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Distribution Payout Practices and the Collapse of A-Reits

Author/s: Laura Cummins, Hugh Zochling

Date Published: 1/01/2011

Published in: Volume 17 - 2011 Issue 4 (pages 598 - 613)

Abstract

In the lead up to the Global Financial Crisis, A-REITS pursued aggressive distribution practices. Payout ratios significantly in excess of 100% of underlying earnings became common place, funded largely from increased borrowings. The GFC painfully exposed the unsustainability of this practice. A-REITs were punished when the global debt markets froze and property values crashed, leading to massive equity destruction for over geared A-REITs. This research explores the pre-GFC distributions practices of A-REITs. Annual report financial data analysis and semi-structured interviews with five industry experts were conducted to examine A-REIT distribution practices. The results reveal a clear systematic decline in the relationship between underlying earnings and distributions. It is further discovered that the since abandoned practice of distributing un-realised profits was designed to boost share prices. Paradoxically, it eventually led to their decline and the A-REIT sector’s demise.

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Keywords

A-Reits - Debt - Distributions - Global Financial Crisis - Retained Earnings - Underlying Earnings

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