Posted by: donmihaihai | April 10, 2020

REITity

COVID 19 increased the tension between landlords and tenants. I think everyone is going to take some pains. Some will be more painful than other.

Talk about Master lessee of hospitality REIT.

I have only read CDLHT before but I was thinking master lessee is crap to investors. I get the attractiveness of this structure. Capped the downside and ride along the upside. But for hotel, the upside can be very up. Extreme case will be UOL Myanmar hotel. Was hardly profitability until opening up of Myanmar resulted in extraordinary profits for the next few years until competition from new hotels. Now I would say if there is a master lessee, it will get a free ride on the upside. Not to forget master lessee does not provide the capital for the hotel.

The first reaction I have with hotel being empty due to COVID 19 is master lessee will walked. The fixed rate in the lease which is protecting the REIT will not always work. When the hotel is empty, how is the master lessee going to pop up the differences? Since master lessee is not providing capital for the hotel, it is a business that take a small portion of total income, ignoring the extreme case. A business like this will not be able to pop up the majority or fixed rate for long. Can’t be otherwise. A promise or contractual promise is only as good as the ability to pay. So REIT will share the risk.

Now I call it head (upside) I lose, tail I lose bigger.

The strong sponsor would likely to support the REIT when they are the master lessee mainly due to reputation or good business sense.

Now I OT a little. If a REIT needs their sponsor to support during bad times, then why are REIT being valued higher than sponsor? It doesn’t make sense.

As for sponsor like CDL, it will likely to support the REIT to a certain point but not to the point of harming the parent company. Well it is simple, which is more important? A REIT where their interests is in 30something % or …………………….. For a company like CapitaLand, it will be different because majority of their investment properties are REITed and they need their REIT to exit properties in their fund. The support level will be higher, not because they like it but out of no choice. Still support won’t be long as that is additional losses on top of operating losses. One punch become two punches.

I don’t see REIT being a better business model. In fact, I think it is at disadvantage against property company owning investment properties. The first thing is it doesn’t has reserves when it is paying more than 90% of income as dividends. A reasonable run property company is generally more safe than a REIT precisely because they are paying way less they earned as dividends. What has been retained can be used during rainy day like now and take advantage of opportunities that pop like now. REIT can’t do that, the lengthy duration for buying a new property and to issue new units at depressed price? It basically make no sense at all, REIT is shut when opportunities pop. From the day I look at Hong Kong Land, I have been looking forward to a day where it buy the remaining 2/3 interest of MBFC and OFQ from REITs at some cheap prices. It only make sense for it to happen but I don’t know if it would happened.

REIT will needs to share the risk, no question about it. Investors who depend on the dividend as income will need to think and go back to basic – reserves. You can’t live your life like a REIT, spend everything you earn (dividend) and think that money(dividend) will keep flowing in, good or bad times. Or in bad times hopefully that government will support you all the way. Good luck when government reserves is depleted……..

Actually, just like in 2008, now is actually a good time to look at REIT, especially those trading at a quarter or 0.5X BV or historical yield at 10% or more because their valuation make sense for sound investment and has to take any future capital calls into consideration.

 


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