V1 http://forum.lowyat.net/topic/479946/+2500

The law/rule required Reit to distribute 90% of their income is the main reason why I invested in reit.

Simple reason, why invested in a listed company? because can share a chunk of its profit.
And with real cash being distributed, you are reloaded with cash and can reinvest on your own liking, whether increaese your stake in reit or diversify into other area.

Another one thing is simple business model, when you know the properties have good rental and occupancy then generally the reit income is pretty highly predictable.

While it can have some part of inflation hedge as well as long as the properties is in highly demanded area.
As we know proeprties price and rental rate generally goes up, when inflation.

Downside:
Due to nature of distributing 90% of its income, there is little money left, so repayment of borrowing totally is a long process, and they need constant or periodically refinancing for their borrowing.
Any new acquisition, must either through increase the borrowing or private placement only.

I don't think the CEO position is a big issue. Company can always apply extension from SC/KLSE to fulfill the requirement.
Atrium is relative small operation company, with 4 warehouses to manage which should be quite easy.

Atrium's concern should be put on lease renewal issue, which one of its warehouse lease is expected to end this year second half, if not mistaken, correct me if I am wrong as I don't know or find any update whether negotiation is taking place to extend/renew the lease yet.

This post has been edited by cherroy: Mar 20 2010, 11:52 PM

Errr..... buying reit on IPO generally is not a good idea, as most reit IPO history showed. They tend to trade below NAV in general from various reit in the market except may be Axreit only.

Reit is not about having potential or not or growth.
The mindset investing in reit is own the properties and get the rental only, one should be treat it as a fixed income instrument and don't expect much appreciation side from the reit price.
Should treat it difference from ordinary share.

I think he may miss out the dilution on the private placement part, just my guess.

It is unlikely to see reit can achieve EPS grow of 50% with just one or two acquisition through private placement and borrowing.

In normal circumstance, market reaction on the share price is quite effective to reflect whatever news or development. As we see reit price generally well position in the range of 7-8% yield across, which most investors are comfortable with that kind of yield range.

Private placement is not a form of borrowing but required SC approval, which the company needs to state the reason for it in order to get it approve. Generally there are guidelines for the use of the money raised when SC approved the private placement or right issue.

So if the private placement stated the money raised is used to fund the acquisition, then it must use for it.

Borrowing/term loan can use for properties acquisition as long as don't exceed the 50% guideline, there is no rule stated borrowing must be solely for working capital, as far as I know. Correct me if I am wrong.

Company and individual is different. Company cannot secure individual housing loan like 25 years. Bank don't do it.

A lot of borrowing are under 5 years under commercial paper, term loan and various type of credit.

It is already considered long tenure if company can secure borrowing more than 5 years period.

As I mentioned before, refinancing availability is very important for reit with gearing.

In 2008, we saw a lot of reit under pressure being sold down and some even went under due to inability to get refinancing on matured borrowing, which eventually force them to liquidate their properties, or fire-sale.

Most reit borrowing cost are around 4-5% as far as I came across.

Since the reit business model is simple, cashflow managing actually derived from occupancy rate and tenant's prompt payment.

For reit, if able to have high occupancy and tenant quality is good aka long term lease and prompt payment each month, then 95% of the reit manager job is done. It is already ensure the reit is under good cashflow position and profitable in general.

As in general, commercial properties yield is around 7-8%, so with 4-5% borrowing cost with high occupancy with prompt payment from tenants, then don't need to work out the math also can rougly know the cashflow situation.

So as mentioned before for reit, the priority concern is more about lease issue.

As long as the rationalisation or selling of its properties at or around its NAV which is expected to be, NAV won't change.

In fact those rationalisation process will realise the capital gain/properties valuation appreciation which is distributable if they wish to.
But just my wishful thinking which I don't think it will. My view only.

Invest in Reit, the primary concern is about yield, not about how much undervalued on its NAV (although it is an important as well, just it is secondary to the earlier factor).

It is not about short term debt vs long term debt at current point situation. As at current point, bankers are willing to lend and credit facilities are available, so short term debt or long term debt is not much an issue. Long term debt will become short term when come or near to its maturity as well, it is all about timing. As long as refinancing is achievable with ease, this is a none issue. And focus should shift to secured interest rate on the loan.

Reit share pricing is primary towards yield issue, not on NAV. So you see reit price generally pricing at around 7-8% across. They follow the yield instead of NAV.

Reit is not popular here, so seldom being discussed in general, no surprise, as many investors here still not fully aware and fully understanding about reit due to the fact reit is boring and somemore low liquidity which make reit volume is low and price generally move little.

Valuation appreciation is already reflected in NAV (from Rm1 to Rm1.20), just the selling of the properties will realise the gain.

The primary risk is about newer properties injection, which not yet being disclosed.
Since there is no info on it, we don't know the future yield which is the primary risk of time being.

The NAV part posted is when Stareit disposes its properties at NAV then NAV will not change due to the disposal of properties.

Don't know what is your meaning especially on the bolded part.

There is no requirement or mandate to pay unit holder 8% or whatever %.
Any distribution is given based on 90% of its profit or income.
Lower income low distribution.
No income, no distribution.

Unit holder is not lendign money to reit company, unit holder is the one 'own' the company.

This post has been edited by cherroy: Mar 29 2010, 02:50 PM

90% is not a policy for Stareit, 90% because if reit is not distributing 90% of its income, it won't be able to enjoy the tax-exempted status.

There is no policy of 8% yield or whatever yield number being guaranteed or promised by any reit company. As income is depended on tenants and lease income.

Stareit is earning about or near 7 cents per unit for the previous year so, at its old NAV of around RM1.00 (before revaluation), it is not a 8% yield either based on NAV.

Don't confuse with the yield of current Stareit's market price around 8.x%.

90% distribution income never equal to 8%.

Also, the realised gain of capital revaluation on disposal, is not the same as operating or rental income. Capital gain is tax-exempted in the first place, there is no mandate or requirement, 90% of the realised capital gain must be distributed to get the tax-exempted benefit like rental income does.

Based on the Atrium financial report, 2 of its property lease is going to expire this year end, wonder negotioation to renew it is under progress or not.

Me really suprise with Arreit declaring quarterly basic, as I didn't came across any announcement they are going to do quarterly distribution before.

Anyway welcome it.

2) yes, there is guideline, debt ratio cannot more than 50% of their NAV. Asset is required to be revalued every 3 years.

3) This is not much an issue for long term investors, as if properties value still intact, the value of Stareit based on NAV is still more than Rm1.00. As share price is a reaction to the yield issue which there is little or no income increment as compared to other reit.

4) Asset can be sold if the property manager wish to, just like Stareit.
Reit currently under 90% distriubtion policy only can grow through private placement to raise money which needed for new asset acquisition. AHP2 is a disappointed incident.
It all depended on how well property manager manage the property and particular property issue, like location, rental demand for the particular type of property.

5) Reit is about how much yield investors willing to pay for or willing to have.
Every year you are getting 9% yield while property is still yours. It is not like you are paying Rm1.00 to them and not returning back, The Rm1.00 property is still belonged to yours.

In fact in reality, you buy a property (residential) adn rent out, it is almost near impossible to have yield more than net 8%. Someore the property you bought is more illiquid than reit. Which reit you can sell whenever you wish to, and with any amount.

At 9%, it is miles better than money parked in FD.

10% return rate is considered moderate high or ok for investment class, giving that reit risk exposure is lesser than ordinary businesses.

Yes, reit growing is little as they can only grow, if there is rental increment, or newer acquisition to improve yield while acquisition financing is only through either borrowing or private placement.
As 90% distribution policy means that only 10% of income is retained in the company.

This post has been edited by cherroy: Apr 9 2010, 01:33 PM

I don't think this is the case for most reit here. Generally there is around 7-8% out there. A lot of their NAV has been going up due to revaluation as we know properties price in general has gone up recent few year. But if taking into the origin NAV in consideration, they are achieving around 8% in average.

10% yield is asking a bit too much out there (but if one has bought last year, most are carrying more than 10% yield), you need to considered there is 1% charge on the management fee side of story. To have a property that can achieve gross 11-12% yield, which is not a reasonable target.

2) The guideline never change. Revaluation is every 3 years. There is SC guideline, not the like every reit has their own rules. It has been there since the reit industry kick off if not mistaken.
Syariah and revaluation is 2 totally different matter. Doesn't relate.

3) AHP2 didn't fetch any income (I don't know what is the reason, as I don't follow the issue), but as far as I had known, shareholders had formed some group to sell off the asset owned which in return will get back money through the asset disposal. They still own the property, not zero. Whatever left is the property.
When a company didn't generate any income, for sure, share price will drop and drop. Who want to invest in a share that doesn't make any money for you.

Share not liquid has nothing to do with reit or any listed company fundamental. Again it is 2 different matter, it is the fundamental issue that causing the reit has little value or depreciated in market price.

4) This rule is to protect shareholders, imagine property manager sold the asset at 50% discount to someone (or though RPT), surely shareholders benefit will be hurt. The rule is to prevent property manager sold the property at significant discount rate due to whatever reason or intention. Any special circumstance can always apply exemption from SC. So this is little case of asset illiquid.

Any guidelines/rules, you consider the unit holders benefit, where got people consider buyer or other party benefit one?
You want to sell your property as close as to the market value. Let say your property/house market value is Rm300K, do you consider buyer must make more than 10% profit, then you decide you must only can sell less than 270K?
It doesn't make sense.

Having reit is about having faith the property manager is managing property properly and generate rental income or yield to the shareholders.
Disposal of properties generally is not something good news to reit, what you want from reit is to expand the rental income scope and getting more properties into thier portfolio and diversified the asset and rental income.

Invested in reit is about expectation of fixed income through rental collection, just like buying a property and rent it out and collect the rent.

If one expect more return like 10-20%, reit is not a place to be. It is more like a fixed income instrument.
Reit is not ordinary share. It is another different class of investment. Risk wise and risk rewards ratio is different. Cannot take in ordinary share return to compare with reit.

The most important for ordinary reit investors, how much return and yield you can get through buying the reit in the market.

You buy Axreit at Rm2.00, it can genearate about 16 cents or little more for you then it is 8%+ gross yield
You buy Stareit at Rm0.86, it can generate about 7 cents, it is about 8% yield.

So reit price is adjusting to the yield attractiveness in general.
Properties revaluation or higher NAV is another bonus aspect, and investors out there don't buy the reit based on NAV but people buy reit due to the yield factor.
Investors buying share out there don't look merely on NAV alone, what investors want is hard real return each year. It is as same acorss stock market. We have a lot of property counter (not reit) that are trading at Rm1.xx but NTA is Rm3-4 as well, why? Because share price react to ability to generate profit to the shareholders.

This post has been edited by cherroy: Apr 10 2010, 12:21 AM

Properties is required to be revalued every 3 years, that's for sure. But under reit, there are many properties, so the every 3 years period is not the same for each one, so you may see revlaution happen every year, but they will state which one is revalued in the period.

Borrowing cannot exceed 50% disregard long term or short term. can refer here http://www.axis-reit.com.my/images/axisrei..._08_chap1-8.pdf

Regarding the ex-date, deduct out the share price, as long as company is earning constantly through rental income, the lower price of the share price, the higher yield it is and more attractive.
It will not become zero. For eg. Stareit is earning 7 cents, so after 10 years, it deduct out 70 cents, so theorectically, it will become 0.86-0.70 = 0.16. It is not the case.
If Stareit is still continue rent out its properties, and earn 7 cents, I can assure the share price won't be 0.16. It is no braniner to see it will be 0.16 if it is still earning 7 cents.

Do not take ex-div which deduct out share price will devalue the share. It doesn't. The share valuation come from ability to generate profit/income to shareholders.
Share price will auto adjust by market force which dictate by yield factor.

For eg.
Axreit is giving out average 12-15 cents for the past few years, but share price of Axreit is higher than before because it managed to grow its earning, diversified and expand through acquisition which through private placement.


AHP2 didn't generate any income to the shareholder previously which is the major downfall of this reit and the reason why unit holder disgruntled, not about share price below or above NAV. So unit holders have no choice to liquidate the properties to get back the money. As said before, no one will want to invest in anything that doesn't generate income for them.

Reit is about renting, leasing properties which is the core income and attractiveness. You look for the properties can be rent out for long term.

You buy reit not because of NAV, you buy reit because about its yield.

As said, if wish to see return rate of 10%, reit is not a place to be.

It is as same as you buy a property then rent out only. The situation is identical to reit. You cannot grow your properties portfolio, if you have no new money or through borrowing. You cannot possible get more than 10% yield through renting out.

Rental market yield is about 7-8%.

For revaluation issue,

Reit guideline has stated 3 years once at least.
New FRS stated every year. This is applied across all company account if they start to adopt the new FRS. This is not applied on reit only.

So I don't see any clash between the guideline and FRS. If adopted the new FRS, then every year revaluation once. I don't see an issue here. The new FRS every year revalaution means they will overwrite the guideline only.

There is no such thing of every reit adopted their own guideline.

If one view the ex-date distrubtion/dividend deduction is actually culprit of share price dropping, I can't help to explain more further (has been explained many times). In actual fact, it is not. Whether there is distrubtion or not, share price still will drop to 0.8x to match the overall market yield around 8% if Stareit cannot earn more than 6.+ cents. Market share price always respond and react to how much earning ability.

After the recent financial crisis, investors demanded more yield to justify their risk, especially with real estate is the main culprit of recent crisis and a number of overseas reit actually went under and have their own problem, mainly due to leverage issue.

If one view short term like that (ex-date of dividend deduct out the share price), then please don't buy any dividend stocks. No offence.

Stareit IPO price at 6.x% yield is not attractive enough for investors, that's why the share price drop to 0.8x become a 8.+% yield. Somemore Stareit DPU never go up at all and with the rationalisation plan uncertainty (new properties injection), then share price will be traded at this range for near term until situation become clearer and how much the future yield it will be.

As said before, you buy reit, you look at yield as primary factor, you don't look at its IPO price nor NAV, as this is secondary.

Look at how much IPO offer price at what expected yield, then only decide the price you are going to enter. If yield is not attractive enough as compared to overall market existing has, then high chance it will drop below IPO price or NAV.

Every reit situation is different, some may have rental revision for every 2-3 years, so if the rental being revised upwards, then there is positive contribution to the profit made.

To make reit price steady, the only and effective way to to have consistently earning power and may be some little improvement in income. (it is not possible to see earning of reit double or triple over short to mid-term, without expanding through borrowing or private placement.

If a reit is earning steady 7% over the long term, it is very unlikely to see its market price drop become 14%, as people will already snap up if the yield become higher and higher. It is no brainer for anyone to sell the reit which is yielding 14% and still able to earn steady and consistently over long period of time.
Except for some special circumstance like financial crisis which lead to risk of reit facing (like cannot find tenants, refinancing facilities is totally shut like what happen during 2008 etc) or FD interest rate become 7% which make 7% reit become non-attractive.

FRS has nothing to do with the reit guideline as said, Guideline provide a guide so that reit doesn't cross the line. I do see any different interpretation.

Market is always has some kind of effectiveness. The good example is Axreit.
Axreit earning and DPU has been increasing quite steadily, eventually, reit price also move along and respond to the DPU.

You reward the investors with more earning and yield, then it eventually will lure investors in it.

Yes, local reit market is not as liquid and effective compared to ordinary share, (without liqudiity and volume, effectiveness surely is severely distorted or affected) but there is some kind of effectiveness as well. As we can see most reit price is positioning to around 7-8% in general. So want higher unit price, then company need to deliver high DPU.

The issue/problem about reit is
Locally reit market is very unknown and not understanding to retailers, so eventually there is little retail investors participation, we can see most reit have shareholders around 1K or so only. And somemore retailers in KLSE are more adventurous, they don't want to have something that price is stagnant and move little and trade little one.

To say reit tend to drop, yes, they tend to drop from IPO price, because I don't find IPO price in some reit is attractive because its yield at IPO price is lower than market out there. But it doesn't drop straight line down, as long the reit is having constant income, then the reit market price will be positioning at around 7-8%. So market unit price will react how well their DPU.

For instituitional,
Reit liqudity is not high enough to prompt instituitional investors to dump big into it. The reit size is singificant smaller to attract large instituitinal investors. Even some insurance fund, and UT only invest around a couple million to ten plus millions in it. The size and liquidity is simply too small for reit industry as compared to overseas.

As said before as well, reit has little or not much room for growth due to restriction on borrowing, so with not much room to grow, it is not justified for investors for own a reit if yield is around 5-6% which is just a notch higher then bond market, as having a reit, risk wise is higher than a bond.
If a steady strong dividend stock that carry 6% and a reit also carry 6%, why investors want to choose the reit over dividend stock? While ordinary dividend stock has way much room to grow in ordinary businesses.

Another aspect, overseas like Sg reit income or distribution is not subjected to 10% witholding tax, while Malaysia reit does. So investors will 'discount' this factor on the reit price as well. As investors care about the net yield they are getting. A gross 8% means real yield is 7.2% only.

I no doubt there are problem/challenge on local market reit which summarise a few as below

1. Size
2. liqudity
3. witholding tax
4. Low understanding on reit for local retailer investors.
5. Restriction on borrowing (which I view, it is good)
6. RPT

But to say reit price is tend to go down, or the distribution is the culprit make reit market price going down, is inclusive conclusion. As said, 50% of reit is actually above IPO price, as reflect there is about individual issue on reit itself like quality of their portfolio, management that improve the reit earning etc issue.
It is as same for ordinary stock as well, some perform good, some worst.

This post has been edited by cherroy: Apr 12 2010, 11:48 AM

Yup, the total amount of income is increasing, just there are more unit to share the pie.

But within the report stated, Quattro West will get 84% of tenant after second half 2010 and SADC1 manage to find a new tenant after 1.5 month without.
So if everything goes right, can see some improvement back.

I don't see there is more upside space from Rm2.00 onwards for near term, almost fully value based on current yield.

But we also need to consider that 3.70 cents is actually a 95% payout only from its realised income, compared to 99% last year.