ValueBuddies.com : Value Investing Forum - Singapore, Hong Kong, U.S.

(21-03-2013, 03:33 PM)sunrocker Wrote: [ -> ]Hi all, I'm new to investing and have some investments in Reits. After a period of time (still on the course of learning). I have some doubts about how Reits operate and I hope you guys can provide some explanation to me.

I noticed Reits have been refinancing again and again without repaying down the debt? Using a new debt to cover an old debt? It seems like Reits (most or all) can never been able to be debt free? The only way to be debt free is to issue a placement or rights issue big enough to repay the debt?

Is my observation correct? As much as I like the "predictable" income, I dislike the fact that debt never seems to be paid down.

Some reit managers treat unit holders like ATMs . Few reits in 2008 need to be recapitalised so as to survive.

(21-03-2013, 03:33 PM)sunrocker Wrote: [ -> ]Hi all, I'm new to investing and have some investments in Reits. After a period of time (still on the course of learning). I have some doubts about how Reits operate and I hope you guys can provide some explanation to me.

I noticed Reits have been refinancing again and again without repaying down the debt? Using a new debt to cover an old debt? It seems like Reits (most or all) can never been able to be debt free? The only way to be debt free is to issue a placement or rights issue big enough to repay the debt?

Is my observation correct? As much as I like the "predictable" income, I dislike the fact that debt never seems to be paid down.

Debt is a tool, not a cost. A cost should be kept at lowest all the time. A tool, should be used when it is helpful.

(21-03-2013, 03:33 PM)sunrocker Wrote: [ -> ]Hi all, I'm new to investing and have some investments in Reits. After a period of time (still on the course of learning). I have some doubts about how Reits operate and I hope you guys can provide some explanation to me.

I noticed Reits have been refinancing again and again without repaying down the debt? Using a new debt to cover an old debt? It seems like Reits (most or all) can never been able to be debt free? The only way to be debt free is to issue a placement or rights issue big enough to repay the debt?

Is my observation correct? As much as I like the "predictable" income, I dislike the fact that debt never seems to be paid down.

Hi,

U are right that reits debt will never be paid down. No managers will issue rights to pay down debts unless they are left with no choice because investors community will not take lightly a non accretive rights issue.

So u are right, reits are risky due to the fact that they need leverage to survive. But it's not the case whereby the debts will keep increasing like a bubble waiting to burst. Loans needs collateral, and the quality of assets purchased will determine if the valuation of assets improve over time and hence gearing ratio goes down, similarly, valuation goes down and gearing goes up without adding a dollar( as pointed out by nick ) banks also lend based on the strength of sponsor and the cash generating power of the assets. ( sometime more so than just valuation)

For gearing to go down, reits can sell existing assets too, suntec sold chimes for a profits to help offset some of the AEI going on at suntec and soften the blow on fall in DPU.

Banks will not be trigger happy in pulling the plug on loans as its lucrative business, unless they see the reits or themselves getting into trouble.

So, unless the banks are at risk of run, or the REIT managers are wantonly increasing debts, or their parents company are financially unstable, u should be concern more about the cash generating capabilities of reits, the occupancy rate and lease expiry, and pipeline of possible assets injections of sponsors, than just focused solely on debt.

Just my 2 cents worth. Read the book by bobby, almost everything I know is from there.

(21-03-2013, 03:33 PM)sunrocker Wrote: [ -> ]Hi all, I'm new to investing and have some investments in Reits. After a period of time (still on the course of learning). I have some doubts about how Reits operate and I hope you guys can provide some explanation to me.

I noticed Reits have been refinancing again and again without repaying down the debt? Using a new debt to cover an old debt? It seems like Reits (most or all) can never been able to be debt free? The only way to be debt free is to issue a placement or rights issue big enough to repay the debt?

Is my observation correct? As much as I like the "predictable" income, I dislike the fact that debt never seems to be paid down.

Hi sunrocker,

I am also an investor in REITs, having close to 30% of portfolio in REITs. The loans that REITS borrow are generally known as "interest only loan". In fact, if I myself can get such a loan for own personal property purchase, I will happily take it up, especially at low interest rate environment. But I can't, so I went for 35yr loan. Reasons being i) future value of the loan amount will be lower than present value, ii) improve my cashflow, iii) ability to invest the additional cashflow for better return. So I don't see anything wrong with such loans.

For REITs, such a loan will mean a higher dividend payout to the unit holders, and the unit holders can decide what to do with the dividend (cashflow).

Of course, such loans need to be refinance every few years, and, as stated by other forumers, possible increase in interest in the future will likely decrease the dividend of the REITs, so I am currently paring down my REITs holding and switching over to companies with small amount of loan and provide similiar dividend return on the share purchase price.

The Straits Times
www.straitstimes.com
Published on Mar 22, 2013
Hospitality Reits in for flat growth
Oversupply in hotel rooms, shorter average visitor stay partly to blame

By Cheryl Lim

INVESTORS in hospitality Real Estate Investment Trusts (Reits) have been warned to prepare themselves for a year of flat growth, given that Singapore's serviced apartments and hotel sectors are set to face challenges.

A report issued by OCBC Investment Research predicts that demand for the serviced-residence industry will likely remain unchanged while room rates for the industry will remain flat or decline.

It said this is partly due to the potential oversupply of hospitality accommodation due to hit the market over the medium term, which could ultimately impact Reits like Far East Hospitality Trust and Ascott Residence Trust.

OCBC estimates that the supply of hotel rooms is set to grow by 5.8 per cent a year between 2013 to 2015, outstripping the 5.4 per cent annual growth in demand for hotel rooms over the same period. The OCBC report also points out that the average length of stay per visitor is falling, partially owing to the strong Singapore dollar.

A recent report by Knight Frank made similar predictions but it expected the potential supply of hotel rooms will marginally weaken room and occupancy rates.

Mr Ian Loh, Knight Frank's director and head of investment, said: "With some 5,020 hotel rooms to be completed in 2013, we expect the occupancy rates to drop marginally but still remain above the 80 per cent mark."

Mr Loh also noted the labour issues the sector is facing, adding that the higher foreign-worker levies and lower dependency ratio ceiling will continue to pose challenges for the service-intensive sector.

He said: "Higher salaries and flexible working hours will have to be introduced to attract and retain service staff, which will add to the cost factor, particularly for upscale and luxury hotels which demand high-quality staff."

But he added that the hotel sector still has bright spots to look out for in the year ahead.

New attractions like the River Safari and the National Art Gallery are expected to maintain Singapore's allure as a global tourist destination.

The Singapore Tourism Board has also forecast that about 14.8 to 15.5 million visitors will visit Singapore this year, a jump of up to 7.6 per cent from last year's figure.

Mr Loh also added that Singapore's top visitor arrival markets - Indonesia, China, Malaysia, Australia and India - may provide more support to Singapore's tourism sector, as visitors trade more expensive long-haul destinations for cheaper flights within the Asian region.

cherlim@sph.com.sg

Hmm.. There is a article on BT about Moody commenting that s- reits embarking more on unsecured funding is credit positive. Er... Sorry huh, unsecured funding as credit positive, does this still apply in a crisis? I thought unsecured funding will be the first to be pulled if banks need funds or reassess their risks??

Now KE has come up with a report on S-REITs. A warning, perhaps?

(22-03-2013, 09:45 AM)Greenrookie Wrote: [ -> ]Sorry huh, unsecured funding as credit positive, does this still apply in a crisis? I thought unsecured funding will be the first to be pulled if banks need funds or reassess their risks??

There is a difference between unsecured VS uncommitted.....

(21-03-2013, 11:20 PM)NTL Wrote: [ -> ]

(21-03-2013, 03:33 PM)sunrocker Wrote: [ -> ]Hi all, I'm new to investing and have some investments in Reits. After a period of time (still on the course of learning). I have some doubts about how Reits operate and I hope you guys can provide some explanation to me.

I noticed Reits have been refinancing again and again without repaying down the debt? Using a new debt to cover an old debt? It seems like Reits (most or all) can never been able to be debt free? The only way to be debt free is to issue a placement or rights issue big enough to repay the debt?

Is my observation correct? As much as I like the "predictable" income, I dislike the fact that debt never seems to be paid down.

Hi sunrocker,

I am also an investor in REITs, having close to 30% of portfolio in REITs. The loans that REITS borrow are generally known as "interest only loan". In fact, if I myself can get such a loan for own personal property purchase, I will happily take it up, especially at low interest rate environment. But I can't, so I went for 35yr loan. Reasons being i) future value of the loan amount will be lower than present value, ii) improve my cashflow, iii) ability to invest the additional cashflow for better return. So I don't see anything wrong with such loans.

For REITs, such a loan will mean a higher dividend payout to the unit holders, and the unit holders can decide what to do with the dividend (cashflow).

Of course, such loans need to be refinance every few years, and, as stated by other forumers, possible increase in interest in the future will likely decrease the dividend of the REITs, so I am currently paring down my REITs holding and switching over to companies with small amount of loan and provide similiar dividend return on the share purchase price.

I am also learning and no expert. My understanding is that Reit is just like another other listed business; it is either funded by shareholders' money or debt. In the case of Reits, the income is rental income and it is used to pay 2 parties; unit holders in the form of DPU and loan creditors who are the banks in the form of interests. The NAV of a Reit is the valuation of the properties minus debts divide by the total number of units. Now the interest question of repaying the entire debt...if cost of debt is lower than gross rental return...wouldn't it be better to keep the debts? (ie is the reason for Reits to be interest rate sensitive). What I still cannot figure out is when the lease tenure of the property expires? Although that would be many years later and I may not even hold my reits that long, what would happen to the NAV? For 99 year leasehold private property, the loan amount possible and selling price would drop as the property ages....Theoretically, for a Reit with say just 1 property with XX years of lease. After XX years, what would happen to the unit price as the property would be written off??

(24-03-2013, 12:11 AM)BeDisciplined Wrote: [ -> ]

(21-03-2013, 11:20 PM)NTL Wrote: [ -> ]

(21-03-2013, 03:33 PM)sunrocker Wrote: [ -> ]Hi all, I'm new to investing and have some investments in Reits. After a period of time (still on the course of learning). I have some doubts about how Reits operate and I hope you guys can provide some explanation to me.

I noticed Reits have been refinancing again and again without repaying down the debt? Using a new debt to cover an old debt? It seems like Reits (most or all) can never been able to be debt free? The only way to be debt free is to issue a placement or rights issue big enough to repay the debt?

Is my observation correct? As much as I like the "predictable" income, I dislike the fact that debt never seems to be paid down.

Hi sunrocker,

I am also an investor in REITs, having close to 30% of portfolio in REITs. The loans that REITS borrow are generally known as "interest only loan". In fact, if I myself can get such a loan for own personal property purchase, I will happily take it up, especially at low interest rate environment. But I can't, so I went for 35yr loan. Reasons being i) future value of the loan amount will be lower than present value, ii) improve my cashflow, iii) ability to invest the additional cashflow for better return. So I don't see anything wrong with such loans.

For REITs, such a loan will mean a higher dividend payout to the unit holders, and the unit holders can decide what to do with the dividend (cashflow).

Of course, such loans need to be refinance every few years, and, as stated by other forumers, possible increase in interest in the future will likely decrease the dividend of the REITs, so I am currently paring down my REITs holding and switching over to companies with small amount of loan and provide similiar dividend return on the share purchase price.

I am also learning and no expert. My understanding is that Reit is just like another other listed business; it is either funded by shareholders' money or debt. In the case of Reits, the income is rental income and it is used to pay 2 parties; unit holders in the form of DPU and loan creditors who are the banks in the form of interests. The NAV of a Reit is the valuation of the properties minus debts divide by the total number of units. Now the interest question of repaying the entire debt...if cost of debt is lower than gross rental return...wouldn't it be better to keep the debts? (ie is the reason for Reits to be interest rate sensitive). What I still cannot figure out is when the lease tenure of the property expires? Although that would be many years later and I may not even hold my reits that long, what would happen to the NAV? For 99 year leasehold private property, the loan amount possible and selling price would drop as the property ages....Theoretically, for a Reit with say just 1 property with XX years of lease. After XX years, what would happen to the unit price as the property would be written off??

The managers will properly sell the property long before the lease is up, if they don't, u better start selling the reits. But the question is, how many years buffer to we allow, industrial reits have leasehold properties of less than 60 years and some in the 30 range, but they seems to be doing well... weird...