Thursday 1 December 2011

How good are the returns from REITS?

Here is a nice table depicting the returns from 22 Singapore REITS.  This table was posted in this blog:
http://cgmalaysia.blogspot.com/2011/11/reit-myth-busted.html



18 of these REITS were launched before 2009, 1 in  2010 and 3 in 2011.

Questions:

1.  What are the possible reasons for one REIT giving a better return on capital compared with another?  For example,  the 64.8% return on capital of Suntec Reit (started in Dec 2004) beats the 39.5% return on capital of Fortune Reit (started in August 2003)?

2.  By law, 90% of earnings of REITS are distributed as dividends to the shareholders.  This leaves little money for reinvesting for growth.  How are the good managers of REITS seeking money to grow the company?

3.  Note that of those 18 REITS launched before 2009, 14 raised new capitals from cash calls from the shareholders.  Only 4 of these 18 (Frasers Centrepoint Trust, Suntec Reit, ParkwayLife Reit and CapitRetailChina Trust) did not ask for any subsequent cash calls.  What distinguishes the 2 groups of REITS and their managers - those seeking cash calls and those not seeking cash calls from the shareholders?  Are there significant differences between the returns on capital between these 2 groups?  How are the managers of the 4 REITS that did not seek further cash calls, seeking growth and growing their earnings?

4.  Of the REITS raising cash calls from the shareholders, the amount raised exceeded the dividends paid to the shareholders over the same period in 9 of these 14 REITS.  In the remaining 5, the cash calls were a significant percentage of the dividends distributed to the shareholders over the same period. Many of those who invested in REITS are seeking passive income to supplement their living and may not have further capital to reinvest.  What is the impact on the return on the capital to the group of shareholders who were unable to take up the rights issue?

5.  For those with the money, would taking up these cash calls give them a better return on capital than if they did not?

These are some interesting points to ponder further.



Also read:
FEATURED POSTING: REITS: WHERE IS THE MOOLAH?

The Myth of EPS Growth
The Myth of EPS Growth - Impact of new capital issues on EPS

and related articles:


Intro to REITs Investment

What are REITs?
REITs stand for Real Estate Investment Trusts. They are specialized companies that invest in commercial, industrial, residential and healthcare real estates. Examples on the Singapore Stock Exchange includes CapitaCommerical Trust (Commercial), Cambridge Industrial REIT (industrial), Saizen REIT (residential) and Parkway Life REIT (healthcare).These companies buy and manage properties including shopping malls, offices, hotels, hospitals.

REITs usually pay a generous dividend because they are required by law to distribute most of their earnings to shareholders. In exchange, they receive tax incentives.

However, good REIT management teams have found ways to raise the money they need.
  1. Sometimes they raise money by selling additional shares of stock, including preferred stock.
  2. They can borrow money from the debt markets through issuing unsecured notes and debentures -- bonds.
  3. They can do private placement offerings.
  4. They can sell poor performing properties and reinvesting the proceeds in more profitable real estate.
  5. Good REIT management also seek ways to raise additional cash from their existing businesses, by raising rents and reducing expenses *this includes reducing overhead.). This increases their Funds From Operations (FFO).

What are the Risks of Investing in Real Estate Investment Trusts?

Of course, nothing in this life is guaranteed, and that includes real estate investment trusts.

REITs are more than just a pile of properties, they are active businesses, and subject to business risks. It's a testimony to the industry, however, that over the years only a handful have gotten into deep financial trouble.

According to Ralph L. Block in Investing in REITs, those real estate trusts that have gotten into trouble have done so primarily due to 
  • excessive debt leverage, 
  • poor allocation of capital resources, and 
  • questionable transactions with directors or major stockholders.
That's for individual REITs. As an industry, their businesses are subject to two particular risks no matter how well managed they are (though good management can succeed despite these dangers).

1.  Overbuilding or excess capacity, or overdevelopment.
2.  High interest rates
Choosing a good REIT is like choosing any other value investment.

Assets = Real Estate
Debt = Debt
Returns = Rents + other payments received on the portfolio.

An investor must analyze and compare a REIT's:

  • management quality,
  • real and anticipated returns,
  • yields, growth,
  • reserves, and
  • asset values.
Many of the techniques for common stock can be put to work here.

REITs - Property Portfolio

REIT investors should check out the property portfolio. This isn't easy, but it's easier than it used to be with online resources, usually provided by the REIT company itself.


Because real estate is not traded regularly, the ability to ascertain values is limited to:
  • appraisals,
  • replacement values, and,
  • for income-producing properties, discounted cash flow analysis.
Appraisals are difficult to find.
Looking at the properties, and their locations, and assessing commonly reported local real estate price trends, occupancy rates, and economic trends, and whether the book value of a property is sustainable, is probably best.



REITs - Debts and Leverage

Good REIT managers will typically hold debt levels to 35% or less of the total capitalization of the trust. 


REITs - what and why

REITS are technically investment trusts that works like closed-ended fundsholding real estate instead of stocks or bonds.


REITS pool investor money to allow average individual investors to invest in a portfolio of
  • commercial,
  • residential, or
  • specialized real estate properties.
By buying shares in a REIT, you take proportional ownership in the real estate ventures that the trust owns. And these ventures range beyond traditional properties to health care and retirement facilities; ports and warehouses; even car dealerships, penitentiaries, and high-end hotels.

REITS and Returns

Funds from operations (FFO) is an important measure of a REIT's operating performance. 


FFO includes all income after operating expenses, but before depreciation and amortization.

Growth in FFO typically comes from:
  • higher revenues,
  • lower costs, and,
  • management's effective recognition of new business opportunities.
REITs with a growing FFO are generally more desirable,because this is a demonstration of an ability
  • to raise rents and
  • keep occupancy stable.
Beware of dividends that are being paid out of profit from the sale of property or from cash reserves; these payments may not be sustainable.

Investing in REITS

Value investors strive to identify investments trading at valuations below intrinsic value. 


The objective is to identify REITS with potential for significant appreciation relative to risk. 


Because REITS are generally regarded as hedges or defensive investments, they may be overlooked during bull markets.

Most recently, REITS in healthcare and industrial sectors have done wellbecause they have both a real estate and a business component.


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