Share Buy-Back By REITs : Does It Make Sense ?
I fully understand the benefit of “share buy-back “ as it has been carried out by many companies who see the value of their share when the price might be temporary plummeted due to market condition or caused by certain bad news.
What is a Share Repurchase/ Buy-Back ( From Investopedia.com)
A share repurchase is a program by which a company buys back its own shares from the marketplace, usually because management thinks the shares are undervalued, and thereby reducing the number of outstanding shares. The company buys shares directly from the market or offers its shareholders the option of tendering their shares directly to the company at a fixed price.
BREAKING DOWN Share Repurchase
Legendary Warren Buffett been actively buying back his own share (BERK) when the PB of his company hit certain level which he deem the company is “undervalue” at that price level.
“Berkshire signaled it was prepared to buy back its own stock in July 2018, when it loosened the rules Buffett and his longtime lieutenant Charlie Munger use to decide whether to purchase the stock. With a cash pile of more than $100 billion and few opportunities to buy companies at a price Buffett is willing to pay, buying back the company's own stock was seen as a good option.”
Every quarter, hundreds of billions spent by SP500 companies to perform the share buyback and this has been known as one of the reasons that fuel the current bull market.
But for REIT , does it make sense to perform share buyback since it need to distribute 90% of their income and doesn’t have cash sitting or idling like some of the companies who have very strong FCF or cash pile. There is no tax benefit for REITs in doing this, other than “signalling effect” or maintain the price level.
I have much reservation for the practice of share buyback by REIT and would rather the cash being distributed back to unit holders and let them decide if the share is really undervalue, they can choose what they wanted to do with the cash.
In the long run , buying properties should still be the underlying fundamentals for REITs to grow their portfolio. Buying back shares is just an opportunistic. Does K-REIT's manager seeing the opportunities which we don’t ? What do you think?
"When stock can be bought below a business's value it is probably the best use of cash." By Warren Buffett
Another problem face by K-REIT is the high management fees as compared to others. No doubt , K-REIT has very good and high quality assets but the fees structure make it one of the worst yield REIT listed on SGX. ( around 4+%)
I have divested my last batch of K-REIT in 2017 and never look back since then… thanks for right timing in buying right after GFC , it gave me a XIRR of 29.2% in holding it for 10 years.
Thank You K-REIT !!