Property investing: cash towers over trusts

Property investing: cash towers over trusts
Carolyn Cummins
December 1, 2011

Overseas investors are pouring money into commercial property in Melbourne.

THE virtues of investing directly into property by asset acquisitions or indirectly through real estate investment trusts have been brought to the fore with two reports indicating that bricks and mortar win every time.

But size does matter, with high net-worth investors able and willing to buy directly, while smaller investor err towards the REIT sector.

According to Emerging Trends in Real Estate Asia Pacific 2012, from PricewaterhouseCoopers and the Urban Land Institute, overseas investors are pouring cash into the Sydney and Melbourne commercial property market through acquisition of office blocks and shopping centres.

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PwC real estate leader James Dunning said the report indicated Sydney was one of the lowest-risk markets in the Asia Pacific region. ''Sydney has jumped from seventh position to third-most favourable investment destination, behind only Singapore and Shanghai. Melbourne has also improved, moving from ninth to seventh spot.

''Melbourne is also one of the region's most important markets, despite its construction levels cooling. For both cities, prospects over the next year are cautiously optimistic.''

In contrast, the indirect Australian REIT sector's recovery from the global financial crisis continues to be hampered by 
- international economic uncertainty, 
- short-term debt maturity and 
- unsustainable gearing levels.

According to Ed Psaltis, head of property and REIT Group at PKF and author of the REIT Monitor for 2011, these factors continue to affect investor confidence, resulting in many REITs trading at discounts to their net tangible assets, further segmenting the sector.

''Despite considerable efforts … to extend debt maturity and reduce gearing levels, both factors remain far too high,'' he said.

Read more: http://www.theage.com.au/money/investing/property-investing-cash-towers-over-trusts-20111201-1o87z.html#ixzz1h4iA8mXi

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.

How Do Real Estate Investment Trusts Grow?

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

REITs - Selecting REITs

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.

Understanding Malaysian REITS

Thursday October 21, 2010

What is REITS and how to get monthly dividend payments from it

Personal Investing - By Ooi Kok Hwa

A LOT of investors, especially senior citizens, are hoping to get consistent and regular dividend payments from stocks.

In this article, we will look into constructing an investment portfolio, which consists of real estate investment trusts (REITs), to get monthly dividend payments.

A REIT is a real estate company that pool investor funds to purchase a portfolio of properties. Normally, it has two unique characteristics: investment in income-producing properties, with almost all of its profits distributed to investors as dividends.

From the table, based on the latest stock price (as at Oct 18) and on assumption that the same dividend payments will be paid over the next 12-month period, almost all REITs will provide about 7%-8% dividend yields. Based on our observations, most of the REITs will try to pay higher dividends over the years. Hence, if the overall economy continues to recover, some REITs may pay even higher dividends for the coming few years.

Due to them only listing at the middle of this year, we have excluded CMMT and Sunreit.

As mentioned earlier, a lot of retirees would like to invest in investment assets that can provide a consistent and regular dividend income. Therefore, we think that REITs can provide a good alternative to the retirees. From the table, except for Arreit, Atrium, Axreit and Hektar, all other REITs will make dividend payments twice per year. Most of them will pay their dividends in the month of February and August. Hence, if an investor would like to receive his dividends other than the above two months, he may need to diversify their REITs into holding many types of REITs.

Based on the list of REITs in the table, we can see that, except for the month of January and April, dividend payments were being made at different months throughout the year, thus investors can receive a stream of dividend income by buying into different types of REITs.

Investors can build a REIT portfolio consisting of a few REITs which make dividend payments at different months of the year. The following is just one of selection options available for consideration.

Based on the current price dated on Oct 18, assuming that the same dividends will be paid in the next 12 months, a portfolio with AMfirst, Arreit, Atrium and Hektar can generate a dividend yield of more than 8% (see table). Besides, by buying with equal amount into these four REITs, investors can get dividend payments for almost every month, except for the month of January, April, July and October.

Nevertheless, investors need to understand that the above selections are solely based on the assumption that these REITs will reward investors with the same dividends and pay during the same month as shown in the table above.

We also understand that apart from the above four REITs, some other REITs may reward investors with even higher dividend payments.

OoiKokHwa is an investment adviser and managing partner of MRR Consulting.

Click here too:

http://boyboycute.blogspot.com/2010/10/why-bother-investing-in-malaysian-reits.html
This blogger expressed concerns over Malaysian REITS.

THURSDAY, OCTOBER 21, 2010

Why bother investing in Malaysian REITs?

Today, i read an article on The Star by Mr. Ooi Kok Hwa regarding REITs. Take a lot at the article here.

What makes me furious is that Mr. Ooi who is an investment adviser and managing partner of MRR Consulting,has misled the public by not discussing the real issues in Malaysian REITs(MREIT).I guess a consultant is still a CONsultant.

MREIT is full of crap properties.If you look at their portfolio,most of these properties are actually dumped by developers/owners since they cannot sell their buildings in the market to professional institutional investors.For example,SUNWAY REIT (which i wrote earlier) is one of them.Creating a REIT is the best way for developers/owners to either 'sell their building at higher valuation' or 'unload their poor quality properties to the market'.

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.

Perhaps, we can view REITs as an instrument to buy and own a small portion of a property, while at the same time shared fundings with many other shareholders to employ someone to manage that piece of property. With REITs, we can invest in real estate with no leverage, no property and no need for any stress in finding tenants and collecting rent from them.

REITs investment generally focus on dividend yield. Also, like any stocks on the exchange, investing REITs can also result in capital gain. The same can be said of investing in real properties. However, because REITs are traded on the stock exchange, it's liquidity is much higher than the actual property itself.

So how do we choose what types of REITs to invest in? I'm not an expert in it, but I shall share some basics of what I think.

The factors that are important to me are:
1) Dividend yield with regards to current stock price, as with how we choose most dividend stocks
2) Gearing
3) Growth potential
4) Sector
5) Sponsor/Backer

1) Dividend yield
Basically, I will be happy with any dividend yield from 6~8% considering that I do not need to actively monitor the stock price. Choosing and buying those with dividend yield of >6% will mean that should anything unforseen occurs, a reduction in DPU would perhaps still beat putting the money in the bank anytime. Of course, reduction in DPUs would likely bring about a drop in the share price as well till the dividend yield is back to the 'acceptable' range. This should not matter if we are taking a longer term investment view as the dividends would eventually pay itself off.

2) Gearing
With the recent credit crisis, there are companies who have to stop dividend payouts, do placement, issue rights, etc, in order to remain in business. If the gearing is low, refinancing of debts is usually a problemless affair. However, if the gearing is high, as in Saizen REIT and Rickmers Maritime, the ability to refinance debts at critical juncture is hampered. The ability to remain as a going concern would be cast in doubt, and this would make it even harder for refinancing.

3) Growth Potential
A REIT which is actively, but conservatively, acquiring properties would in the long run benefit the shareholders with increasing NAV and increasing dividend yield.

4) Sector
The different sectors mentioned earlier, commercial, industrial, residential and healthcare are different in nature. Industrial and healthcare related properties are usually more defensive in revenue, hence the dividend yield would be more consistent. For commercial and residential sectors, the rents could vary more as the tenants are much more mobile. Hence, the dividend yield could fluctuate. However, for the risk, the yield is usually higher.

At the moment, for REITs, I have only CapitaCommercial Trust and Starhill Global REIT, both in the commercial sector. I hope to eventually include the other 3 sectors so that there will be some diversification.

5) Sponsor/Backer
A strong sponsor like Temasek Holdings, Capitaland, or YTL Corporation would be key to the success of the REIT in refinancing its loans.

You might also like:

• Gearing of REITs
• Dividends Reinvestment Strategy Calculations
• Bought Starhub and GRP
• The Enlightenment About Passive Income

http://wealthbuch.blogspot.com/2009/11/intro-to-reits-investment.html

How Do Real Estate Investment Trusts Grow?

How Do Real Estate Investment Trusts Grow?

One argument that might be made against real estate investment trusts is that, because they are required by the government to pay out at least 90% of net income to their shareholders, they don't have the cash from retained earnings to expand their businesses.

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).

When speaking of this, even non-retail REITs make use of a retail industry term -- same store sales. That is, the more sales that can be generated by the same store, the more profitable it. The more rent and other revenue that can be raised from the same property, the profitable it is and the more cash it generates for the company.

This can include raising rents on existing occupants, upgrading properties to higher-level occupants and reducing vacancy rates. It can include upgrading or expanding the property.

Retail REITs, especially shopping malls, usually have percentage-rent clauses in their leases. This means that the mall gets a percentage of the store's revenue above a certain preset level. The more successful the store, the higher rent it pays. Keep that in mind the next time you hear a commercial for a shopping mall on the radio -- the mall wants you to come and shop there because the more money their individual stores make, the more rent the mall receives.

Some REIT leases include periodic rent bumps that are fixed amounts or based on an index of inflation such as the Consumer Price Index.

Some mall and other types of REITs save on expenses by getting occupants to pay for common needs such as security, advertising, and janitorial services. This is known as expense sharing or cost recovery.

Overall, the more cash the real estate investment REIT can raise through its operations, the higher its internal rate of return or IRR.

Obviously, the Higher a Company's Internal Rate of Return is, the Better for its Investors

Of course, the stronger the real estate trust company is to begin with, the more able it is able to raise additional money.

The REIT Real Estate Investment Trust can use the additional cash to purchase additional properties, or even to purchase entire private real estate companies, or even other REITs.

The goal is to find opportunities to make an additional internal rate of return that's higher than the company's cost of equity capital. The difference between the cost of capital and the FFO a company can earn from the property is called the spread.

Strong Real Estate Investment Trusts have picked up great properties at bargain basement prices following local and national real estate market collapses. Eventually demand picks up again, and the REIT is making money off the properties.

Some REITs are Able to Expand by Developing New Properties in their Specialization and Local Geographic Area

Of course, this depends on their ability to raise the necessary capital to fund the development until it begin making money.

Of course, such development projects come with the risk of cost overruns on the construction, the demand for the space may be reduced during the development period (perhaps a recession has just started), and the risk that interest rates rise during the construction period.

Some real estate companies have formed joint ventures (JVs) with institutions to develop, acquire and manage properties. The REIT provides the skills and experience to acquire, develop and manage the commercial properties. The institutions provide the capital. Both can benefit.

With the passage of the REIT Modernization Act, these trusts have been allowed to engage in real estate-related businesses.

REIT trust investors should look for management teams who are aggressively seeking to increase both Funds From Operations and Internal Rates of Return.

http://www.incomeinvesthome.com/growth/reit/equity/growth.htm


Related: Understanding REITS


Investing in Real Estate Investment Trusts (REITs)
http://www.pimco.com/LeftNav/Bond+Basics/2006/REIT+Basics.htm

Real Estate Investing through REITS
http://beginnersinvest.about.com/od/reit/a/aa101404.htm

Understanding Risks before Investing in REITS
http://findarticles.com/p/articles/mi_m0JQR/is_3_14/ai_30366025/

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

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.

Real estate property typically goes through a boom to bust cycle. When demand for offices/apartments/malls is going up, developers rush in to build more of these properties. It's difficult to know when enough is enough, and within a few years, too many offices/apartments/malls are on the market, and rents go up and occupancy rates go down.

Sometimes the problem is not with the amount of new properties put on the market, it's with the local economy. When it goes bust, for whatever reason, the local commercial real estate market goes down.

One good example is the San Francisco Bay Area during the late 1990s. During the dot com/high tech bubble, people in Silicon Valley were renting out their couches to computer programmers for hundreds of dollars a month. After the dot bomb crash of March 2001, when many high tech companies closed their doors, the market for office space in that area went downhill with it.

Such periods are known as renters markets, and are therefore bad for property owners.

It's simple economics. When supply goes up too much and/or demand goes down too much, the price of the product must go down.

2.  High interest rates

Interest rate increases affect REITs in a number of ways.

Since their value as an investment is for their income, higher interest rates in the overall economy makes bond yields higher, driving some money from REITs to bonds and preferred stocks.

In operating their businesses, higher interests rates makes it harder and more expensive for Real Estate Investment Trusts to borrow the money they need to expand.

Also, higher interest rates put pressure on the businesses they're renting to (by increasing their cost of borrowing money, and from reducing consumer income to spend), making it harder for those businesses to pay rent, or to pay higher rents.

Also, reduced sales in stores reduces the amount of overage rents that mall REITs can collect from the stores.

There is a risk in using current rental income to value a REIT. What current tenants are paying may be more or less than current market rents. When the current leases expire, the company will have to negotiate current market rents.

When current rents are below market rents, that's known as embedded rent growth or loss to lease, because when the lease is renewed, rents will have to go up.

When current rents are below market rents, that's known as rental roll-down, because when the lease is renewed, rental income will have to go down.

In a commercial lease, one year is used as a reference against which revenues or expenses are measured in later years. This is known as the base year.

The total leasable space in a commercial property is known as the Gross Leasable Area or GLA

http://www.incomeinvesthome.com/growth/reit/equity/risks.htm