Big valuation difference in Industrial Reits

[tanjm]

Does anyone care to venture an opinion as to why Sabana REIT and Cambridge REIT (I do not include AIMSAMPReit aka Allco due to its chequered history) value at a implied yield of >9%, while Ascendas REIT values at a implied yield of 6+%. Ascendas market price is above its NAV while for the other 2, their market price is below NAV.

[cif5000]

Because at its worst, it was still overwhelming at 60.1%.

[Nick]

1) Diversification of Counterparties/Tenants - if 1 goes bust, minimal impact

2) Number of Properties - If 1 gets destroyed, it wouldn't impact revenue much.

3) Strong Sponsor - acquisition pipeliine in Singapore and rest of Asia & can participate in equity fund raising in dark times

4) Diversification of asset class - flatted factories, business parks, warehouses, hi-tech industrial, distribution centres etc

5) Economies of Scale from larger portfolio size localized in 1 country

6) Can participate in development projects which boasts higher returns

This is why I believe A-REIT trade with blue chip status. Just look at what happened in 2008 - most of the small cap industrial reits (CIT, MI-REIT) faced financing problems while A-REIT rode the storm.

I think we can also see the same thing happening between First REIT and Plife REIT.

This is how I see it haha !

(Not vested in either)

[Drizzt]

I solely believe there is a premium for those cap mall and ascend as REIT. In terms of debt profile and diversification and assess to financing there is really not much diff

[yeokiwi]

This is why I believe A-REIT trade with blue chip status. Just look at what happened in 2008 - most of the small cap industrial reits (CIT, MI-REIT) faced financing problems while A-REIT rode the storm.

In 1st quarter 2009, AREIT raised fund through a preferential offer of 1:15 and also a private placement of 258 million shares at $1.16.
In a financial storm, only the gearing matters. Any REIT that has high gearing will have to go through either right issues or private placement to shore up the balance sheet but at the expense of the long term investors.

CIT surprisingly did not perform a private placement nor right issues during the darkest of the hour in 1st qtr 2009.

Except the AIMS REIT debacle, I thought CIT was doing pretty well in most aspect of REIT management.

[tanjm]

Assuming your average holding period is 10 years and 6% vs 9% yield, you are talking about an extra 30 cents of dividends for the 10 year period per dollar of investment.

If I discount the extra cashflows using a 3% rate, we are talking about an extra 25 cents per dollar in present value terms. That's quite a bit of money.

Assuming this spread difference is due to credit risk, then it may be possible to look at it from the point of view of "What would the market charge me for a CDS if I were able to buy protection against default". i.e. If I buy $1 of CIT and enter into a insurance contract to protect myself against CIT default for a nominal of $1, the net effect should be riskless (wrt Credit Risk though not stock price risk). If I have time, I will try to calculate it tonight or tomorrow.

---

CIT surprisingly did not perform a private placement nor right issues during the darkest of the hour in 1st qtr 2009.

I am a long time holder of CIT.

Yes, I remember why. Right at the beginning of the financial crisis, CIT negotiated a new loan at a pretty high effective interest. At that time, some people criticized it for negotiating such a high interest rate. In hindsight, that was a pretty good and fleet footed reaction to the situation.

[lonewolf]

In a financial storm, only the gearing matters. Any REIT that has high gearing will have to go through either right issues or private placement to shore up the balance sheet but at the expense of the long term investors.

A-REIT was not the only REIT that did some form of equity raising during the financial crisis. Personally I do not see equity fund raising being carried out at the expense of long term unitholders but I know many still feel strongly about this. Regardless of your personal opinion, the fact remain for me that buying into A-REIT just before the PO in Jan 2009 has been a good decision for me. My returns for holding for 2 yrs is >90%.

CIT surprisingly did not perform a private placement nor right issues during the darkest of the hour in 1st qtr 2009.

Except the AIMS REIT debacle, I thought CIT was doing pretty well in most aspect of REIT management.

Its a little ironical that after the financial crisis is over, they did 2 round of equity raising in quick succession. I was quite ok with CIT management until its ill-advised attempt at taking over MI-REIT (before it became AIMSAMP) using funds it raised from private placement no less.

CIT has not been a good investment for me; even factoring in the distributions, I'm still looking at a small loss. I'm looking to divest CIT soon. Regardless of what you make of the different industrial REITs, the bottomline is that A-REIT has delivered in spades whereas the 2nd tier I-REITs has been less than stellar.

[yeokiwi]

Do you mean that you bought in CIT at Jan 2009 and yet it returned less than AREIT?
I thought CIT was selling at around 26-28cts in Jan 2009. Factoring the dividend, the return for the last 2yrs should be comparable to AREIT?

[lonewolf]

No. I bought CIT in Aug 07 just before the full blown financial crisis. So maybe just a case of bad timing? Hmm.. I never compared the relative performance of CIT and A-REIT if both were bought at the same time.

[tanjm]

Assuming your average holding period is 10 years and 6% vs 9% yield, you are talking about an extra 30 cents of dividends for the 10 year period per dollar of investment.

If I discount the extra cashflows using a 3% rate, we are talking about an extra 25 cents per dollar in present value terms. That's quite a bit of money.

Assuming this spread difference is due to credit risk, then it may be possible to look at it from the point of view of "What would the market charge me for a CDS if I were able to buy protection against default". i.e. If I buy $1 of CIT and enter into a insurance contract to protect myself against CIT default for a nominal of $1, the net effect should be riskless (wrt Credit Risk though not stock price risk). If I have time, I will try to calculate it tonight or tomorrow.

I'm going to assume that credit rating agencies know their stuff and that historical default probabilities in the US against credit ratings can apply here.

The numbers presented will be very very rough and for "thinking" only. please take my calculations as approximate and the credit ratings with a grain of salt.

http://monevator.com/2010/04/09/bond-def...obability/

CIT has a S&P credit rating of BBB. Using a simplified default calculation, and assuming that CIT mkt price will jump to 40% on default, then its credit risk alone needs about 600bp over risk free rate (this doesn't count pure equity systematic risk) with a probability of default of about 10%. By contrast, Ascendas reit should have about 90bp of credit risk spread with the same assumptions (and 1.5% prob of default)

This means that AREIT and CIT should have about 500bp of difference, assuming they are exposed to the same generic equity risk. Instead they have about 300bp of difference.