Whiterock Real Estate Investment Trust T.WRK.DB.K

RE: RE: As a potential value/income investor...

[baudelaire]

Canadafan:

"AFFO includes depreciation , which is a non cash expense."

How non-cash is this:

“The building has undergone over $20 million of improvements over the last 7 years including new lobby and atrium areas, new windows, upgraded HVAC equipment, and significant tenant area improvement.”

That's from WRK's news release related to the West Mall acquisition.  It shows that these assets experience very real and very expensive (at least relative to the purchase price of $82.3-million) depreciation.  The previous owners didn't do these things for fun.  The improvements, if done by WRK, would go on the balance sheet as assets, which they are, and would then depreciate.  Which is a non-cash expense.  See the circularity of this nonsense?  It's not expensed since it is a revenue enhancing investment, and so the cashflow isn't affected. 

WRK is small enough to grow out of many problems, and its long and staggered lease portfolio can mask a lot for a long time, too. But eventually these office buildings need serious re-investment.  It doesn't help that REIT accounting is trying to reflect the real world, but when describing the sustainability of their distributions, the industry wants us to believe a big chunk of it's imaginary.  

"Q4 had some exceptional event (ie tenants going bankrupt etc), which have been corrected for."

There's nothing exceptional about that; it's prosaic for a multi-tenant suburban office focused REIT.  As more and more of the acquisitions are multi-tenant and not 100% government, unitholders will see increased variability in occupancy and higher leasing expenses.  A gov't  20-30 year triple net lease is quite different from recent purchases where the avg lease term is 7-8 years with a handful of different tenants in every building.  You have to spend a lot of money to keep the latter situation going.  There's no shortage of land and developers in the GTA willing to put up spanking new office space to compete with these 70's and 80's era spaces. 

"If you check out RioCan , Canada's largest REIT , touted by many analists they also pay out more than AFFO."

Yep.  And the payout of gains on sales has come back to bite REI in the tush.  As it should.  As, I'm sure, management knew well it one day would.