Income Investing, Cash, Money and Life
I RECEIVED quite a number of e-mail and text messages in response to my article last week which talked about how it is a myth to expect real estateinvestment trusts (Reits) to be a steady income yielding instruments.The fact is, Reit managers are always on the lookout to expand theirportfolio under management. The bigger their portfolio, the moretransactions they carry out, the higher their fees.But there is no denying that some managers do have the contacts andexpertise to bag the right acquisitions at the right price, hence benefitingunitholders who chose to pump in more money to participate in thecontinued expansion of the Reits.One of the most common questions that I received in response to last week's article was: What would the return be if I don't subscribe to therights?
Does it pay to subscribe?
I decided to tabulate all the cash flows of the Reits with at least four years'track record. For one set of cash flows, I assumed that the investorsubscribed to his or her entitlement of rights shares. For the other set, theassumption was that the investor didn't subscribe and didn't sell the rightsshares in the market as well. Some rights shares have market value, andsome, like the recent K-Reit rights have zero market value. That's becausethe exercise price for the rights is almost equivalent to the market price of K-Reit, hence there is no privilege to owning the rights.Based on the cash flow stream, I then calculated the internal rate of return(IRR) for each strategy.This is the definition of IRR from Wikipedia: 'The IRR on an investment orproject is the 'annualised effective compounded return rate' or 'rate of return' that makes the net present value of costs (negative cash flows) of theinvestment equal to the net present value of the benefits (positive cashflows) of the investment.