RE4803 AY 2024/25 Real Estate Investment Trusts Module PDF

AY2021/22 RE4803: AY 2024/25 MODULE INTRODUCTION Prof S E Ong PhD, CFA Prof S E Ong, PhD, CFA Department of Real Estate National University of Singapore 1 2 3 Peaks, Pits and Progress UNCOVERING THE...

AY2021/22 RE4803: AY 2024/25 MODULE INTRODUCTION Prof S E Ong PhD, CFA Prof S E Ong, PhD, CFA Department of Real Estate National University of Singapore 1 2 3 Peaks, Pits and Progress UNCOVERING THE ROLLERCOASTER JOURNEY OF MANULIFE US REIT Ng Ye Ting Year: 2024  To provide students with a good and practical understanding of how Real Estate Investment Trusts (REITs) and Business Trusts (BTs) work and what is involved in its management COURSE Module covers topics on REIT/BT concepts and models; REIT experience in the US and other Asia markets; asset OBJECTIVES characteristics and types of REIT; tax efficient model; growth and acquisition strategies; financing and dividend policies of REITs; cross-border REITs, stapled REITs and business trusts; Business Trust models; and institutional investment in REITs. Past module code: RE4211  ONG Seow Eng , PhD, CFA Research: Real Estate Investment Trusts, securitized real estate, housing finance and affordability issues, and real estate innovations Work & consulting experience with various government organizations and private companies Independent director (2006 - 2014 ) of Cambridge Industrial Trust, (now ESR REIT); Capitaland China Trust (2022 - ) Email: [email protected] Office: MRB (BIZ1) 7-55 International Real Estate Society past president 2006/7; Asian Real Estate Society past president 2002/3.  Approach Learning through – Classroom sessions – Flipped classrooms – Case studies – Self-learning – Group projects – Group presentations Students are urged to keep track of market developments in this sector – regulatory changes, REIT transactions, performance, M & A activity, new listings, etc. Schedule Subject to change 9 10  CA: 60% – Group project: 50% – Participation/Flipped: 10% Assessment Exam: 40% – E-quiz: 10% – Final exam: 30% 11  STRATEGIC THEORY PRACTICE OPERATIONAL  The objective of this project is to conduct an in-depth investigation into an interesting REIT-related issue. Open Canvas basis Group Students are to work in teams with no more than 5 members and the grouping Project should be finalized by end of week 3 Project consultation with the instructor (by appointment) wef week 4 Peer review (zero sum) upon request  Group project presentations on week 12 during lecture session (possibly week 11). Each presentation should be no more than 20 minutes (concise and to the point!) You may incorporate comments received during the presentation to improve your final submitted project. Group Group Project report due week 13. The report should consist of concise, but well constructed and visually Project effective Powerpoint slides sufficiently detailed to be self explanatory, but not the result of cutting and pasting from Word documents. Please limit your slides to no more than Deliverables 60. 50% CA All uploaded individual and group projects will be open access to promote learning for all students.  Project Learning Outcomes Open Canvas concept: curiosity, self-motivated learning (with customized guidance) Requires substantial individual and group effort – Knowledge vs Understanding – Analytical – Self motivation – Creative (optional) Good Good Don’t do this Biz trust- v good Is there a trigger point for equity financing? reinvest the reit- what drives the participation ratae Interesting  E-quiz on week 7 during lecture session – MCQ – Calculations – Essay – 10% of final assessment Final examination Examinations – MCQ – Calculations – Essay – 30% of final assessment Flipped Class Before Class – Read / Watch Reference/Notes/Videos During Class (Lecture period) – Break into small groups (5 to 6 students) – Discuss assigned questions (45 min) – Report key learning outcomes (45 min) After Class – Reflect on learning outcomes – Forum follow-up – Online quiz (?) © S E Ong 32  Students watch pre-recorded videos before class session Class session (face-to-face) – for tutorial/case study discussions during class – Students upload group ppt – Selected groups will present after reconvening Reflection – Forum Q&A – Mid-semester quiz  Example Lecture 3 - Listing a REIT Lecture notes (Canvas) Videos: – Listing a REIT (3 parts) Case study: Elite Commercial Trust IPO – Video instruction  AY2021/22 RE4803 : AY 2024/25 OVERVIEW & FRAMEWORK Prof S E Ong PhD, CFA Prof S E Ong, PhD, CFA Department of Real Estate National University of Singapore  What are REITs? Typical REIT structure Why REITS? Global development, size of global market Outline REITs in Singapore (When) Legal & regulatory framework – Code on CIS, Securities & Futures Act Business Trusts vs REITs  Regulatory framework Regulatory framework set up in July 2002: Property Fund Guidelines Administered by MAS and SGX Governed by general securities regulations as well as Collective Investment Scheme and Property Fund Guidelines First S-REIT set up in 2002 – CapitaMall Trust (CMT) 70% invested in real estate or RE-related assets Property development capped at 10% of total assets Gearing limit: 50% wef April 2020 Min distribution: 90%  Legal Framework Code on Collective Investment Scheme (CIS) Securities & Futures Act SGX Listing Rules CMS Licence IRAS Income Tax Act 40  Mapletree Logistics Trust manager part of the reit but in sg it is a seperate entity- manager not part of the reit external manager sabana reit trying to internalise and get rid of the managers earns management fee Gatekeepers stated the first time it is listed  Internal versus External Managers Asian REIT markets follow the external manager model US REIT market has gravitated towards the internal manager model internally managed REITs outperform externally managed REITs over borrow to grow asset base Internalization for SREITs? info to release to al at the same time Perspectives internal manager can see more info REIT Analyst Investment Bank Analyst  reit management half yearly info release in sg public info for those events Perspectives REIT Analyst Investment Bank Analyst Manager / CEO / CFO / Finance / Financial analyst Analyst Inside view Outside view Detailed cash flows High level portfolio cash flows Management Investors Half yearly announcements; analyst meetings  RE4803 is a “demanding” module Extensive use of Flipped Classroom and Case Studies “Never ask a question that you can Key Features google the answer to!” Final year module… “how well prepared are you for the REIT/BT industry?”  REIT as listed entities traded, listed public listed on stock exchange Public equities Efficient market Liquidity for most investors it is liquid enough reit terminology specific Unit price vs intrinsic asset value mkt price but it is not intrinsic value mkt don’t think it is worth as much mortgage unlisted private reits other types of reits  mortgage pte equity re funds not listed so pte public and pte equity and debt reits sit at the left quad they are public equities securitised re  REITs as listed entities Are traded on stock exchange ➔ Liquid Price available in real time Change in price of units ➔ Price return change over time Unitholders receive dividends / distributions ➔ Income return eg every half year they distribute you $ Total return = Price return + Income return REIT Financials NPI net property income DPU distribution per unit due term per share NAV net asset value- total asset value - total liability divergent btw price of reit and asset value price:nav =1 but most are not the same Gearing total levarage or gearing how much debt reit share price of reit is the same as nav not worth price $1 at mkt at $1 then place u at discount then nav will be -ve ICR mkt not optimistic interest coverage ratio  REIT MANAGEMENT How do REITs they managed well in the beginning manage? Diversification – Country – Sector Governance every reit has gd gov alr - not that impt now External vs Internal M&A merger and acquisition why reit merge does it better one party more thru the merger - analyse of the company before and after m&a  und finiancial ratio then can invest in reits how are reit managed Summary operational level und what the boss is doing then u can do the work better financial metrics for reits and listed company more abt management REIT management = REIT specific content + integration of RE modules Real World, Real Skills QUESTIONS?  AY2021/22 RE4803 : AY 2024/25 OVERVIEW & FRAMEWORK Prof S E Ong PhD, CFA Prof S E Ong, PhD, CFA Department of Real Estate National University of Singapore  What are REITs? Typical REIT structure Why REITS? Global development, size of global market Outline REITs in Singapore (When) Legal & regulatory framework – Code on CIS, Securities & Futures Act Business Trusts vs REITs What are Real Estate Investment Trusts (REITs)? What is Real Estate?  “Real Estate is Space and Money over Time” James Graaskamp, U Wisconsin Space Time space and money over time change space and cashflow over time Money 4 Your property Space over time Renovation Alteration Cash flow over time Rental Service charge Mortgage payment Resale value What are Real Estate Investment vehicles (trusts) to hold income producing Investment real estate income producing re Trust is owned by Investors (via units in the REIT) Trusts (REITs)? listed on the stock exchange- sg only has listed reits while other countries have open reits  Investment vehicles (trusts) to hold income producing What are Real real estate Investors hold units in the REIT Estate Managed by internal or external manager Investment Listed on the stock exchange (public vs private REITs) Trusts (REITs)? First introduced in the US in 1960s, and Australia in 1970s, in Europe in 1990s and Asia in 2000s Japan first then Singapore Tax transparency: As long as REIT distributes more than a certain % of income, it does not need to pay corporate tax. And investors do not pay income tax on REIT distributions proliferation of reits came abt bc of debt transparency Why REITs? Policy perspective Investors Promotes broader base of participation in property Deepening of capital markets ownership with limited outlay High & stable dividend payout Liquidity & transparency Stable cash flow suitable as retirement income for rapidly ageing population Regulated by stock exchange & monetary authorities Tax benefits Why REITs? Issuers/Sponsors Optimize capital allocation: monetize illiquid real estate assets, allowing firm to re-deploy proceeds towards value accretive investments REIT allow for distributions in excess of accounting profits, maximising valuations, which are based on cash flows generated by the asset Creates a stable fee income stream from ownership of the asset manager Creates an acquisition vehicle, that allows the sponsor to acquire and grow its business from the capital markets Source: SGX website 10  REIT as a Firm Portfolio of Projects Nexus of Contracts Distribution of / Properties Rights Cash Flow Claims Return Debtors Managers Trustee Unitholders 12 PwC MSCI World REITs Index The MSCI World REITs Index is a free float-adjusted market capitalization index that captures large and mid cap representation across 23 Developed Markets (DM) countries* around the world. Singapore REITs 6th largest in the world 44 S-REITs and property trusts listed on SGX Market cap of SGD110b as of Dec 2021 (13% compound annual growth rate over last 10 years), over 13% of the Singapore Exchange’s market cap Average dividend yield of 5.6% (May 2022) Income component More than 85% of S-REITs hold foreign properties, and 19 S-REITs have entirely foreign property portfolios (Dec 2021) https://www.reitas.sg/singapore-reits/overview-of-the-s-reit-industry/ MSCI World REITs Index As of Feb 2024 Singapore REITs Composition of REIT portfolios Source: REITAS Performance Sector and Average Yields Distribution Income component As of Dec 2023 SREITs performance (last 5 years) Sector and Average Yields Distribution Income component As of Feb 2023 Source: SGX 2022 Questions Why the big increase in foreign exposure? What is Distribution Yield? What is REIT distribution? How is Yield related to distribution and REIT price? How is REIT price determined? Regulatory framework Regulatory framework set up in July 2002: Property Fund Guidelines Administered by MAS and SGX Governed by general securities regulations as well as Collective Investment Scheme and Property Fund Guidelines First S-REIT set up in 2002 – CapitaMall Trust (CMT) merged to CICT 70% invested in real estate or RE-related assets Property development capped at 10% of total assets Gearing limit: 50% wef April 2020 Min distribution: 90% Gearing limit going to 50% changed many times Consultation advice to change from MAS Acquisition fee Divestment fee Development fee Internal versus External Managers Asian REIT markets follow the external manager model US REIT market has gravitated towards the internal manager model internally managed REITs outperform externally managed REITs over borrow to grow asset base Internalization for SREITs? Legal Framework Code on Collective Investment Scheme (CIS) Securities & Futures Act SGX Listing Rules CMS Licence IRAS Income Tax Act 30  Income tax: corporations pay corporate income tax (17%) which represents a cost REITs are exempt from corporate income tax Tax provided the REIT distribute at least 90% of its taxable income to unit holders in the same year in which the income is derived. Transparency Distributions received by non-corporate unitholders: Individuals: Exempt from income tax Part of partnership/profession: tax at individual tax rate Tax transparencysingaporean shareholder dont pay y tax Investors Investors 0%/10%/17% No further SG tax SAVING LEAkage from rental rev S-REITs SingCo 0% 17% SG Real SG Real Estate Estate Income from Singapore Real Estate Singapore Real Estate S-REITs (0% tax) SG Foreign Individuals companies companies (0%) (17%) (10%) sg listed company it is still income to you so still need to pay y tax Tax Exemption Foreign Real asset base in sg but if not.. then rental can Estate follow this structure Rental income Intermediate structure Tax exempt income is tax exempt Foreign Income S-REIT Income eligible for Tax Exemption Tax exempt - Foreign dividends Distributions Unitholders - Foreign interests - Foreign trust distributions  Introduced as a new form of business structure in September 2004 when the Business Trusts Act (Chapter 31A of Singapore) was passed Business Trusts (BTs) are essentially companies structured as trusts. Motivation is to add greater depth and breadth to Singapore’s equity markets. What are BT is similar to a company in that both run and operate business enterprises. But, unlike a company, is not a separate legal entity. As a business trust is established under a trust deed, the trustee-manager Business has legal ownership of the underlying assets in the trust. The trustee- manager is also responsible for managing the assets for the beneficial Trusts? owners of the trust. The Business Trusts Act (Singapore) provides for the twin objectives of protecting the interest of unitholders and to establish the duties and accountability of the trustee-manager and its directors. BTs that raise funds through the offering of units to the retail public must be registered under the Business Trusts Act. BTs are allowed to pay distributions to investors out of operating cashflow. This is unlike companies, which can only pay dividends out of accounting profits.  Key Differences between REITs and BTs REITs BTs Constituted by trust deed, trustee has legal Constituted by trust deed, the trustee- ownership of trust assets and holds them on manager has legal ownership of trust assets, behalf of the REIT holds them on behalf of the business trust Trustee and manager as separate entities and manages the trust assets for unitholders’ benefit Passive investment vehicle Trustee and manager as single entity Must distribute at least 90% of specified Can engage in any business activity, incl active income to enjoy tax transparency business operations The Code on Collective Investment Schemes No statutory requirement to distribute a sets a 45%* cap on gearing certain percentage of its income No statutory gearing limit, but business trusts * Raised to 50% wef April 2020 may commit to a self-imposed borrowing limit. https://www.reitas.sg/singapore-reits/differences-between-s-reits-business-trusts-in-singapore/  Examples Keppel Infrastructure Trust CDL Hospitality Business Trust ARA US Hospitality Management Asian Pay Television Trust Trust Accordia Golf Trust Capitaland India Trust Capitaland Ascott Trust https://www.mas.gov.sg/regulation/capital-markets/List-of-Registered-Business-Trusts References REIT Association of Singapore - https://www.reitas.sg/reit-basics/what-is-a-real-estate-investment-trust- reit/ How do REITs work? NAREIT video https://youtu.be/yDl1_uLR5Os RE4803 KEY FINANCIAL METRICS REITs recap Tax transparent pass-through investment vehicles Publicly listed and traded RE equities Equity and mortgage REITs Role of MAS and SGX Property Funds Guidelines (PFG) Review questions What is aggregate leverage limit or gearing ratio? 37.6% for the top 6 reits What is the maximum aggregate leverage limit / gearing for SREITs? 45% What is Interest Coverage Ratio (ICR) for SREITs? at least 2.5times What is the significance of the proposed July 2024 change in gearing and ICR? analytical what you think  Outline 01 02 03 Overview of REITs Key Financial Growth strategies and BTs metrics for REITs How to interpret financials? REIT performance Theoretical Framework opex things , capex things Gross Revenue rental income Property operating expenses Less: Borrowing costs Management fees Trustee fees Other trust expenses Adjmt for non-tax items Distributable Income  From Gross Revenue to Net Property Income total return financial position BORROW AT 50% - 2% 100- 2% 200mil- 6% = x 100mil -2% interest =y x-y= what you earn, 10% 6% You invest 6-2=4 4+6 baseline= 10 borrow 0, it will be 6 baseline fair value price return of equity or asset? unleveled or leveled yield equity holders so it is a return of equity unleveled return, borrow $ - return of equity ? POSITIVE FINANCIAL LEVERAGE equity= leveled yield BORROWING DEBT AT A COST THAT IS asset = unleveled yield LOWER THAN WHAT YOU CAN GET based on the 88 cents, dec 23 rates WHEN INVESTING? BORROW LOW AND INVEST HIGH liability and debt/total assets quite low below 45% safe gearing level very safe reit much higher than the 2,5 AVERAGE OUT ALL DEBT TAKEN  Total Return Components of Property Operating Expenses Manager’s management fee Trustee’s fees Finance costs Fair value gain/loss manulife hit by this iinvest overseas Net forex differences due to assets overseas https://paragonreit.listedcompany.com/misc/Financials-SGX-Announcement-FY2023-signed.pdf  unique to sg Non-tax deductible items: can offset this - just for accounting ffo -us reits Fair value gain/loss /ac it is a p and l not part of this  Financial Position grp and trust are the same if only invest in sg how they account for overseas- all that the company has is in the grp acc trust is purely the trust itself held by the reit how much they have- gearing total asset - total liability = net asset Total units issued DPU = Distributable income to unitholders / number of units in issue at end of the period  Gross revenue : Gross Net property income rentals DPU: Distributable Financial Distributable income: Distributions for income to unitholders / number of units in Metrics unitholders issue at end of the period Dividend yield (Distribution yield) day to day diff DPU divided by unit price Traded Unit price  Aggregate Leverage (Gearing ) Level Other Debt-to-total property value financial Financial metrics Metrics (2) Price to Net Asset Value (NAV) total value of assets less total liabilities, and divided by the number of units How to interpret Financials? weighted average termination- break option lese expiry dont want the lease take it back etc more certainty on rental income longer wale is usually better added much later  length of debt on average- debt that is due depends on the interest rate, debt mkt gotta refinance to pay back debt for short term more of net profit have to be used to finance debt Evaluating REIT portfolio Completing the portfolio evaluation What other information would you (investor / analyst) require? Evaluating REIT investment performance Unit price performance stock price performance DPU – past, present and future Asset value REIT unit price performance what is the benchmark overall stock mkt? relative measure/comparison  share price may look good but low volume traded not v good also PARAGON REIT Annual Report 2023 Page 41  price is on par to net asset value Significance of Price/NAV? less than one - undervalue this less than 1 discount reit -ve perception of the reit more than 1 value at premium P/NAV premium & discount benchmark- other sg reits Trend of P/NAV Comparison with SREITs share price has changed a bit levered yield 1.05,.995 sort of on par events target REIT DPU gives u better yield so doing quite well PARAGON REIT Annual Report 2023 Page 41 REIT DPU trend last year not so good drop abit PARAGON REIT Annual Report 2023 Page 37 REIT asset valuation Valuations to be carried out at least once a year Net asset value = Total Assets – Total Liabilities The case of Manulife US REIT  Portfolio Composition and Valuation Changes FY2016: Portfolio consisted of Figueroa, Michelson, and Peachtree properties with high occupancy rates Subsequent years saw significant expansions with acquisitions of Plaza, Exchange, Penn, Phipps, Centerpointe, Capitol, Diablo, Park Place, and Tanasbourne (Details on the next slide) Recent trend towards portfolio consolidation with divestitures of Tanasbourne and Park Place Peaks, Pits and Progress: Uncovering the Rollercoaster Joruney of Manulife US REIT 8  Portfolio Composition and Valuation Changes Reflecting the observed trends in US office capitalisation rates, MUST experienced a negative percentage change in its valuation since 2H21 Graph illustrates the downturn in MUST's valuation in alignment with market trends Peaks, Pits and Progress: Uncovering the Rollercoaster Joruney of Manulife US REIT 11  Portfolio Composition and Valuation Changes According to S&P Global Market Intelligence, there has been a discernible trend of increasing capitalisation rates for US office properties since 2021 Higher capitalisation rates lead to downward pressure on property valuations Investors demand higher returns to compensate for perceived risks associated with office assets Peaks, Pits and Progress: Uncovering the Rollercoaster Joruney of Manulife US REIT 10 Is Asset Valuation the only issue?  Capital Structure Changes Gross borrowings increased from 3Q16 to 2H23 Gradual rise in gearing ratios over reporting periods, indicating greater reliance on debt financing Weighted average interest rates show a steady uptick, leading to higher finance costs for MUST Shift in debt maturity profiles towards shorter maturities in recent periods (Details in following slide) Peaks, Pits and Progress: Uncovering the Rollercoaster Joruney of Manulife US REIT 12 MAS Consultation July 2024  Key Events for MUST 29 November 2023 Re capati lisation plan to reduce leverage 9 February 2023 June 2015 Furthe r declin e in asset valuations 5 December 2019 Speculation reg ardin g MUST’s listin g as Sin gapore’s first US-focu sed RE IT In clusion of RE IT in to the FTSE EPR A Nare it Globa l Re al Estate In de x Seri es 18 July 2023 Declin e in valuation that resulted in bre ach of fin ancia l coven ants and im pact on distri bu tion s May 2016 Suc cessful IPO lau nch, raisin g US$470 milli on 30 December 2022 Declin e in asset valuations but ge aring sti ll with in reg ulatory lim it Peaks, Pits and Progress: Uncovering the Rollercoaster Joruney of Manulife US REIT 14  Comparative Analysis Against Other Singapore-Listed US Office REITs MUST consistently increase in gearing ratio from 2019 to 2023 but suffered the sharpest decline in share price since its IPO ⚬ Indicates a notable deviation from market expectations ⚬ Points to potential underlying issues affecting investor confidence or operational performance KORE maintained a stable gearing ratio and experienced a comparatively lower decline in share price compared to MUST PRIME showcased a similar upward trajectory in gearing ratio to MUST but also faced a significant drop in share price Gearing (%) Change in share price since its IPO as of 1 Office REITs IPO Date FY2019 FY2020 FY2021 FY2022 FY2023 April 2024 MUST 20 May 2016 37.7 41.0 42.8 48.8 58.3 -90.82% KORE 9 November 2017 36.9 37.0 37.2 38.2 43.2 -77.92% PRIME 19 July 2019 33.7 33.5 37.9 42.1 48.4 -82.88% Peaks, Pits and Progress: Uncovering the Rollercoaster Joruney of Manulife US REIT 20  Comparative Analysis Results Graph showing comparison of MUST against indexes indicate that certain primary factors contribute to the peaks and pits in MUST’s performance Initially, MUST’s share price followed the iEdge S-REITs Index, reflecting broader SG REIT market influence However, divergence emerges early 2021 onwards between MUST’s performance and the other indexes This indicates influences of specific factors unique to MUST or US office REIT sector to its share price performance Peaks, Pits and Progress: Uncovering the Rollercoaster Joruney of Manulife US REIT 22  Evaluation Against Other Singapore Listed US Office REITs Compared to KORE & PRIME, MUST has maintained a higher gearing ratio over the years MUST’s consistently higher gearing indicate a more aggressive approach to its leveraging Results addresses Hypothesis 2, suggesting that gearing strategy significantly influences its performance Comparison of MUST with KORE and PRIME reveals that its higher gearing ratio may have led to a sharper decline in its share price Peaks, Pits and Progress: Uncovering the Rollercoaster Joruney of Manulife US REIT 23 Analyst reports Corollary: Efficient Market Hypothesis Recall REITs are listed equity entities Efficiency of public stock/equity markets Efficient Market Hypothesis The efficient market hypothesis (EMH), alternatively known as the efficient market theory, is a hypothesis that states that share prices reflect all information. Stocks always trade at their fair value on exchanges, making it impossible for investors to purchase undervalued stocks or sell stocks for inflated prices. Therefore, it should be impossible to outperform the overall market through expert stock selection or market timing, and the only way an investor can obtain higher returns is by purchasing riskier investments. https://www.investopedia.com/terms/e/efficientmarkethypothesis. asp Gordon’s Growth Valuation Model 𝐷1 𝑃0 = 𝑟−𝑔 where 𝑃0 is the market price of the stock and 𝐷1 is next year’s annual dividend; g is the expected dividend growth rate Recall: g (growth rate) g = retention ratio x return on retained earnings r (discount rate) r = Dividend/P0 + g r = Dividend yield + Growth in dividend Implications Since REITs are listed equity entities, their values (unit prices) reflect market’s / investors’ valuation of the REIT distribution (DPU) DPU matters Market expectation affects the discount rate Interest rates (risk free rate), inflation, etc Growth in dividend / distribution matters Distribution / Dividend Yield = DPU / price Market determined Event study methodology A simple event study involves the following steps: Identifying the event of interest and defining an event window. Compute the difference between the actual and predicted returns during the event window. Testing whether the abnormal return is statistically different from zero. Compute Abnormal Return (AR) Calculate Cumulative Abnormal Return (CAR) With many events, use Cumulative Average Abnormal Return (CAAR)  Measuring Abnormal Returns Abnormal Returns (AR) related to announcements are calculated Analysis covers 41-day event window, spanning from Day -20 to 20, with announcement date marked as 0 for reference AR calculated using the following equation: ⚬ ARt = Rt − RMt where: ⚬ AR represents abnormal return at time t ⚬ R refers to the actual return of MUST on day t ⚬ RMt signifies the expected return of a benchmark market index on day t For market indexes: ⚬ SG Benchmark: iEdge S-REITs Index employed as it is widely recognised and is specifically designed to track performance of S-REITs ⚬ US Benchmark: S&P 1500 Office REITs Sub-Industry Index as it tracks major office property REITs in US Interpretation: ⚬ Significantly +ve AR: Market reacts positively to the announcement ⚬ Significantly -ve AR: Market reacts negatively to the announcement * Given that US stock index operates one day behind SG stock index, expected return of US Benchmark is taken from the previous day to reflect its lagging nature relative to MUST’s trading activities. Peaks, Pits and Progress: Uncovering the Rollercoaster Joruney of Manulife US REIT 21  CAR For MUST devaluation Against Benchmark Indexes Peaks, Pits and Progress: Uncovering the Rollercoaster Joruney of Manulife US REIT 35 SUMMARY REITs are listed entities required to file periodic (half yearly) financial reports Financial metrics provide snapshots of the financial health of REITs Result announcements, major corporate announcements are events that analysts and investors watch closely. Stock market is generally efficient, where the traded price quick incorporates publicly available information RE4803 REIT and Business Trust Management Listing a REIT Prof ONG Seow Eng, PhD, CFA [email protected]  IPO news #1 before case date impt after dont need is it a good investment?  IPO news #2 some try to list but didnt S$1.1bn IPO IPO news #3  Four Quadrant Approach to Equity and Debt https://www.investmentexecutive.com/in-depth_/partner-reports/4-quadrant-approach-to-real-estate-investing/  What drives REIT IPOs? ➔ motivation, success factors How to list a REIT? ➔ IPO process. Regulatory requirements How to price REIT IPO issue? ➔ Investor demand. Questions Why leave money-on-the-table? Does sponsorship & Right of First Refusal (ROFR) matter in REIT IPOs? ➔ Investor demand, IPO subscription, post IPO performance How REITs dress up ➔ financial engineering?  Why List (a REIT)? Asset light strategy Raise capital Exit strategy: Realize Differential valuations profits between private and public markets IPO Process  Critical Success Factors Attractive equity story Pricing Timing and Planning Positioning of company Market oriented valuation / Optimal market conditions Positive growth story yields Effective project management Convincing & viable business Deal sweeteners Well thought out planning strategy Critical Success Factors Long standing experience in industry Experienced Management Qualified management team Visibility to investors Clear communication strategy Transparency Robust corporate governance Source: OCBC Bank Critical Success Factors Size of IPO Capital Leverage Structure Debt profile Business Management fee, acquisition fee, etc model Sponsor(s) Source: Industry experts  Portfolio value Sizer of IPO: Valuation: $100m How much Net Property Income: $6m p.a. (6% unlevered) Debt equity to same as the irr qn Leverage: 40%; Cost of Debt: 2% p.a. 4% , +ve fin leverage raise? Debt repayment: $0.8m p.a. term loan- pay principal at the end of expiry= ppay interest only, this is the interest cost Equity to raise (IPO Size) raise equity thru ipo 60% ($60m) What is the expected distribution to unit holders? What is the initial distribution yield? Asset = Debt + Equity  dont care abt the fees to pay for now dist in total assume 100% dist 5.2mil 6-0.8=5.2 must be higher than 6% what u price your ipo at 60%*100m=60mil p/nav =1 assume 5.2/60 million=8.67%  Key points Compliance with listing regulations and processes Corporate governance Business model – Management fee, acquisition fee, etc Capital Structure – equity and debt Management Team Sponsor Growth strategies Main learning points Listing as exit strategy Success factors Packaging a portfolio for IPO – Listing requirements – Market expectations (size, yield, leverage, etc) – Customizing – Growth story Knowledge gaps (?) – Levered vs unlevered yields – Debt structure & cost of debt – Financial leverage conditions CASE DISCUSSION DIGITAL CORE REIT IPO NOV 2021 Discussion Questions You are an analyst covering the IPO. Task: – Evaluate the key features of the REIT IPO including portfolio, tenancy, yields, management, etc – Evaluate the key risk factors – Formulate an investment advice to prospective clients – buy or avoid? Breakout small group discussion Duration: 45 minutes Reconvene for presentations Presentations May use PPT or appropriate platforms All group presentations to be uploaded to Canvas – Discussion – week 3 (IPO), containing names and matric # of group members Each group presentation no more than 15 min max  References Digital Core REIT IPO analyst briefing: https://s28.q4cdn.com/669718746/files/doc_presentations/20211201_Digital_Core_REIT_ - _Analyst_Briefing_vSS.pdf Independent analysts RE4803 REIT/BT Management REIT / BT Valuation Performance Cost of Capital © S E Ong 1 Value of a Real Estate Investment Trust of publicly traded reits Model-driven view Market view Fundamental view  Recap REIT unit price Since REITs are listed equity entities, their values (unit prices) reflect market’s / investors’ valuation of the REIT distribution (DPU) percpetion of investor of the quality of distribution tech stock poor dividends DPU matters will your dpu go up or down future prospect impounded in share price vs reits that are income producing hence it matters esp for reits Market expectation affects the discount rate Interest rates (risk free rate), inflation, etc Growth in dividend / distribution matters by reit by mkt Distribution or Dividend Yield = DPU / price report the distr they have Market determined Gordon’s Growth Valuation Model 0- is always today 𝐷" 1 years’ time 𝑃! = us fed tighten monetary policy- ir go up 𝑟−𝑔 disc rate r also goes up price today where 𝑃! is the market price of the stock and 𝐷" is next year’s annual dividend; g is the expected dividend growth rate aggregate of views- reflected in prices Recall: pays out 90% , v little re future distr also matters cannot count on this to grow g- future growth as well g (growth rate) still relevant- g rate of the distribution higher rentals in the future quality of portfolio is impt g = retention ratio x return on retained earnings r (discount rate) mkt exp of ir has mkt ir gone up- should be proportional r = Dividend/P0 + g r = Dividend yield + Growth in dividend  valuer for reits DCF valuation By extension, the price of a REIT can be estimated using the DCF valuation model: Estimate the NPI & DPU over a reasonable time period Discount with appropriate discount rate terminal value- various reits have diff practices time horizon depends on the country and valuer very short lease left- end of 10 years valuation will be 0 The process of determining share valuation involves finding the present value of the share’s expected cash flows using the investor’s required rate of return: P = V = åt =1 Ct (1 + r )t n V = intrinsic value or present value of the share Ct = expected future cash flows in period t=1,2,…n r = investor’s required rate of return  reflect the news into the share price when the reit acquires new asset- how to evaluate Efficient Market Hypothesis distr up, price goes up - D1 increase P0 should increase unless cost of financing goes up The efficient market hypothesis (EMH), alternatively known as the efficient market theory, is a hypothesis that states that share prices reflect all information. Stocks always trade at their fair value on exchanges, making it impossible for investors to purchase undervalued stocks or sell stocks for inflated prices. Therefore, it should be impossible to outperform the overall market through expert stock selection or market timing, and the only way an investor can obtain higher returns is by purchasing riskier investments. https://www.investopedia.com/terms/e/efficientmarkethypothesis. asp Evaluating Stock Performance Return change iin price Coefficient of Variation Risk / volatility diff in return Sharpe Index Treynor Index Jensen Index Return https://www.fool.com/investing/how-to-calculate-total-stock- returns.aspx  Risk Risk measures are statistical measures that are historical predictors of investment risk and volatility Q: How to calculate standard deviation of returns? https://www.investopedia.com/terms/r/riskmeasures.asp Coefficient of variation (CV) The CV measures risk per unit of return of an asset. It provides a simple relative risk measure that may be used to rank investments having returns with different means and variances. An asset outperforms the market when the asset's CV is lower than that of the market. 𝑆𝐷! 𝐶𝑉! = 𝑅! where: CVi = coefficient of variation for asset i Ri = nominal return for asset i SDi = standard deviation of returns for asset i Sharpe Index (SI) Sharpe Ratio (1966) measures investment performance using total risk: 𝑆𝑅! = 𝑅! − 𝑅" /𝜎! where SI i = Sharpe Index for asset i Rf = risk-free rate of return 𝜎! = standard deviation of return for asset i The SI is a measure of return/reward to variability. The numerator measures the firm's risk premium and the denominator measures the total variability of the returns. The higher the index, the higher the risk-adjusted return. Also, an asset outperforms the market when the asset's SI is greater than the market's SI. sj Treynor Index (TI) TI also measures desirability but uses systematic risk instead of a total risk 𝑇𝐼! = 𝑅! − 𝑅" /𝛽! Perform better than the market when asset’s TI is larger than 𝑅# − 𝑅" where 𝑅# is the market return Jensen’s Alpha (𝜶) Jensen (1968) developed an ex-post alpha measure – Jensen Index (JI) - to measure the size of abnormal returns achieved by an asset JI is estimated by regressing the asset’s excess return on the market portfolio’s excess return 𝑅! − 𝑅" = 𝛼! + 𝛽! 𝑅# − 𝑅" + 𝜀! To adjust for the systematic risk factor, an Adjusted Jensen Index (AJI) for each asset is computed 𝐴𝐽𝐼! = 𝐽𝐼! ⁄𝛽!  R Alpha & Beta return b = 1.0 e Security a 0 Market return Rm Beta (b), the market sensitivity index, is the slope of the line. Alpha (a), the average of the residual returns, is the intercept of the line on the security axis. Epsilon (e), the residual returns, are the perpendicular distances of the points from the line. https://www.investopedia.com/ask/answers/102714/how-do-you-calculate-beta-excel.asp Mini Exercise Pick a REIT Evaluate it’s performance (returns, risk) vs market / industry Look up its beta, WACC, ROIC Form an opinion of how the company is performing Fundamental Financial Analysis Financial Analysis over time Financial statement analysis How well did the firm perform or operate during the period (P & L account)? Why did the firm’s retained earnings change during the period? What is the firm’s financial position at the end of the period? How much cash did not the firm generate and spend during the period? Basic Financial Analysis Key Financial Indicators Financial leverage ratios (long Net Asset Value (NAV), debt/equity; debt/TA) Earnings per share (EPS) Growth indicators: % change in total asset, % change in Dividend per share (DPS) shareholders’ equity, SGR Return on Asset (ROA) Profit and earnings volatility Return on Equity (ROE) Enterprise Value Add (EVA) and Earnings Retention Rate (ERR) MVA  not as impt in a normal company- not how much net asset they have but what they will perform in the future re is a steady income producing company- make projections with some certainty value pretty stable as well- intrinsic value is always there Net Asset Value (NAV) value u fallback on price to nav what mkt thinks gear 50%- equity 50% p:nav=1 value at mkt value reflects unit holders equity mkt thinks it is not doing well- p:nav