale of assets, they usually get punished big time.

While dividend cut or stop by companies to conserve cash will incur the wrath of investors , I think investors will still prefer that then what happen to MI, super dilution by a Coporate raider/ whit knight depending who u are.

But, dun think you can find a net cash company with a solid business giving u a yield of 8 percent, except during a bad bear market.

why have to be 8%? 8% is absolutely extraordinary for well managed and well capitalized company.

If 8% is what you desire, by all means, wait for the next crisis. However, it might not happen in another 5 or 10 years.

Ya like that too restrictive lah, sgx so small how many one can find. Maybe should ask why need to be well managed, why need to be well capitalized and why need so much dividends? IMO value investors no need to buy like going for beauty campaign ...

The wonderful thing about Value Investing is, there're many variations... If we were to follow the Buffett approach, it means waiting for the perfect pitch before swinging your bat and having a punch card that limits the number of trades in your lifetime. In such an approach, yes, it's rather restrictive and you'd need patience... most likely, more options only become available during major crisis.

However, in modern times, we also have what I'd term as the 'Fund Manager' approach (Peter Lynch, Seth Klarman, Joel Greenblatt,...) to Value Investing. Altho' it follows the original Graham teachings of 'Intrinsic Value' & 'Margin of Safety' plus long term investing, it allows for a lot more swings of the bat and a punch card with a lot more holes....

So, ya, take your pick, no restrictions... Choose one that best suits you and test out your own combo / variations...

[smallcaps]

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.

Cut the dividends to repay debt as capital management is the last thing "Top Management" wants to do. They know that once they do that it will be punished by the Market. And they definitely worry about whether Company can ask for new capital from the public investors in future by rights issue.
i think they would prefer to risk to ask for new capital by rights issue or debt instruments from anyone willing to lend.

the point is not to cut dividends to repay debt, rather than having an option to cut dividends to repay debt.

The problem with REITs is that they don't even have such option open...

---

I think if we talk about extraordinary event like the GFC or likes in the future, companies generally are still safer proposition, u can easily find company with very little debt or net cash, but you won't find a REIT that is not geared, thou lippo with its many rights issues which to have gearing of below. 10percent. Granted, cash can burnt really fast, but a solid company can close down branches, become lean and survive to fight another day.

Reits does not have the option of paring down debts. When a company pay down debt, it's a good thing, if reits lower debt, throu rights or sale of assets, they usually get punished big time.

While dividend cut or stop by companies to conserve cash will incur the wrath of investors , I think investors will still prefer that then what happen to MI, super dilution by a Coporate raider/ whit knight depending who u are.

But, dun think you can find a net cash company with a solid business giving u a yield of 8 percent, except during a bad bear market.

why have to be 8%? 8% is absolutely extraordinary for well managed and well capitalized company.

If 8% is what you desire, by all means, wait for the next crisis. However, it might not happen in another 5 or 10 years.

Ya like that too restrictive lah, sgx so small how many one can find. Maybe should ask why need to be well managed, why need to be well capitalized and why need so much dividends? IMO value investors no need to buy like going for beauty campaign ...

It's about comparisons, there are a number of smaller industrial reits giving 8% yield. The spread between that and blue chips dividend companies is the extra risks that go with it. Wether 8 % fully compensate the risks is everyone call. But there is no free lunch. U want 8 or more yield now, your choices are limited. I dun think all reits yielding 8 % are bad buys even if you Acc for interest rises, weak sponsors and the likes. But it's definitely not a long term companies that warren speak about, where u but and go to sleep, and wakes up 10 years later, and voila, I have a multi baggers. Do invest in reits h need to keep both eyes open... That's why the intention o starting this thread, to understand the true risks of investing in reits in worst case screnario ... :p

Isn't that like uncomparable, between industrial reits and a blue chip company, based on dividend yield alone. They are quite likely to be very different business wise, accounting wise and probable total shareholder return wise. I dun think its just the spread. The entire 8% dividend and mkt cap is subjected to different risk and potential growth as compared to a blue chip's. For example, doesn't the yield for industrial reits contain a portion representing return of capital to shareholders? (I'm not familiar with reits so may be totally wrong...)