REITS question

Good question!

Just to clarify on terminology I will use (not necessarily correct) - I am going to use Australian REITs for listed entities and Comm Prop Trust (or just CPT) for the unlisted type. There are also syndications but I'll just bundle them into the CPT thing for now.

There has been a reit that has gone under in living memory - Centro.
Westfield nearly followed, but Frank had deeper pockets.

It is even more likely for a CPT to go under - as they don't have the same reporting requirements that listed entities do. They can be very opaque in what they are doing.

@Big A @bookworm etc can probably give some examples.

The Y-man

 

For listed, you just need to open a standard online share trading account.

Unlisted can be bought straight from the fund manager eg
Unlisted Direct Property Funds
Unlisted Property Funds | Commercial Property Investment | Centuria

The Y-man

 

There's several variable here.

The unit prices of unlisted trusts are figured out by (latest bank val) / (number of units)

The unit prices of listed REITs are .... completely arbitrary. It's whatever the last buyer seller agreed to transact some units at.

Then there are companies like Charter Hall (ASX:CHC) which are basically the Property Managers (of the listed trusts like CQR and all the unlisted funds). They also do construction work too.

To complicate matters, many of the listed REITs like CMW, VCX etc are actually "2-in-1" or "stapled" entities so when you buy them on the ASX, you get some shares in the property management company and some units in the property trust. The distributions you get then are a combination of rent + profits the PM makes form the fees they charge the property trust...

The Y-man

 

Another way to illustrate this:

@igor1234 sets up a Fund Management / PM firm called IgorProp and is the 100% shareholder of the company.

IgorProp contact 100 mates to pitch in $10k each to jointly buy a $1m property.

IgorProp structures the ownership in such a way that the $1m property is owned by a trust called IgorProp Unlisted Property Trust (IUPT), in which there are 100 units (each unit worth $10k at the start). Therefore each investor has 1 unit for their $10k investment.

IUPT appoints IgorProp as PM for the property and pays monthly management fees.

@igor1234 decides IgorProp is worth money so lists it on the ASX through an IPO (stock code IGX) of 1 million shares at $1 each. @igor1234 also retains 1 million shares in his own name to maintain control.

The IPO is a big success, and IGX shares soon rocket to $100 (as @igor1234 the CEO is very good at talking up future projects, massive expansion etc)

The personal wealth of @igor1234 is now $100m!!

IUPT meanwhile collects $80k in rent pa from the tenants of the $1m building.
They pay $20k to IGX as PM fees, and the remaining $60k they split to the unit holders - i.e. each unit holder gets $600pa = 6% return on initial investment.

After 1 year, IUPT does a bank valuation of the building, and to the unit holder's delight the bank val comes in at $2mil!!

So now, each unit is worth $20k (still only 100 units on issue)

Now one of the original investors decide they want to sell out.
Another investor is found who buys the unit at $20k.
Note the new investor will get only 3% yield (600/20000) but they are suffering FOMO so all good. Also keep in mind IUPT being the professional outfit they are have signed up tenants with annual rent increases, so the yield will improve with time.

However, on the ASX, rumours are going around that @igor1234 is having some domestic issues, and even though this is completely unfounded, the shareholders of IGX dump them, resulting in the share price going to $0.01

It's important here to note:

• The 1 cent share price of IGX does not affect IUPT's unit price or yield in any way
• The 1 cent share price of IGX does not affect IGX's financials in any way (other than making it harder to raise more funds etc)
• The 1 cent share price of IGX does affect the personal wealth of @igor1234 who is now only worth $10k, and the rumours of domestic issues become a self-fulfilling prophecy....

The Y-man

 

Not necessarily!!

The listed route:

• allow you to access properties that are not available through the unlisted route - eg SCG (trading as "Westfield" shopping centres), VCX, SGP, DXS, DXI etc
• Give you liquidity to buy amd sell when you want (although potentially at a crappy price)
• Give you the opportunity to buy into properties "below bank valuation".

For example, if we spun the story above further:

@igor1234 survives a domestic issue and begins to rebuild his reputation.

The share prices recover eventually after a long hard slog to $1 (although a far cry from the $100 peak, at least it is back to where it started!)

@igor1234 decides to stop running IUPT as a separate unlisted trust open to the public, and staple it to IGX.

He offers a units for shares offer to the IUPT unit holders, of course explaining to them that this deal will

1. give them shares in the management company thereby recouping the management fees and
2. giving them much greater liquidity to buy and sell when they want.

As the shares are worth $1 each, and each IUPT unit is worth $20k (let's say the bank val hasn't moved), each unit holder will get 20,000 shares in IGX.

Now all the unlisted trust unit holders have become ordinary shareholders of IGX.
IUPT is no longer available for public investment.

At this point, if you want to invest in Igor's property, you can only do it by buying IGX shares (for which you get a share in IgorProp AND IUPT).

The THEORETICAL value of IGX shares is now

((the business value of IgorProp) + (the value of IUPT property)) / (# of shares)

The NET TANGIBLE ASSET (NTA) however is:

((the value of the buildings) + (other bits and pieces in the office)) / (# of shares)

If my maths is correct (and it probably isn't...)

Building: $2m

Bits and pieces in the office (that can actually be sold in an emergency): $5k (i.e. not significant)

#of shares = 1m (held by @igor1234) + 1m (issued on IPO) + 2m (issued original IUPT holders) = 4 million

NTA = ($2m + $5k) / 4 m = $0.50125

This NTA basically represents what a shareholder is left with after a sale of all assets (and all debts are paid of - there is no debt in this case)

@igor1234 being the brilliant man he is (wait... I assume you are male... sincere apologies if you are not...) decides on a leveraged growth strategy.
He mortgages the IUPT property, and borrows $1m from the bank and buys another property.

So now the NTA = ($1m + $2m + $5k) / 4m = $0.75125

NOTE: Shareholders of IGX get distributed to them (rental from 2 buildings + portion of management fees collected by IgorProp - interest costs - maintenance and other expenses - money put aside by IgroProp for a rainy day)

Let's say in the news of this exciting development, IGX shares go up to $10.

Now the NTA (ie the "material value") of IGX is only $0.75125
So at this point we say IGX shares are trading at a (significant) premium to the NTA.

Seen another way, if something disastrous were to happen, in theory anyone who paid $10 for a share would only potentially see $0.75125 come back (less administrator fees etc).

Seen yet another way, the property component of IGX is only $0.75125, the rest is the intangible "value of the business"

All is well until big correction comes around, and people just dump shares because everyone else is doing it.

IGX shares dip to only $0.50 !!!

Here's where things get interesting.

The average investor is now given the opportunity to buy into the properties BELOW BANK VALUATION (remember that spruiking line? )

Remember the NTA is $0.75125
You are effectively paying $0.50 for $0.75125 of property.
We say: the share price is at a discount to NTA

Does it happen in real life?

Today:
SCG $2.76 NTA:$3.66
DXS $10.24 NTA: $11.35
DXI $3.09 NTA: $3.20
GPT $4.69 NTA $6.09
VCX $1.86 NTA $2.20
etc.....
(these are NOT recommendations by the way!)

The Y-man