Friday, December 12, 2014

Reits and the common grouses

I have heard of these grouses too many times, and is guilty of some of these. But are these really the issue, are there ways to look beyond these?

1) Fund raising
It diluted the shareholders' interest.

Me: How else would you like to do it, there is 35-60% limit and soon to be universal 45% Loan limit.

2) Shares placement 
Damn, why don't they do a rights exercise instead?

Me: Placement exercise is faster, and does not required the big owner to cough out cash. I used to prefer rights, now, if the fund raising exercise is less than 10% dilutive and is used in yield accretive exercises, I prefer placements.

3) DIscount in rights or shares placement.
WT... Why is the discount so excessive? 

Me: if there is no discount, it is difficult to get big players. Usually, if the discount is 1-3% plus the dilution effect, it is considered not too bad. If it is more than that, it reflected the weakness of the reit. LMIR and Sabana are weak in this respect compared to Ascendas Reit. 

Also, AIMS rights discount is rather excessive too, but Mr market see it as a opprtunity rather than Weakness. Again, it is not the discount per se, but the track record of using the money for yield accretive accquisition.

4) Payment of fees in the form
Of units.
This leads to further dilution. 

Me: But if payment is done in the form of cash, there is less cash for distribution at the end of the day anyway. However, I do not take kindly to management who received the units at discount at sell it off almost immediately. 

5) Management fees or performances fees pegged to AUM and not DPU.

The management just do dump and recycle and earn management fees at the expense of shareholders!

Me: There are indeed management who do that. But it's the track records of management that matters, not the pegging to DPU or AUM per se. Some
Management pegged perfoRmance fees to DPU growth, but never deliver. Instead they keep buying and buying to earn acquistion fees and earn higher base fees. To me, there is a BIG BIG difference in buying a 92% occupied mall at 10% dilution cost and buying a 50% factory at 10% dilution cost!!

If u see management that do that, run! But do note that management changes. Vested and biased, but LMIr past acquisitions are yield destroying, they did highly dilutive rights when gearing is low to buy mall. Straight in your face dumping in action. Alvin, the new CEO, reduce dilution by raising less money to buy a 92% occupied mall (that is new), and stretch cash and gearing. It's shows hell of a difference in management style. Who is Alvin? The ex-manager of PST, the only shipping trust that is privatized and is giving a yield of close to 9% to me. Too bad...

Keppel reit managers are accused of that too, but when the yield improve, everyone keep quiet again.

6) Dividends reinvestment plan.

Me: This is something new, have not heard any grouses about it yet. You can use your dividends to buy back units at discounted price.

Again, it depends on the discount. But my gut feel and infoRmal tracking seem to suggest reits with dividends reinvestment plan seem to do worse than  those without. 

But, if u ask me. If The big boss take units as dividends when it is trading above NAV, and the boss holds it, it is not that bad a deal. 

7) Weak parent or sponsor, or small stake  of sponsor
If it is so good, why didn't the sponsor hold more of it?

Me: this is one grouse I considered valid. Also, there are few real tangibles for a strong sponsor.
1) pipeline of acquisitions
2) big sponsor and reit with big AUM usually has lower interest costs 
3) possibility of bailout by parent when shits happen. ( don't worry, as retail investor, you are screw when that happens, read conclusion)

8) lousy management 
Anything that goes wrong, blame management.

Me: I gauge management in 3 areas.
1) portfolio management, ability to keep properties at tip top conditions, and occupancy rate high as compared to industry norm and achieving positive rental revision when rent is lower than spot rate. 
2) Capital management. Spreading out refinancing needs with different refinancing sources. 
3) growth management. Clear track records or pattern/predictability of fund raising to acquistions
I, however think, it is unfair to blame
Management for lower revenue due to currency exchange weakness. Blame them on wrong hedging would be more justifiable.
Blame them on timing of fund raising. As no one can predict the performance of share price in the short term, that a share price under perform and fund raising go ahead is a tad too demanding. 


Conclusion:
REITs as a asset class, has its inherent flaws and risks. Understand it so that there will be less grouses for your own health benefits. LOL

Reit as a model, is inherently flawed. In the case of rapid falling property prices due to falling occupancy, reits will be in serious trouble unless their ah gong ( parent) come to the rescue, by then, the rights will be highly dilutive and heavily discounted.

Silly talking again
SI

2 comments:

  1. Hi Silly Investor

    Very good take and explanation there on all the grudges around.

    I went to eat lunch once with Alvin asking him about his experience with the shipping trust. Apparently he was doing a good job there but left after a year due to conflict of objective with the board. Pretty good business person he is but a very demanding boss to employee :)

    Agree also on the aims rights that people view it as a positive move hence different outcome with lmirt.

    ReplyDelete
    Replies
    1. Hi B,

      Thank you for your thoughts on this matter.

      I wonder what the disagreement is? If PST is not privatized, would he still be around?

      I am not sure if it is his credit that PST amortize their loans which have the financial muscle to buy ships on the cheap in the downturn. But if it is his call, then I say his business acumen is quite there.

      Anyway, LMIR, is definitely not those strong blue chip reit, it has too many risks, it's only about valuation and risk reward and the lesser evil for those already vested.

      If I am not vested at all, I may or may not accumulate, but I did manage to get some at 34 cents. Hope the wall holds.

      Delete