........................................................................................................................................................
PLEASE NOTE: To better serve the individual needs and preferences of our 1,700 Member-Partners, I have prepared this letter such that our readers may access as much or as little information as required. Please use the links below to access the extra information:
Included in this email:
- Insight into the IGW REIT's Net Asset Value and current Unit Price
- Distribution to be reduced effective October 31st for distribution payments made November 20th
- Performance in perspective
- Future Prospects
For the extra information (below), just click here to download the complete report:
- Market and Economic News
- Analysis and Discussion
- Strategy & Targets Review
- Progress & Opportunities
- League Invests in Leadership
- To hear the Audio Recording by Founding Partner,Adam Gant; President and COO, Brien Biondi; and CFO Patrick Miniutti, click this link.
........................................................................................................................................................
Thursday, September 24, 2009
Greetings Member-Partners of the IGW REIT and IGW REIT LP,
You will recall from my recent letter, that despite two properties being appraised last quarter -- and both of them showing improved values as a result of the improvements we've made -- the unit price of the IGW REIT declined by 3.9 cents. I explained that this was due in part to cash being spent to make value-adding improvements that, while not reflected in current valuations, are deemed necessary to create future value increases that would show up at future revaluations.
How the Unit Price is calculated
The unit value of the IGW REIT is not based solely on the value of the properties. Instead, the unit price is made up of the following: the fair market value of the assets based on the most recent appraisals plus other assets from the balance sheet (receivables, etc.), less the aggregate amount of the liabilities of the REIT and the paid up capital and unpaid distributions on issued Income Priority Units, divided by the outstanding number of units. (For a complete definition, along with financial statements which are updated quarterly, see the IGW REIT's Offering Memorandum available here.)
So, all cash expenditures which are not presently reflected in market value increases can contribute to a decline in unit value. Had there not been the previous decline as a result of overall market conditions, as described in a previous letter, the more recent effect on unit price would not have been so noticeable.
Think of the REIT as a pool that has both assets and liabilities inside of it. It may have a $1 million property, but if that property has a mortgage of $600,000, the net asset value is $400,000 (assets -- liabilities). An important asset in the REIT is its cash on hand. Such cash is used for many things including property improvements, which are made with the aim of increasing the value of the property when it is appraised at a later date.
When cash is spent on making improvements, the REIT is using an asset (cash) with the intention of increasing another asset (the property value) in the future. In the period between spending the cash and reappraising the property, this value on the books has decreased. This puts downward pressure on unit values in the interim. Conversely, reducing the cash outflow puts upward pressure on the unit values because as more cash is retained in the REIT, the net asset value increases proportionately.
Distributable Income
Briefly, Distributable Income for the REIT LP is equal to the net income from all of the REIT LP's business activities (as determined in accordance with GAAP) plus non-cash expenses such as amortization plus proceeds from property sales or refinancings. Generally, proceeds from refinancings and property sales are not considered to arise from operating activities. A complete definition is available in the IGW REIT's Offering Memorandum available here.
History Revisited
During the past year, we have experienced economic conditions that are unprecedented in our time and that have limited the REIT's ability to acquire and improve assets as it did before. The lack of liquidity in the credit markets affected the REIT's availability of debt (mortgage/refinancing) capital, which forced us to rely only on improvements to properties acquired prior to the onset of the credit crisis.
Despite this, we are proud that the REIT has been able to generate sufficient Distributable Income to maintain the same 10.05 cents per unit per year that it had since its inception in February of 2007 and help bridge the gap from bad times to good for our Member-Partners.
Present Conditions Warrant Change
Maintaining distributions, however, has come at a price reflected in recent reductions in the REIT's unit value. We must now adjust our course and retain more funds within the REIT so that it's better able to make acquisitions targeted to increase unit value and funds available for distribution.
One cannot both feast and become rich. This being so, management has determined, pursuant to the distribution policy (as set out in the REIT's Offering Memorandum) that it is appropriate to reduce the distribution to an amount that is prudent going forward, and aligns with both the short and long-term targets set for the IGW REIT.
New Distribution Amount Set
Effective October 31st and beginning for distribution payments made November 20th, the amount distributed per IGW REIT (Classes A and AA) and IGW REIT LP unit will be reduced from 10.05 cents to 7.25 cents per unit, per year. A decrease of 2.8 cents. At the current price of $0.975 per unit, the annual distribution yield is 7.43%. The period for this new distribution amount is undetermined at this time.
In order to allow you to make any necessary adjustments to your personal finances, we have provided this advance notice. This is in keeping with the first tenet of Our Credo:
"We will do for others, as we would have them do for us."
Please note, current issuances of IGW REIT's fixed-distribution Income Priority Units are not affected by this change in distribution amount. For those of you most concerned with your monthly income, we will gladly facilitate the transfer of your investment into fixed-distribution Income Priority Units. The three current series of IPUnits offer the following: 9.25% on a five-year term, 8% on a three-year term, and 6.5% on a one-year term.
Future Distributions
At this point, the question on everyone's mind is, "Will the distribution increase once things return to 'normal'?" Good question.
Our priorities are to ensure that the REIT's distributions are sustainable and that the unit value of the REIT continually increases -- while remaining competitive with other investment choices available. Needless to say, the REIT must be sustainable in order for it to deliver the results we all want. Taking into account the REIT's tax-efficiency, we believe that even at the new distribution rate the REIT offers a very attractive return on investment. Page 18 of the current edition of the REIT's Investment Overview shows the targeted range of returns we're seeking to achieve over the next 10 years -- taking into account the uncertainty in the financial sector and real estate market that still exists in the short-term. You will note that assuming we achieve results between our targeted high and low expectations for the traditional IGW REIT Units, one would have to earn between 17.46% to 26.20% from a non-tax-efficient investment to receive the same after tax return targeted for the REIT. (Click here or call your Member Services Manager for the current edition of the IGW REIT Investment Overview.)
Reducing the distribution at this time will give us the best chance at starting the unit value on the path to appreciation again. Even at its new level, however, distributions to investors will exceed cash flows from operations and we will need to rely on other sources of Distributable Income, such as the proceeds of property sales and refinancings, to maintain distributions. Pursuant to our distribution policy, we will prudently make any adjustments deemed necessary to facilitate the ongoing operations of the REIT for the benefit of our Member-Partners.
League continues to manage the REIT's portfolio of assets to maximize value while protecting your original investment. Our primary objective in the near-term is to increase the REIT's cash position to a level that will be sufficient to begin acquiring stabilized (cash producing) assets and help increase the REIT's unit value and distributable income over the medium and long term.
Performance in Perspective: The View From the Bottom of the Market
The recent decline in the unit values for the IGW REIT for Q2 2009, while disappointing, provides us all a lesson in the risks involved in making any investment. It also underscores the importance of a strategy that is based on careful selection and proactive improvement combined with management compensation designed to spur forward progress, rather than buy-and-hope asset-picking. The Canadian REIT and TSX indices, show that there is still a ways to go before they reach their previous highs.
Even so, it is important to keep in mind that any value created by improvements made in the last six months, likely won't be realized for at least two quarters -- that's the nature of real estate.
Commercial Real Estate -- A Lagging Indicator
A lagging indicator is an economic statistic that changes after macroeconomic conditions have already changed. Commercial real estate fits this description: while the equity markets have recovered somewhat, changes in commercial real estate values generally lag behind these events.
The past year, economically speaking, has been very difficult for many people. During this time, the effect of what has been called the greatest economic crisis in 60 years has further reverberated through the IGW REIT, although we have worked diligently to mitigate its effects.
Although it appears that economic conditions are improving, most experts expect that the recovery will be a slow process. Keep in mind that it took more than two years of diligent work to get the IGW REIT to its high of $1.116 per unit, and progress going forward will not be instantaneous. Nevertheless, we hope to see increases in the REIT's unit price soon.
Future Prospects Look Positive
In the past two months, we have experienced a remarkable turn-around from the previous six. Liquidity has begun its return to the credit markets, and we are in the midst of refinancing three properties. This bodes well for the REIT's return to its "normal" pattern of buying properties, making improvements and distributing or re-investing the proceeds.
Looking forward, the management team is excited about the future prospects and opportunities that will be available to us over the next six months. With things slowly returning to normal, we're happy to be getting back to growing the REIT's asset base and creating new value and distributable income at a rate of growth that we hope will allow us to get back on track to achieving our five-year goals.
Needless to say, with what we hope is the worst of the credit crunch behind us, we're looking forward to applying our efforts and skills to moving forward (hopefully at a faster rate than ever before) rather than just working to hold our ground.
I hope this explanation helps ease some of your concerns and gives you assurance that League is working hard to preserve and grow your investment for your future and for the future generations to follow.
In Summary
Those of you who have been with League from the beginning know that this is the first period in League's history that you've received anything less than stellar news from me. It's also the first I've had the occasion to deliver it.
During the past year, we have experienced economic conditions that are unprecedented in our time and that have limited the REIT's ability to sell assets for fair value. This has resulted in the recent reduction in appraised value for the REIT portfolio, and unit price.
Because we are all Member-Partners, we share the same risks and rewards. As we affirm in the 16th tenet of Our Credo:
"We believe our membership is comprised of extraordinary individuals who are deserving of respect. We respect them foremost for the effort, care, and constraint it took to produce, accumulate, and save their investment capital. Having their capital entrusted to our care, we will manage it with exceptional ability on their behalf."
Without exception, every one of us at League (now nearly 60 strong!) are dedicated to your success. Our interests, as always, are aligned with yours. Therefore, we will always do for the group whatever is required to ensure our mutual success for the long term.
Where to get more information
IGW REIT financials are updated quarterly -- along with summary information included for each property in the Offering Memorandum, available here: www.league.ca/igwreitdocs.html
For the extra information (below), just click here to download the complete report including:
- Market and Economic News
- Analysis and Discussion
- Strategy & Targets Review
- Progress & Opportunities
- League Invests in Leadership
To hear the Audio Recording by Founding Partner,Adam Gant; President and COO, Brien Biondi; and CFO Patrick Miniutti, click this link.
Two-Way Communication
Our success depends on the support and feedback we receive from you, our esteemed friends and Member-Partners. If you have any words of encouragement, opinion, or suggestions for improvement, I hope you will share them with us at this address: feedback@league.ca. We take your suggestions seriously and look forward to continuously making improvements so that we can better anticipate and provide for your needs.
As always, League's Member Services Managers are eager to take your calls and answer your questions. If you need anything more, just ask.
Respectfully and sincerely,
|
