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REITS(canadian)
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Re: Calloway nka Smart REIT"I don't totally disagree with this but isn't this partly why we look at
AFFO vs FFO concerning sustainability of distributions? Sure small time
real estate operators could get away with spending nothing but I believe
the major operators are maintaining their properties well to ensure
tenants stay happy and to attract new when necessary. Over the years in
the GTA I have seen lots of upgrades occurring to office complexes and
major shopping malls and while no first hand knowledge I would think
similar improvements occur in other major markets." and "If I understand you correctly, you consider all REITs to be paying unsustainable distributions?" --------------------------------------------------------------------------------------------------------------------------------------------------------- I don't want to sound equivocating but it kinda depends ... If
new units and debt are used to fund the gap between distributions and
capex minus cash from operations, you could say that this by definition
is not a sustainable situation though it can clearly be sustained for
years and years depending on property values appreciating and cost of
debt/equity falling consistently over the same time period. Unitholders might experience some dilution and less growth than they would have received doing things differently. One way to keep an eye on things is to look at stuff in addition to AFFO, FFO, POR, reserves / suite / year amounts... Boardwalk REIT 2010 Capex: $71.6 million, Distributions: $94.7million Units o/s: 52.3 million, CFO: $139.8 million NOI: $265.3 million, Debt: $2 265.4 million 2011 Capex: $69.3million, Distributions: $94.0 million Units o/s: 52.2 million, CFO: $142.9 million NOI: $262.7 million, Debt: $2 331.1 million 2012 Capex: $79.7 million, Distributions: $98.3 million Units o/s: 52.3million, CFO: $157.6 millionNOI: $276.1 million, Debt: $2 248.1 million 2013 Capex: $73.8 million, Distributions: $103.4 million Units o/s: 52.3million, CFO: $178.5 millionNOI: $290.0 million, Debt: $2 261.4 million 2014 Capex: $80.2 million, Distributions: $106.2 million Units o/s: 51.9million, CFO: $182.4 millionNOI: $292.4 million, Debt: $2 169.4 million Looking
at things this way, it's easy to see that cash from ops (CFO) almost
covers all capex and distributions (for 2014 and looks to be headed in
the right direction) with no increases in units or debt - probably a
rare example and Boardwalk REIT isn't currently being rewarded for this.
And, to answer your query, this would be an example of a REIT that has a
sustainable distribution. Another thing that
jumps out is that the NOI is up only $27.1 million over the five year
period (and yes Boardwalk has sold some assets during this time - less
than 10% I'd reckon - and paid down some debt so it's not a perfect
apples to apples situation, but close enough). What's that worth? Say
put a 5% cap rate on it and it's worth $542 million. Now compare that to
the cumulative capex of $374.6 million. Was that worth it? Depends on
their cost of capital which IIRC is between 5-6% (can't recall where
they disclosed it) so apparently it was. Is that what you would expect
from what most REITs would call growth or value enhancing capex? Should
all of the NOI growth be attributed to the capex? Either way, Boardwalk
funded it internally from CFO so there's over $10 a unit of "value"
there for unitholders, depending on how you want to look at it (i.e.
what sort of cap rate you put on it and maybe you have a different cost
of capital than BEI's self-determined 5-6% and maybe it's a mistake to attribute the NOI growth solely to the capex as a lot of it is simply the market rate moving up). I put
NOI in the table because it's the property side, without the benefit of
falling interest expense that adds to FFO but isn't property related.
Boardwalk discloses that impact: 2012 About 43% of the YoY FFOPU increase. 2013 About 44%. 2014 About 44%. So,
in this case, falling interest expense is a big part of the FFO
growth. If rates stay where they are for another few years this growth
eventually stops. If rates rise, the effect reverses. Looking
at these six items (Capex, DIstributions, Units o/s, Cash from
operations, NOI and Debt), you can see a bit more about what's doing
what, versus the typical AFFO or FFO and reserves per suite per year
amounts that are miles away from the actual capital expenditure outlays. This
example is an apartment REIT but the same works for commercial.
Recoverable capex will be included in NOI, and if it's not funded
internally, Units o/s and Debt will keep track, i.e. it will show up in
NOIPU and Debt per unit. You can get some idea over time if the capex is
paying for itself (whether it's CFO, units, debt, or some combination),
i.e. how sustainable, using the six items. And yes it is a bit of work,
but it is the closest objective way of looking at sustainability that I
can come up with at the moment. I guess I have to add that this
includes "growth" capex, and as we hope to be buying a growing stream of
distributions / cashflow I don't think there's any reason to exclude it
or categorize it under multiple headings. YMMV. Just to highlight something in my original post, there's no rule that REITs can't make money by spending money to remedy depreciation, obsolescence and competitiveness issues. And, under long term net leases the story is different versus gross leases like hotels and apartments, but I would use the same approach as above. If REITs use units or debt to fund remedies rather than cash from operations that's important as well, but it doesn't guarantee dilution or value destruction, you have to check - i.e. if the REIT is spending $X million a year on growth capex but NOI per unit is flat or very low growth, or the debt per unit is up by an amount equal / greater than NAVPU created from additional NOI resulting from "growth / value enhancing capex". If you look at FFO, the financing side of the business obscures the property picture and it's harder to tell if capex is translating into more rent. AFFO includes financing side and the reserves per suite per year are a placebo compared to the actual outlays (below). AFFO determination for Killam uses $450/suite/year for apartments, but actual is higher: Boardwalk uses $500/suite/year (raised from $475 in 2014 to reflect inflation) but actual is higher: It's approaching $3000 per suite per year. They're selling apartments of late, not buying them. And have held these assets for years, so it's not a case where they're taking some long neglected property and bringing it up to snuff with outsize one time re-investment. It's a lot of money relative to NOI and CFO, so it has to be considered in terms of impact on sustainable distributions, I would politely argue. |
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