Analysing REITS

[HitandRun]

I wish to caution that I am not simply painting a hypothetical situation. This actually occurred during the GFC - CapitaCommercial Trust posted a 10.15% decline in property valuation and had to announce a 1 for 1 rights issue (on the same day) priced at $0.59. The gearing originally was 39% but after the asset devaluation, it was a hefty 48%. This wasn't the only REIT which reported > 5% decline in property valuation in that period.

http://cct.listedcompany.com/newsroom/20...ED56.1.pdf [Rights Issue]

http://cct.listedcompany.com/newsroom/20...5A32.1.pdf [Asset Valuation]

I think you are giving good advice, especially if folks just blindly chasing after the GLC linked REITs, overpaying for them.

E.g. if folks are paying for Capitalmall at less than 4.5% yield and more than 20% above NAV, the room for error becomes very narrow.

And then there is depreciation. Surely someone has to pay for it sooner or later?


Drizzt and Arthur

My discussion with the Colliers person was in the context of industrial properties. From my hazy memory, the DCF was only for 10 years. I believe that a factor of rental appreciation was built in, maybe around 2.5% per year? At the same time, vacancy was also assumed at around 5%? In any case, these assumptions might change from year to year. I would recommend that folks should take a look at whatever valuation reports that they are interested in.

[felixleong]

if interest rates goes up to say 5%
borrowing cost will go up too
wouldn't distribution be reduced? as such stock price of reits also come down?

[Boon]

Retailers say REITs are pushing up rental costs
By Linette Lim | Posted: 20 March 2013 2304 hrs

SINGAPORE : Real estate investment trusts (REITs) have become an investment darling in Singapore giving investors attractive returns.

But for retailers, REITs are causing them to cough out more in rents.

This is because REITs act mainly to boost returns for their shareholders.

President of the Singapore Retailers Association (SRA), Jannie Chan, says the higher rentals are adding to the woes in the retail sector which include a labour crunch and shortage of parking space.

Ms Chan says: "We've got the REITs killing us, we've got the labour killing us, and we've got no shopping (centre) car parks, so where are we going? So I think this is really (the result) of the government policies."

In Singapore, up to 75 percent of a retailer's costs are fixed costs such as rents and wages.

And over the years, the Singapore Retailers Association says rents, as a proportion of fixed costs, have risen relative to wages.

SRA says mall landlords like REIT managers raise rents by 5 to 10 percent every three years.

Ms Chan says: "(The make up of ) the fixed costs for retailers have shifted from 50 percent rental and 50 percent staff costs to 50 percent rental and 25 percent staff costs. The leases are short-term - it's renewed every three years. Each time there is a renewal, (the retailer or tenant) has to pay between 5 and 10 percent more."

She adds: "If your business is surviving, or doing well, you could afford that raise. But if not, you would then have to move, which means that the investments you have made over the last three years - the renovation, the staff - you may have to pull out. That becomes quite damaging, especially when you have been there for a long time and (are) there for the long haul within the shopping centre. So I think the REITs should be more mindful. If you have clients that over a period have been supportive of you, but during a certain period when there's a downturn in the economy, they could make adjustments and be more reasonable and more compassionate."

Speaking at the World Retail Congress, a retail industry event, which was attended by over 500 retail professionals, Ms Chan suggests that REITs could moderate their shareholders' expectations of yields.

And this can then translate to more reasonable increases in rents.

She says: "Perhaps there could be a policy to set the REITs off between 4 and 5 percent, instead of 7 to 8 percent. At the end of the day, it's what sort of returns (being delivered) to the investor. And at a time like this, when you've got very low interest rates, that seems to be compatible and reasonable."

Other industry experts say the problems that Singapore retailers face are not unique.

Ian Mcgarrigle, Chairman, World Retail Congress, says: "For Singapore retailers, the key issue seems to be the high fixed costs that they have to operate with - the rent that they are paying for space and the high cost of labour, and also the increasing scarcity of labour. They're not issues that surprise me - we hear them to greater or lesser degree around the world."

CapitaMall Trust (CMT) is one of the biggest mall landlords in Singapore.

A spokesperson from CapitaMall Trust Management says it is an industry norm to have rental reversions every three years, regardless of a REIT or non-REIT regime.

Some experts believe higher rents are justified as these REIT managers upgrade mall properties to improve its business mix and customer flow.

In the 2012 financial year, CMT revealed that it raised rents across its portfolio of malls by an average of 6 percent from preceding rental rates, typically committed three years ago.

"At an average of 2 percent a year, the change in rental is lower than inflation in Singapore," said the CapitaMall Trust Management Limited spokesperson.

The current inflation rate is around 4 percent.

The spokesperson added that the trust manager's approach is to partner its retailers to drive shopper traffic to their malls and increase their sales.

"For example, last year, we held 13 Biz+ seminars, workshops and classes in areas such as customer relationship management and visual merchandising. These initiatives help retailers to increase business in our malls," said the spokesperson.

Another major REIT manager, Frasers Centrepoint Trust management, was not available for comment.

- CNA/ch

[CityFarmer]

if interest rates goes up to say 5%
borrowing cost will go up too
wouldn't distribution be reduced? as such stock price of reits also come down?

Borrowing cost will follow if cost of capital (interest rate) increases.

I believe there is a time lag due to maturity and spread of debts in a specific REIT, but overall the distribution will come down eventually.

IMO, i didn't hold REIT at the moment, with anticipation of a correction. Rental will not go up forever, similarly property valuation will not always go up and low interest will not sustain forever.

[Temperament]

Can i use a very strong backing REIT compare to a bank?
If i keep my money in the bank, i get almost nothing in return.
Let's say my YOC is now 8%. And when the Big Bear Hug comes my YOC is 3%.
Is this REIT or any similar stock with this type of YOC worth to keep as long as possible or "forever"? (Actually, nothing last forever.) Have to always monitor.

[Greenrookie]

if interest rates goes up to say 5%
borrowing cost will go up too
wouldn't distribution be reduced? as such stock price of reits also come down?

It depends also on the mode of financing. Lippo mall before the rather dumb(my opinion) only buying of shopping malls using loans, relied heavily on rights issue to fund aquisitions that are yield accretive. That's why they used to have less than 10% gearing.

They can also do placement and hence will be be affect by high borrowing costs.

In the end, it boils down to management track records. If I dun remember wrongly, suntec has MTN notes, that provide flexible loans as and when they need it at pte agreed rates.

At high interest rate env, I doubt REIT managers are so dumb to use debt to finance debts, they will properly ask u to bear the pain for a rights. That why as per all equity analysis, there must margin of safety. Not just in price but also the possibility of raising funds thro rights issues .. If u can get 8% yield reits for years, say 5, the management must really do a stupid rights issue at 40% discount that is non yield accretive to wipe out your investment gain.

But at such high price and low yield of reits today. The risk is high. I have liquidate suntec and lippo mall some time back. Lippo mall because I have lose faith with its managers. Suntec because I guess a rights issue might be imminent.

[Temperament]

if interest rates goes up to say 5%
borrowing cost will go up too
wouldn't distribution be reduced? as such stock price of reits also come down?

It depends also on the mode of financing. Lippo mall before the rather dumb(my opinion) only buying of shopping malls using loans, relied heavily on rights issue to fund aquisitions that are yield accretive. That's why they used to have less than 10% gearing.

They can also do placement and hence will be be affect by high borrowing costs.

In the end, it boils down to management track records. If I dun remember wrongly, suntec has MTN notes, that provide flexible loans as and when they need it at pte agreed rates.

At high interest rate env, I doubt REIT managers are so dumb to use debt to finance debts, they will properly ask u to bear the pain for a rights. That why as per all equity analysis, there must margin of safety. Not just in price but also the possibility of raising funds thro rights issues .. If u can get 8% yield reits for years, say 5, the management must really do a stupid rights issue at 40% discount that is non yield accretive to wipe out your investment gain.

But at such high price and low yield of reits today. The risk is high. I have liquidate suntec and lippo mall some time back.

Well put! Where & how the coy get their capital will determine their cost of capital. In turn will affect their profitability. The management of cost of capital is like my management of my cost of debt. The best is to strive to be debt free & still profitable. Coy or individual.

[weijian]

If i keep my money in the bank, i get almost nothing in return.

Idea learnt from WB - Cash is a call option to buy a company at a certain strike price and this option has NO expiry date. Option premium comes in the form of opportunity costs (in potential investments) and erosion of purchasing power due to inflation.

As for whether the option premium is truly much lower than its intrinsic value for one to 'buy this option', it is for each individual to assess accordingly to their needs and current situation. Just do not forget that market comes in cycles and avoid that crowded trade!

[Temperament]

If i keep my money in the bank, i get almost nothing in return.

Idea learnt from WB - Cash is a call option to buy a company at a certain strike price and this option has NO expiry date. Option premium comes in the form of opportunity costs (in potential investments) and erosion of purchasing power due to inflation.

As for whether the option premium is truly much lower than its intrinsic value for one to 'buy this option', it is for each individual to assess accordingly to their needs and current situation. Just do not forget that market comes in cycles and avoid that crowded trade!

You are right about WB. i do keep some cash as "option" with No expiry date in the banks. Sometimes for > than 3 years if "unfortunately" i can't find any stocks i like to buy. That's why it's not a bad idea to put some capital into brick & mortar & collect rent. Though i can't bring myself to be a rent collector in the past due to my inherent weakness. i have the typical Singaporean's 4Ks. Ha! Ha!
And i have patience only for the things i like. (my inherent weakness also.)

[sunrocker]

Hi all, I'm new to investing and have some investments in Reits. After a period of time (still on the course of learning). I have some doubts about how Reits operate and I hope you guys can provide some explanation to me.

I noticed Reits have been refinancing again and again without repaying down the debt? Using a new debt to cover an old debt? It seems like Reits (most or all) can never been able to be debt free? The only way to be debt free is to issue a placement or rights issue big enough to repay the debt?

Is my observation correct? As much as I like the "predictable" income, I dislike the fact that debt never seems to be paid down.