Analysing REITS

[Musicwhiz]

Hi MW,

Philips Securities had launch a SG Reits fund in 2011. They had been putting their factsheet outside their investor centre near my place, so I took a sheet now and then to see their holdings.

http://internetfileserver.phillip.com.sg...534121.PDF

Ever since I took notice of it, the fund size had grown from $6M to current $42M. This shows the interests in dividend play in the local market. This could be the reason why Henderson also want to have part of this pie. As indicated in many brokers' reports, SG Reits is currently still one with a better yield compare with the rest globally, so I not surprise that they allocate 25% in SG. If this fund grows too, I suppose there will be more upside for REITs performance.

Thanks NTL,

So can I conclude from this that Phillips was actually "early to the party", while Henderson is joining the festivities much later? These guys don't know when the clock might strike midnight and signal the end of the party.....

While I do agree SG REITS have better yields than global REITs, the appetite for REITS from retail investors suggests that perhaps a lot of the optimism has been priced in, so I do not know how much upside one can enjoy when that occurs. To say that Henderson's Fund would buy in local REITS and push up prices further seems to suggest a "Greater Fool" theory at play here.

Feel free to correct me on any of the points above. Thanks!

[NTL]

Hi MW,

Philips Securities had launch a SG Reits fund in 2011. They had been putting their factsheet outside their investor centre near my place, so I took a sheet now and then to see their holdings.

http://internetfileserver.phillip.com.sg...534121.PDF

Ever since I took notice of it, the fund size had grown from $6M to current $42M. This shows the interests in dividend play in the local market. This could be the reason why Henderson also want to have part of this pie. As indicated in many brokers' reports, SG Reits is currently still one with a better yield compare with the rest globally, so I not surprise that they allocate 25% in SG. If this fund grows too, I suppose there will be more upside for REITs performance.

Thanks NTL,

So can I conclude from this that Phillips was actually "early to the party", while Henderson is joining the festivities much later? These guys don't know when the clock might strike midnight and signal the end of the party.....

While I do agree SG REITS have better yields than global REITs, the appetite for REITS from retail investors suggests that perhaps a lot of the optimism has been priced in, so I do not know how much upside one can enjoy when that occurs. To say that Henderson's Fund would buy in local REITS and push up prices further seems to suggest a "Greater Fool" theory at play here.

Feel free to correct me on any of the points above. Thanks!

Ya, they are late. They had missed out the major run up in 2012. While Reits likely still performing well this year, I don't think it will be as well as last year. As a Reits investor myself, as long as it continue to give me higher than 5% dividend based on current price, I still fine with it. But I am slowly shifting out of Reits and move my $$$ into companies that give similar dividends.

1 point to add. I believe that why Henderson still want to carve out part of this pie is due to Singaporean's appetite on properties. With the run up in the property market, some of these investors will look elsewhere, like property funds, to "own" some properties indirectly. This is just my view.

[KopiKat]

This article smacks of vested interest! He is lauching a fund targeting REITS in Singapore, to be sold to the RETAIL investor - of course he is bullish on REITS! Someone should really point out such articles as being subtle "Advertorials", rather than being informative.

His target of 10% to 12% returns is also a little on the high side. Expectations for dividends are in line with historical norms but the 5% to 6% capital gains per year is rather aggressive, I feel. Having about 25% of your fund in ONE sector (i.e. Singapore REITS) also doesn't show much risk control.

I welcome other views, whether similar or divergent.

Altho' I do agree that a target of 10% to 12% returns is on the high side, I don't quite understand why having 25% of the Fund in ONE sector (SREITs) doesn't show much risk control. In the 1st place, this fund is named 'Henderson Global Property Income Fund' and is meant to be investing in Properties related stocks that'll give regular income via dividend payout. So, why not a sizeable chunk in SREITs? Would the risk be lower if it's spread out to other countries' REITs (where the yield is compressed even lower)? If anything, this narrowly focussed (on Properties) fund by itself presents a high risk and anyone investing in it shouldn't allow this investment to be too sizeable chunk of their overall portfolio...

Ya, they are late. They had missed out the major run up in 2012. While Reits likely still performing well this year, I don't think it will be as well as last year. As a Reits investor myself, as long as it continue to give me higher than 5% dividend based on current price, I still fine with it. But I am slowly shifting out of Reits and move my $$$ into companies that give similar dividends.

My target yield is higher at 6%, used to be 8%...
REITs (Singapore & Malaysia - now no more) used to form a sizeable chunk of my investments (>50%) but the last financial crisis had been a great learning experience for me (and hopefully all the REITs mgrs who ought to be now better at their financial mgmt, esp. of their debts - Gearing + Maturity) and I have taken the recent run up to reduce to currently aro' 20% - 25%. My treatment of REITs is no different from other stocks ie. Buy if there's value, Sell if not much value left or switch if I find better value....

[NTL]

Ya, they are late. They had missed out the major run up in 2012. While Reits likely still performing well this year, I don't think it will be as well as last year. As a Reits investor myself, as long as it continue to give me higher than 5% dividend based on current price, I still fine with it. But I am slowly shifting out of Reits and move my $$$ into companies that give similar dividends.

My target yield is higher at 6%, used to be 8%...
REITs (Singapore & Malaysia - now no more) used to form a sizeable chunk of my investments (>50%) but the last financial crisis had been a great learning experience for me (and hopefully all the REITs mgrs who ought to be now better at their financial mgmt, esp. of their debts - Gearing + Maturity) and I have taken the recent run up to reduce to currently aro' 20% - 25%. My treatment of REITs is no different from other stocks ie. Buy if there's value, Sell if not much value left or switch if I find better value....

6% would left with only a few of the smaller Reits, mainly in industrial. The big boys are now all <6%... Same as you, currently having around 25% in Reits after offloading some last month.

[KopiKat]

6% would left with only a few of the smaller Reits, mainly in industrial. The big boys are now all <6%... Same as you, currently having around 25% in Reits after offloading some last month.

The interesting question is what is the definition of 'big boys'?

If it's the parentage, then we'd be restricting ourselves to the ones with strong blue chip parents like govt linked (Capitaland, Ascendas,..) or FE, CDL linked ones.

If it's based on Asset size, then what is the cut-off? $5Bil? Then very few. $4Bil? Perhaps a couple more. $2Bil? A lot more. $1Bil? Then not too far from the smaller ones.

Even if it's classified by asset size, then the recently listed MGCC, with an asset size of $4.45Bil would also qualify with their yield at a borderline 5.014% @ $1.045 (Friday close). But, only 2 huge assets.

Perhaps we should consider classifying by the no. of assets? It's after all the numbers that provide some degree of diversification of risk? Hmm.. I think I have to start compiling the nos. of assets for each REIT then..But, individual asset size do differ, perhaps need to do some weightage or normalising?... *Headache*...

[kichialo]

I have a question on Management Fees in the form of share issuance. Does management actually pay for the new shares, money come out from management's own pocket? Or the REIT issues the shares to management and deducts from the REIT's cash?

[Nick]

I have a question on Management Fees in the form of share issuance. Does management actually pay for the new shares, money come out from management's own pocket? Or the REIT issues the shares to management and deducts from the REIT's cash?

Management fees is an expense the REIT will have to pay on a quarterly basis. It could either pay with cash or by issuing new shares to the Management team. If the latter is used, the shares are issued 'freely' since it is a form of currency. For example if the REIT owes $1,000 to the Management team - it could either pay $1,000 in cash or $1,000 in the form of newly issued shares. The Management could then either keep the share or sell it in the open market once the restriction period is over - ARA does that for Suntec REIT. So why do REIT pay fees in shares ? Ans: It reduces cash expense and hence boost the distributable income.

[kichialo]

I have a question on Management Fees in the form of share issuance. Does management actually pay for the new shares, money come out from management's own pocket? Or the REIT issues the shares to management and deducts from the REIT's cash?

Management fees is an expense the REIT will have to pay on a quarterly basis. It could either pay with cash or by issuing new shares to the Management team. If the latter is used, the shares are issued 'freely' since it is a form of currency. For example if the REIT owes $1,000 to the Management team - it could either pay $1,000 in cash or $1,000 in the form of newly issued shares. The Management could then either keep the share or sell it in the open market once the restriction period is over - ARA does that for Suntec REIT. So why do REIT pay fees in shares ? Ans: It reduces cash expense and hence boost the distributable income.

Okay I got it. I got confused because I was looking at the Statement Of Cash Flow and I see under 'Cash Flows from Operating Activities' there is the item Manager's fees. This is rightly ADDED BACK to reflect an actual depletion of cash holdings when new shares are issued out free. Am I right to say that?

P.S. I am not accounting trained.

[Nick]

I have a question on Management Fees in the form of share issuance. Does management actually pay for the new shares, money come out from management's own pocket? Or the REIT issues the shares to management and deducts from the REIT's cash?

Management fees is an expense the REIT will have to pay on a quarterly basis. It could either pay with cash or by issuing new shares to the Management team. If the latter is used, the shares are issued 'freely' since it is a form of currency. For example if the REIT owes $1,000 to the Management team - it could either pay $1,000 in cash or $1,000 in the form of newly issued shares. The Management could then either keep the share or sell it in the open market once the restriction period is over - ARA does that for Suntec REIT. So why do REIT pay fees in shares ? Ans: It reduces cash expense and hence boost the distributable income.

Okay I got it. I got confused because I was looking at the Statement Of Cash Flow and I see under 'Cash Flows from Operating Activities' there is the item Manager's fees. This is rightly ADDED BACK to reflect an actual depletion of cash holdings when new shares are issued out free. Am I right to say that?

P.S. I am not accounting trained.

First REIT 4Q F/S: http://firstreit.listedcompany.com/newsr...F9B9.1.pdf

In pg 7, we have the cash-flow statement and as you rightfully noticed, the management fees payable in units are added back since it is a non-cash item. There is no depletion in cash and hence in terms of cash-flow, there should be no deduction. As a result, it is added back to the PBT (which treated management fees as an expense) to derive the overall OCF. You can use depreciation as an analogy - an actual expense but since it is non-cash, it is always added back to the PBT to derive the OCF.

[kichialo]

Thanks Nick, I got it now. Thanks for the quick reply.