Ann: HY23 Results presentation, page-5

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19/03/23

17:32

Post #: 66846830
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Originally posted by pete11: ↑

i was wondering can someone please work out if our dividend is sustainable in relation to out FFO , but adjusted for CAPEX, is there any way to work this out? i just found an interesting article why so many REITS are not as good value as they seem because people think the divvy is sustainable but they dont take into account the CAPEX required , they just look at the dividend payout ratio and they think its covered quite well, but they dont take into account the CAPEX the company needs every year

here is the article,Yet, I almost lost it all.What did I miss?I made one major mistake:I underestimated the company's leverage because I overlooked the impact of capex spending. I thought that the company's payout was safe because the dividend only represented about 50% of its FFO.But adjusted for capex, the dividend was poorly covered and the leverage was excessive relative to its free cash flow.The capex went into improving the malls and so it misled me into thinking that it was optional and could be reduced if needed.But the reality is that these malls were struggling and if they stopped spending the capex, these malls could quickly end up in a death spiral.The consequence of this is that CBL's balance sheet was too weak to endure the pandemic. The company had already cut its dividend and later it fully eliminated it, but even that wasn't enough as its tenants began to miss rent payments and it drove the company into bankruptcy.What are the lessons here?There are three main lessons:Lesson #1: Capex should not be underappreciated. It has a major impact on leverage and financial flexibility. Not all capex is optional and in the case of malls, it was critical to their survival. The same applies today to office buildings today! We think that investors are commonly overlooking capex and as a result, they overestimate the free cash flow generation potential of discounted office REITs like SL Green (SLG) and Vornado Realty (VNO). They are priced at very low FFO multiples, but once you account for capex, the multiples aren't as low as they may seem

.https://seekingalpha.com/article/4586564-my-worst-reit-investment-of-all-time

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Best practice is to differentiate between maintenance capex and growth capex.

Maintenance capex in the long term should be around Depreciation and Amortisation.
Growth capex should directly increase assets.

So maintenance capex is reflected in EBIT, with a delay, newer assets often have higher maintenance costs, but are usually depreciated on a long term average, so its a bit fuzzy.
Growth capex is reflected in book value.

DXS Price at posting: $7.84 Sentiment: Buy Disclosure: Held
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Ann: HY23 Results presentation, page-5

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