I came across an interesting research report regarding office REITs recently. It recommended a strong buy for the sector. One of the points caught my eye: 40% leverage is the new norm.
Certainly caught my eye thats for sure (I added the red font color by the way).
Being the astute reader that you are, you probably guessed by now that I don’t really like REITs.
1) The nature of the business itself – I certainly understand how it works, but I don’t see how it makes sense. I am fine with the idea of using moderate leverage to fund growth – provided that the loans eventually get paid off. It seems illogical to take a substantial bank loan, agree to pay out 90% of whatever income you have to unit-holders, and than seek refinancing again in 3 years time at whatever interest rate exists.
2) The dilution of existing unit-holders – After maxing out their loan facilities, REITs than turn to their unit-holders for funds. I have nothing wrong with the issuing of shares (I must admit, I don’t look favorably upon companies that dilute their shareholders), but again, I rather not be forced to buy new shares of companies I already own a certain percentage in just in order to maintain my X% stake of the company.
3) The downside - Low interest rate environments aren’t going to last forever. Period. It might not end this year, next year or eventhe year after that, but eventually governments ARE going to have find a way to pay off their debts. When that happens, it won’t be a pretty picture for companies that look for refinancing.
To make a long story short, this industry makes me uncomfortable. When I close my eyes and think, if the stock market closes for 5 years, would I really be confident in that X REIT would still be around? I can’t see it with a level of confidence I am comfortable with.
Do let me know your views on REITs.
PS: Nothing against investors of REITs personally. Like all things, I could be wrong and I dohope that they continue to do well for all of you out there. Just my personal opinions of the situation.