Reits look good, for now

[pianist]

for me in yeo's shoes, I use PE ratio.

[yeokiwi]

A worked example should show yeo-san's logic clearly:

1. You bought stock A with $1000 capital, It yields 10%, so div is $100 per year.
2. 1 year later, stock A doubled, and still gives a div of $100 per year. The mkt value of your investment has become $2000 (yield based on mkt val drops to 5%).
3. At the same time, there's now a stock B that has a yield of 8%.

If u stay with A, you continue to get $100 per year.
If u sell A and switch to B, you would have invested $2000 in B, and will get $160 per year. This is obviously the better choice.

If u have compared B's current yield (8%) with A's yield based on your purchase price (10%), you would think that A is the better choice, which is wrong. U need to use the same denominator (mkt val) to normalize the yield, for a correct comparison.

Thank you Blue san, your example is excellent.
I use current yield and market valuation because I am more concerned with my current portfolio valuation and yield.
Historical price and yield are history and in my opinion, they should not be used as considerations for holding on to the stock.

One interesting example is General Electric that is listed US stock exchange.
It was first traded at $108 a share but had undergone 9 stock splits till date.
The split adjusted price at 2007 is 2.3 cts.
GE paid a dividend of $1.24 in 2008 i think.

So, if a fund had held the share since 1892, the historical yield is about 5400% in 2008.
It is exhilarating to get this yield but the piece of information is not very useful to make a proper investment decision now.

http://www.usatoday.com/money/perfi/colu...sted_N.htm
http://www.ge.com/investors/stock_info/d...story.html

[psslo]

> Great thing that you managed to resist the urge to lock in the capital gains

Psslo, u are good man. 30% on CDL REIT. Salute you.

There is a price for everything. The time to sell is when the REIT fundamentals are not so good.

I personally sold all my Suntec REIT when they bought MBFC at such high price. Li Ka Shing and ARA got the best deal. Suntec REIT carry the baby now...

Contrarian,

I still like Suntec because yield is ok at 6% and P/B is still below 1 in terms of valuation. Actually, I thought MBFC is a good deal in the long run as office rents has bottomed and likely to increase in the future, perhaps sooner than later. If you compare to CapitaComm, it has the money to invest, but currently can not find anything suitable unlike Suntec & K-Reit because sponser CapitaLand does not have such attractive CBD office pipeline. If you compare the performance over the recent downturn, CapitaComm double shareholding with rights issue to raise cash when it's price is still low. Suntec, in comparison, held off any dilutive fund raising until the market recovered. I sold off CapitaCom and added Suntec instead. Now Suntec is one of my larger Reit counter.

[wj888]

Agreed with yeo and bluestamp.

I believed it's mentioned somewhere in intelligent investor on this example.

As an investor, you are supposed to make the capital allocation decision and capital should go where it is best treated.

In this case, if we are just using yield as a means to evaluate, then we should benchmarked against the current market price as highlighted by bluestamp.

Some property investors also used historical purchase price to "boast" about their rental yield.. but it is not correct in my humble opinion.

[bb88]

Oh ok, thanks for the great example.

That would be the best basis if you want to maximise funds or get out of a particular stock at the reduction of diversity. But how do you consider the diversification of risk in this case?

Clearly it is unwise to put all your eggs into 1 basket. Unless you do not have enough funds for Stock B, or think Stock A is by all counts "inferior", this approach may not always be the best?

I thought that having such an approach would incline towards a lack of objectivity for individual stocks on individual merits and result in swapping around like musical chairs. Any views?

[donmihaihai]

Oh ok, thanks for the great example.

That would be the best basis if you want to maximise funds or get out of a particular stock at the reduction of diversity. But how do you consider the diversification of risk in this case?

Clearly it is unwise to put all your eggs into 1 basket. Unless you do not have enough funds for Stock B, or think Stock A is by all counts "inferior", this approach may not always be the best?

I thought that having such an approach would incline towards a lack of objectivity for individual stocks on individual merits and result in swapping around like musical chairs. Any views?

It is the opposite. Buying stock is base on quality, price and sometime diversification. Chairs must be compare during initial purchase. It must be compare again when quality and price changed. Nothing is cast in stone. An investor must has the kind of objectivity to process it.

[Contrarian]

> I still like Suntec because yield is ok at 6% and P/B is still
> below 1 in terms of valuation. Actually, I thought MBFC is a
> good deal in the long run as office rents has bottomed and
> likely to increase in the future, perhaps sooner than later.
> If you compare to CapitaComm, it has the money to invest,
> but currently can not find anything suitable unlike Suntec & K-
> Reit because sponser CapitaLand does not have such attractive
> CBD office pipeline. If you compare the performance over the
> recent downturn, CapitaComm double shareholding with rights
> issue to raise cash when it's price is still low. Suntec, in
> comparison, held off any dilutive fund raising until the market
> recovered. I sold off CapitaCom and added Suntec instead. Now
> Suntec is one of my larger Reit counter.
[/quote]

> I still like Suntec because yield is ok at 6% and P/B is still
> below 1 in terms of valuation

The MBFC bought is at yield of 4% (if u calculate the purchase price, not against stock price). The valuation of MBFC are very aggressive by my standard.

So the Asset Value is how the mgt tends to mark it up.

> I thought MBFC is a good deal in the long run as office rents
> has bottomed and likely to increase in the future.

I believe MBFC structures many of their leases in 5+5 terms. There is an agreed increase in rental X% every year. Most likely3-5%

If you get a steep increase in interest rates beyond 2011, this will most certainly eat into the yield.

> If you compare to CapitaComm, it has the money to invest,
> but currently can not find anything suitable unlike Suntec & K
> -REIT

K REIT holders did not get a good deales at all. They gave up Keppel Towers and GE towers, both Freehold CBD assets to K Land, in exchange for MBFC at such high valuations.

I think Suntec is unlikely to swallow more assets in next 1-2 years. Their debt profile is increased significantly, hitting gearing of 40%. It gives little room for downside in valuation markdown.

Yes CCT has used up all the Capitaland pipeline. So it has to find new office buildings.

> CapitaComm double shareholding with rights
> issue to raise cash when it's price is still low. Suntec, in
> comparison, held off any dilutive fund raising until the market
> recovered. I sold off CapitaCom and added Suntec instead. Now
> Suntec is one of my larger Reit counter.

There is no right or wrong here. At the point of downturn, CCT probably think the crisis will drag 3 - 5 yrs and bet on a worst case scenario. On hindsight, nobody knew the recession rebounded so fast and strongly. If I had known this, I will triple my bet on ARA and Suntec REIT.

I believe CCT's leases are structured on a shorter term. So it is likely the releases and rentals will rise much faster.

Whatever it is, the sponsor and the REIT mgr of any REIT is the sure winner.

[arthur]

So the Asset Value is how the mgt tends to mark it up.

I think this is the best statement so far I have heard about REITs.
Its so true but most "dividend investors" cannot differentiate the true valuation vs. mark-up "discounted valuation".

Cheers.

[yyt]

A worked example should show yeo-san's logic clearly:

1. You bought stock A with $1000 capital, It yields 10%, so div is $100 per year.
2. 1 year later, stock A doubled, and still gives a div of $100 per year. The mkt value of your investment has become $2000 (yield based on mkt val drops to 5%).
3. At the same time, there's now a stock B that has a yield of 8%.

If u stay with A, you continue to get $100 per year.
If u sell A and switch to B, you would have invested $2000 in B, and will get $160 per year. This is obviously the better choice.

If u have compared B's current yield (8%) with A's yield based on your purchase price (10%), you would think that A is the better choice, which is wrong. U need to use the same denominator (mkt val) to normalize the yield, for a correct comparison.

Hi bluechipstamp and yeokiwi, this evaluation of REITs definitely makes more sense to just pegging the Yield to the purchased price. I believe I'll use this tip in the future. Thank you very much!

I think there are some caveats that we should keep in mind too when using this analysis

• The investor must ask him/herself what causes the yield to change. It could be either the Market price or could be DPU. Both companies, A and B have to be considered.
  
  Let me give an theoretical e.g.
  In 2009
  Stock A : $1000/shr, Div $100/shr/yr, Yield 10%
  Stock B : $2000/shr, Div $160/shr/yr, Yield 8%
  
  In 2010
  Stock A : $2000/shr, Div $100/shr/yr, Yield 5%
  Stock B : $1000/shr, Div $ 80/shr/yr, Yield 8%
  
  As seen, investors will have to be aware of the macro trends surrounding the companies too. It could potentially dangerous if we just follow yield. Company B might be in trouble with it's stock price and Div slipping down 50%.
  
  Even when in the case where the yield increase is due to a DPU increase, we'll have to check whether it's sustainable. I find Drizzt's FCF Yield ratio pretty useful in this case. It's a much conservative figure compared to the normal Div Yield ratio. Also, if the payout ratio is >100%, it also means that the DPU is not very sustainable, and the company most probably have problems growing organically in future.Drizzt's Dividend Stock Tracker.
  
  Investors also have to be wary in the bear market where yield could shoot up due to non-fundamental reasons.
  
  In essence, find the meaning behind the numbers, and do your due diligence.
  yeokiwi and bluechipstamp provided a very valuable tool, but one still have to do his part and polish it before it can be added into his arsenal.
  
  
• This doesn't mean investors can stop doing FA. It's a pre-requiste at all times.
  
• Dun forget to account for transaction cost when switching stocks, it might hurt your bottom line, esp for small investors like me.
  

[Drizzt]

A worked example should show yeo-san's logic clearly:

1. You bought stock A with $1000 capital, It yields 10%, so div is $100 per year.
2. 1 year later, stock A doubled, and still gives a div of $100 per year. The mkt value of your investment has become $2000 (yield based on mkt val drops to 5%).
3. At the same time, there's now a stock B that has a yield of 8%.

If u stay with A, you continue to get $100 per year.
If u sell A and switch to B, you would have invested $2000 in B, and will get $160 per year. This is obviously the better choice.

If u have compared B's current yield (8%) with A's yield based on your purchase price (10%), you would think that A is the better choice, which is wrong. U need to use the same denominator (mkt val) to normalize the yield, for a correct comparison.

Thank you Blue san, your example is excellent.
I use current yield and market valuation because I am more concerned with my current portfolio valuation and yield.
Historical price and yield are history and in my opinion, they should not be used as considerations for holding on to the stock.

One interesting example is General Electric that is listed US stock exchange.
It was first traded at $108 a share but had undergone 9 stock splits till date.
The split adjusted price at 2007 is 2.3 cts.
GE paid a dividend of $1.24 in 2008 i think.

So, if a fund had held the share since 1892, the historical yield is about 5400% in 2008.
It is exhilarating to get this yield but the piece of information is not very useful to make a proper investment decision now.

http://www.usatoday.com/money/perfi/colu...sted_N.htm
http://www.ge.com/investors/stock_info/d...story.html

hi yeokiwi, what is your rational of this comparison. i find it facinating that big us companies can grow to that extend. in asia there isn't alot of good cases like that.