Reits look good, for now

[pianist]

thanks d.o.g. for the post, may i ask do u have any view on first reit? it didnt issue rights during deepest of the crisis and intending ar right issue at present bull market condition pending EGM approval..

[cookieguy]

REITS, if bought at attractive valuation per se as of NAV, acknowledging their risks and investors keeping abreast of REIT Manager's actions to visualize their potential direction, will help to reap in attractive dividends if managed well to a certain extent by the Manager. REIT Manager actions meaning understanding the debt obligations, asset enhancement prospects, little rights issue annually (too much is like begging money from us), quality of tenant etc...that of course impacted by external factors such as interest rates and other macro-changes.

If you will to ask me, it's one of the cost-effective ways to literally own a small portion of different types of the properties indirectly without incurring huge capital upfront and yet be able to earn "rental income" in the form of paid dividends, either quarterly or semi annually.

Yes, managed by a REIT Manager whom draws a juicy mgmt fee (hey, everyone needs to earn ), the returns paid back might be what some of the people call it "leftovers"

Yes, funding issues when it's highly leveraged due to their model

Yes, cash flow problems when sponsor is not strong enough and does not support the REIT in rough times...

And the disadvantages continue...

But if you will to weigh the pros and cons and ask me about this asset class, I will say the advantages are stronger, primarily the fact of the property ownership at an affordable rate with the opportuity of capital appreciation and dividend payout.

Your call

[nextwave]

REITS, if bought at attractive valuation per se as of NAV, acknowledging their risks and investors keeping abreast of REIT Manager's actions to visualize their potential direction, will help to reap in attractive dividends if managed well to a certain extent by the Manager. REIT Manager actions meaning understanding the debt obligations, asset enhancement prospects, little rights issue annually (too much is like begging money from us), quality of tenant etc...that of course impacted by external factors such as interest rates and other macro-changes.

If you will to ask me, it's one of the cost-effective ways to literally own a small portion of different types of the properties indirectly without incurring huge capital upfront and yet be able to earn "rental income" in the form of paid dividends, either quarterly or semi annually.

Yes, managed by a REIT Manager whom draws a juicy mgmt fee (hey, everyone needs to earn ), the returns paid back might be what some of the people call it "leftovers"

Yes, funding issues when it's highly leveraged due to their model

Yes, cash flow problems when sponsor is not strong enough and does not support the REIT in rough times...

And the disadvantages continue...

But if you will to weigh the pros and cons and ask me about this asset class, I will say the advantages are stronger, primarily the fact of the property ownership at an affordable rate with the opportuity of capital appreciation and dividend payout.

Your call

hi all,

good discussion on reits, let me contribute my 2 cents as a fairly advanced reit investor.

1. D.O.G's assertion that reits are foremost for the managers themselves is a good general observation but the same can be said for any stock? the task of the savvy investor is to seperate the wheat from the chaff, in SGX today the quality of reits is very variable, the mistake most investors do is go for ones with the highest yield without understaing why it is trading at a high yield

2. it is also not true that the worst assets are packaged into a reit, this again is a general observation and there are some that do this and some don't. can anyone say that CMT's assets are poor quality? are causeway point and north point (part of FCT) poor assets? yes, many of the junk warehouses packaged into reits are definetely weak assets which is why they offer mouth water yields to entice novice investors

3. reits dependence on debt is an issue but needs to be put into perspective- virtually all reits in singapore have less than 35% leverage which is very normal and nothing compared to leverage property developers have, interest coverage fo reits is also well above 3X, you won't find this in many foreign reits. this is one reason why no singapore reit other than poor quality ones such as saizen really got into trouble during the crisis. Btw, as a banker i can tell you that banks are very eager to lend to top quality reits such as CMT. Which business other than suburban malls has such resilient and predictable cash flows? so the real question to ask is whether they have access to varied sources of funding? the answer here is a solid yes for the good quality ones. CMT and FCT even accessed the local sing $ bond market at very good rates

More to follow...

[d.o.g.]

1. D.O.G's assertion that reits are foremost for the managers themselves is a good general observation but the same can be said for any stock?

The big difference is that in owner-managed companies the owner is not concerned about salary; as the biggest shareholder he is concerned about his stake. The first priority is to protect his own net worth and by extension the company. So he will usually err on the side of conservatism e.g. low gearing, blue-chip customers etc. In this way the interests of the minority investor and the owner-manager are aligned.

In a REIT the manager either owns very little of the REIT, or was originally the sole owner and is now merely a large minority owner. The first priority is to increase the size of the REIT to increase management fees. In this way there is a conflict of interest between the unitholder and the trust manager.

2. it is also not true that the worst assets are packaged into a reit, this again is a general observation and there are some that do this and some don't. can anyone say that CMT's assets are poor quality? are causeway point and north point (part of FCT) poor assets? yes, many of the junk warehouses packaged into reits are definetely weak assets which is why they offer mouth water yields to entice novice investors

To be clear, I said that the best assets will not be put into a REIT. Poor assets may or may not be REIT-able; there is a limit to the amount of lipstick you can put on a pig. Mediocre assets can be dressed up to some extent, and in a bull market are definitely REIT-able.

3. reits dependence on debt is an issue but needs to be put into perspective- virtually all reits in singapore have less than 35% leverage which is very normal and nothing compared to leverage property developers have, interest coverage fo reits is also well above 3X, you won't find this in many foreign reits.

This may be true today. But prior to the rights issues conducted by CMT, CCT, MLT, K-REIT etc their balance sheets were timebombs and it was obvious, at least to me, that rights issues would be likely. In Singapore the REITs are limited to a 60% debt/asset ratio, but the commercial limit allowed by the banks is actually 40%. Any REIT that went beyond 40% has had to fix it eventually via a placement or a rights issue.

Property developers usually carry heavy gearing, but the financing is project-based i.e. the debt gets repaid as a development is sold and proceeds are received. So there is a clear repayment schedule. Unless they get their timing very wrong, they are seldom stuck with a large project and its accompanying debt at the height of the market. If they are stuck with a midsize project when the market crashes, they can usually either mark the project down and sell it to clear the debt, or hold on to it until the market recovers.

In other words, in a pure property developer, money is borrowed as needed, and repaid once funds are available. Permanent debt is not a feature of a pure property developer. Landlords and integrated real estate companies will of course carry some long-term debt on their investment properties, but even this debt is usually slowly paid down.

In contrast, REITs never pay down their debt. In a boom, they use the increased equity from property revaluation to borrow additional money to buy more buildings at high prices. In a bust, the reduced equity forces a rights issue, with a deep discount to compel subscription. So they buy other people's assets expensively, and sell their own equity cheaply. Buy high, sell low. This is, to borrow Charlie Munger's words, "bonkers".

[arthur]

This post has generated enough interest to spill across other blogs and forums. Seems like the interest in REITs locally is indeed very high in order to generate such massive coverage.

One proponents of value investing is to seek out unloved counters. REITs are now like the 18 yr old school belle that every kid wants to have a go at. We make our own judgements ourselves.

D.o.g-san, seems like you are pretty famous nowadays eh? Heh heh.

http://forums.hardwarezone.com.sg/showth...?t=3009930
http://www.investmentmoats.com/money-man...t+Moats%29

[Blackjack]

Very interesting discussion here I just realised as I read through the different perspectives. I should have chanced on this thread earlier. I guess I'm one kid who is trying to have a go at the "school belle" as well, though not every "belle" in general appeals to me. I would have loved to consider myself as someone who loves value as well, so hopefully one can still co-exist between the 2 states?

Firstly on the point of reits being structured in general to favour owners (to cash out, earn management fee, reduce risks etc) and to market/hype to end investors (like myself), agreed totally. But which stock on the stock exchange is not listed in order to bring about some form of benefit to the original owners? (be it raising cash for expansion/operating expenses, securing future funding sources, increasing reputation to prospective business clients by being a listed entity, fleecing unwitting IPO investors to take over weak/falsified assets, etc etc)? Do you think stocks are listed because the rich folks behind genuinely wants you to have a piece of their business to share future profits and joy? In the same way, we can also say the best businesses will not be listed, as the business owners do not need your (institutional support/retail investors) to propel their growth. If they can remain unlisted and still grow, why not do so and enjoy 100% profit?

Simply put, in any transaction there are mutual benefits to both parties. There is no free lunch in this world. Investors are in reits or any other instruments because they find no other way to grow their assets in their own perceived safe way. This same group of investors may find it hard simply to achieve economy of scale with their minute assets and thus have to leverage on some platform (in this case, reits) to do so. Conversely some with adequate assets may buy their own private property and then decide to lease it out. Just because the original owners seem to be getting the sweeter deal in the way reits are structured doesn't mean it has to be a bad deal for reit holders. We make use of each other. Since I'm less useful, therefore I take less and give more. Its a fact of life. But both must gain.

Secondly, the fact that 1) weak assets are easily divested into a reit (whether its a bull or bear market in fact), and that the 2) best assets need never be divested is also true. I guess its up to an individual to define what are weak/unattractive assets for the first part of the argument, though that said, if weak assets can still be divested as attractive prices, why not? It may be done because there is no longer perceived capital growth nor redevelopment potential, or worse still, no more room for asset enhancement., or simply because the cash may indeed be deployed into higher growth areas. But that does not mean its a bad deal for reit investors? Reit investors naturally belong to a different psyche where they may not necessarily require gleaming growth to consider attractive. Same for retirees who prudently put their cash in fixed deposits and are shielded from the crisis. No good no bad, just a personal comfort and perceived returns. For the second part, I guess it needs no further elaboration. No free lunch remember? Even pre-ipo investors who seem to be getting the sweetest deal has to bear the risk of the business failing at an early stage. Similarly for those anchor institutions in IPO placements, they may be needed for their "established name" to support the issue, in the same way they need to deploy their cash somewhere where they perceive can still grow.

Thirdly, to call reits something waiting to fail or simply something not viable for investors may not be fair as well, much less apply a blanket view that all reits eventually or inevitably cost the investors losses in the form of cash calls. Value destruction does not mean you cannot make money out of it. I have held/am currently holding (so my views are biased obviously) Ascott reit, Starhill reit, First reit, Suntec reit, Saizen reit and CCT previously. With the exception of Saizen (which I've cut loss after failing to anticipate such a dilutive rights issue previously), I have made profits from all these other reits, so obviously I will not rule out reits to be a viable investment tool. In fact the gains from reits category in my investment portfolio is pretty significant overall from the realised and yet to be realised profits. Compared to stocks, I feel its far simpler to decide which are good buys and which are not, cos there are really less factors to consider. Not just reits alone, but don't we also have our own set of rules to decide what makes us money even when we invest in companies (not reits)?

In essence, it may be pretty unfair to eliminate reits as a natural choice for investments simply because we as retail investors do not get a sweet enough deal as compared to the reit managers.

[nextwave]

1. D.O.G's assertion that reits are foremost for the managers themselves is a good general observation but the same can be said for any stock?

The big difference is that in owner-managed companies the owner is not concerned about salary; as the biggest shareholder he is concerned about his stake. The first priority is to protect his own net worth and by extension the company. So he will usually err on the side of conservatism e.g. low gearing, blue-chip customers etc. In this way the interests of the minority investor and the owner-manager are aligned.

In a REIT the manager either owns very little of the REIT, or was originally the sole owner and is now merely a large minority owner. The first priority is to increase the size of the REIT to increase management fees. In this way there is a conflict of interest between the unitholder and the trust manager.

2. it is also not true that the worst assets are packaged into a reit, this again is a general observation and there are some that do this and some don't. can anyone say that CMT's assets are poor quality? are causeway point and north point (part of FCT) poor assets? yes, many of the junk warehouses packaged into reits are definetely weak assets which is why they offer mouth water yields to entice novice investors

To be clear, I said that the best assets will not be put into a REIT. Poor assets may or may not be REIT-able; there is a limit to the amount of lipstick you can put on a pig. Mediocre assets can be dressed up to some extent, and in a bull market are definitely REIT-able.

3. reits dependence on debt is an issue but needs to be put into perspective- virtually all reits in singapore have less than 35% leverage which is very normal and nothing compared to leverage property developers have, interest coverage fo reits is also well above 3X, you won't find this in many foreign reits.

This may be true today. But prior to the rights issues conducted by CMT, CCT, MLT, K-REIT etc their balance sheets were timebombs and it was obvious, at least to me, that rights issues would be likely. In Singapore the REITs are limited to a 60% debt/asset ratio, but the commercial limit allowed by the banks is actually 40%. Any REIT that went beyond 40% has had to fix it eventually via a placement or a rights issue.

Property developers usually carry heavy gearing, but the financing is project-based i.e. the debt gets repaid as a development is sold and proceeds are received. So there is a clear repayment schedule. Unless they get their timing very wrong, they are seldom stuck with a large project and its accompanying debt at the height of the market. If they are stuck with a midsize project when the market crashes, they can usually either mark the project down and sell it to clear the debt, or hold on to it until the market recovers.

In other words, in a pure property developer, money is borrowed as needed, and repaid once funds are available. Permanent debt is not a feature of a pure property developer. Landlords and integrated real estate companies will of course carry some long-term debt on their investment properties, but even this debt is usually slowly paid down.

In contrast, REITs never pay down their debt. In a boom, they use the increased equity from property revaluation to borrow additional money to buy more buildings at high prices. In a bust, the reduced equity forces a rights issue, with a deep discount to compel subscription. So they buy other people's assets expensively, and sell their own equity cheaply. Buy high, sell low. This is, to borrow Charlie Munger's words, "bonkers".

---

1. D.O.G's assertion that reits are foremost for the managers themselves is a good general observation but the same can be said for any stock?

The big difference is that in owner-managed companies the owner is not concerned about salary; as the biggest shareholder he is concerned about his stake. The first priority is to protect his own net worth and by extension the company. So he will usually err on the side of conservatism e.g. low gearing, blue-chip customers etc. In this way the interests of the minority investor and the owner-manager are aligned.

In a REIT the manager either owns very little of the REIT, or was originally the sole owner and is now merely a large minority owner. The first priority is to increase the size of the REIT to increase management fees. In this way there is a conflict of interest between the unitholder and the trust manager.

2. it is also not true that the worst assets are packaged into a reit, this again is a general observation and there are some that do this and some don't. can anyone say that CMT's assets are poor quality? are causeway point and north point (part of FCT) poor assets? yes, many of the junk warehouses packaged into reits are definetely weak assets which is why they offer mouth water yields to entice novice investors

To be clear, I said that the best assets will not be put into a REIT. Poor assets may or may not be REIT-able; there is a limit to the amount of lipstick you can put on a pig. Mediocre assets can be dressed up to some extent, and in a bull market are definitely REIT-able.

3. reits dependence on debt is an issue but needs to be put into perspective- virtually all reits in singapore have less than 35% leverage which is very normal and nothing compared to leverage property developers have, interest coverage fo reits is also well above 3X, you won't find this in many foreign reits.

This may be true today. But prior to the rights issues conducted by CMT, CCT, MLT, K-REIT etc their balance sheets were timebombs and it was obvious, at least to me, that rights issues would be likely. In Singapore the REITs are limited to a 60% debt/asset ratio, but the commercial limit allowed by the banks is actually 40%. Any REIT that went beyond 40% has had to fix it eventually via a placement or a rights issue.

Property developers usually carry heavy gearing, but the financing is project-based i.e. the debt gets repaid as a development is sold and proceeds are received. So there is a clear repayment schedule. Unless they get their timing very wrong, they are seldom stuck with a large project and its accompanying debt at the height of the market. If they are stuck with a midsize project when the market crashes, they can usually either mark the project down and sell it to clear the debt, or hold on to it until the market recovers.

In other words, in a pure property developer, money is borrowed as needed, and repaid once funds are available. Permanent debt is not a feature of a pure property developer. Landlords and integrated real estate companies will of course carry some long-term debt on their investment properties, but even this debt is usually slowly paid down.

In contrast, REITs never pay down their debt. In a boom, they use the increased equity from property revaluation to borrow additional money to buy more buildings at high prices. In a bust, the reduced equity forces a rights issue, with a deep discount to compel subscription. So they buy other people's assets expensively, and sell their own equity cheaply. Buy high, sell low. This is, to borrow Charlie Munger's words, "bonkers".

D.O.G

you missed my major point- there are GOOD reits and there are BAD reits, everything you said is done by BAD reits- no arguments

your thrust that NO reit can be a good investment is completely off the mark as is your understanding of developers- developers pay back loans? don;t make me laugh? yes, they pay back a loan for sure only to take another even bigger loan, and their ability to pay back a loan is a pure coin toss- will thsentiment be good for their overpriced properties? GOOD reits have assets that have generated cash flows for decades with minimal volatility- who is more risky?

[mrEngineer]

I am not siding anyone here. Just a general remark. Readers need to differentiate between the opinions and facts. Opinions need to be verified to become facts. I hope constructive posting can resume and not hurt any contributors with sarcasm.

PS I have seen wonderful posters leaving unnecessarily in e previous forums. Moderators please help. Thanks.

[arthur]

I am not siding anyone here. Just a general remark. Readers need to differentiate between the opinions and facts. Opinions need to be verified to become facts. I hope constructive posting can resume and not hurt any contributors with sarcasm.

PS I have seen wonderful posters leaving unnecessarily in e previous forums. Moderators please help. Thanks.

Dun fret. Everyone is entitled to his opinion. I am sure d.o.g will be able to back his claims later on.

As long as this thread doesn't go to the level of calling names, it's still within reasonable discussion.

BUT I need to highlight this observation. How come suddenly there are such strong opinions on the investment viability of REITs? Are we looking at REIT investors going towards a denial state or the thread has really gotten more interest from newcomers and thus, we are looking at an evolutionary state of quality posts within this forum.
OR.. There are some hidden agendas around?

Anyway all of us have our investment/trading strategies. Let's stick to our rules and enjoy the ride forward.

Cheers.

[Nick]

I think I will just stick to my own mantra - all stocks are good at the right price.

I don't think anyone can say purchasing a blue chip REIT in 1H 09 was a poor decision. But at the same time, investing in over-priced REITs (or any other stock) just to keep up with the latest portfolio trend may very well result in one's portfolio generating lower returns than another person who simply left his cash under his mattress. So the key thing is valuing the REIT correctly.

Perhaps it will be better to discuss the various ways to value a REIT or to detect potential red flags ?

Cheers