Ann: Announces Sale of Northbridge, WA , page-34

Yield,

Looking at the simplistics of REITs consider the following,

Hypothetically, a REIT could have 1000% debt but still exist comfortable providing it can service it's debt repayments (ignoring some debt covenants). Most REITs have interest cover of 2 or 3 times from standardised income, some much more (MOF is about 2.2 times). So assuming income remains the same then there is no problem - in fact equity for stakeholders (whether dividends or debt repayments increases).

Of course the second point that income may decrease due to tennancy issues (companies going bankrupt etc, or reduced occupancy / rents). Not all REITs are equal in this department as if you do your own research you will find certain REITs have tennants on long term contracts with very significant (even - dare i say - recession proof clients) tied in long term. There are very few REITs with a tennancy expiry rate of above 15% in the next 12 months. Even if only 50% of these tennants were kept (and what reports consistently keep saying is almost all tennants are staying as the replacement cost (new office fit out etc) is greater that the stay cost (albeit they may get a discount for renewing..). Thus it's very hard to model much more than a 10% loss of rental income across the board. Some may be worse , some will be better.

Hence (generally) the only actual issue here is in terms of debt schedules. If a REIT has a huge chunk of debt due in the next 12-18 months then they might be looking a little nervous. In the absolute worst case scenario then a REIT will be unable to service its debt at this point and has to look for options. Options to a REIT generally consist of a) selling portions of a portfolio to pay down debt, b) finding money from elsewhere. c) renegotiating debt terms. Only if a & c are not possible does a problem become more likely.


If you look at MOF's debt schedules then theres no real risk of default until 2012, and agree that if the GFC continued through to 2012 then MOF would possibly be in real trouble....

MOF's tennancy expiry is about 8% this year 15% next and 6% vacant currently. This expiry profile is hedged to cope with scenarios like this.

So do i believe the GFC will continue till 2012 and MOF go under or do i believe that eventually property prices will correct and very quickly create equity in much more streamlined business modelled REITs at a rate never before seen? Well, thats the basic argument as why you would consider investing in eg. MOF or not.

I personally look a little suspiciously at REITs with high debt due in the next 18 months (thats the dealbreaker for me as a rule) , but thats just my investor profile as you only invest with risks acceptable to an individual. Will some REITs go under , yes probably. Will it be many, No. Will most REITs come out streamlined huge cash generating vehicles in a few years time..... ?????

If you look at something like CHC with almost zero debt due in the next 2-3 years, about 6% expiry or unoccupied in the next 3 years with blue chip tennant base, only 11% debt ratio then i'd argue it's actually not much of a risk and interested to hear thoughts to back up your second hand statement as to why it could possibly go under?

Kasper