Analysing REITS

[smallcaps]

I should have started a new thread called "Suitable investments for retirees" rather than post my comment on REITs in this one.

For income seeking retirees, I thought that REITs could form say 10- 15% of their portfolio, especially if one stays invested for some time, select the ones which have good sponsors (eg those which are have a 'quasi-sovereign" ownership, therefore hopefully can raise debt at competitive rates) and where eg fraud risk is minimised.

I don't know whether dividend stocks or ETFs can provide 6% yield - with the same risk as REITs. There are some SGD bonds issued by local companies but those with yields above 4% are mostly in the junk (in the real sense of the word) category, well below BBB-.

Even more interesting are the foreign companies issuing SGD bonds - one called itself secured, but was a deeply subordinated, non-guaranteed SPV whose only asset was shares in other companies. A rather well known sub-continent name but caveat emptor written all over it - and the coupon - 4%!

IMO it seems strange to want to find a dividend stock that has same risk as REITS. It should generally be not that hard to find one that is of a much lower PE ratio than reits, much lower debt ratios, much lower payout ratio, yet giving an equivalent dividend yield net of depreciation (or return of capital).

[LLS]

I should have started a new thread called "Suitable investments for retirees" rather than post my comment on REITs in this one.

For income seeking retirees, I thought that REITs could form say 10- 15% of their portfolio, especially if one stays invested for some time, select the ones which have good sponsors (eg those which are have a 'quasi-sovereign" ownership, therefore hopefully can raise debt at competitive rates) and where eg fraud risk is minimised.

I don't know whether dividend stocks or ETFs can provide 6% yield - with the same risk as REITs. There are some SGD bonds issued by local companies but those with yields above 4% are mostly in the junk (in the real sense of the word) category, well below BBB-.

Even more interesting are the foreign companies issuing SGD bonds - one called itself secured, but was a deeply subordinated, non-guaranteed SPV whose only asset was shares in other companies. A rather well known sub-continent name but caveat emptor written all over it - and the coupon - 4%!

IMO it seems strange to want to find a dividend stock that has same risk as REITS. It should generally be not that hard to find one that is of a much lower PE ratio than reits, much lower debt ratios, much lower payout ratio, yet giving an equivalent dividend yield net of depreciation (or return of capital).

can please give some examples of such companies? would love to invest in them

[CY09]

With much enthusiasm, some examples are KSH, LKH and St****** in the property

KSH - Is using its proceeds to invest in a office building providing about 4-4.5% yield. Supplemented by its income from construction, KSH should be able to provide at least 4.5% over the long run and 6% for these 3 years at current price. Gearing ratio about 31%.

LKH- Will have rental from PL square, WEstgate tower and hotel mgmt which will provide about 4.5% yield. Again supplemented by construction arm and with future cash inflow from TOP, company should be able to sustain a 5% yield. However given this conservative mgmt, likely to be only 4.5% in the long run

St******- Hospitality in Australia has been able to provide 3.5% annually as dividend.

Other possible dividend stocks outside of property - include CMpacific (7.5%), Valuetronics (about 5.5%), Challenger (full year dividends likely to be 2 cents or 4.5% yield), YZJ (4.5%), Keppel corp (4.2%), Penguin & Sunningdale (expected 4%)*, the last two are my expected forecast, Singship (4%) & TTJ (3.8%)

In general, these companies pay down their debts or are almost debt free. Secondly, their yields are match able to REITS despite 1) not being obligated to pay out a certain %, 2) Dividend payout less than 60% or 3) face a high and direct interest rate risk. This is simply because they have cashflow generative businesses. I believe a combination of CMpacific, Penguin, KSH, Keppel corp, Sgship,YZJ will outperform any six REITS (in terms of dividends + capital gains in share price - rights) .

[Andrew Q]

With much enthusiasm, some examples are KSH, LKH and St****** in the property

KSH - Is using its proceeds to invest in a office building providing about 4-4.5% yield. Supplemented by its income from construction, KSH should be able to provide at least 4.5% over the long run and 6% for these 3 years at current price. Gearing ratio about 31%.

LKH- Will have rental from PL square, WEstgate tower and hotel mgmt which will provide about 4.5% yield. Again supplemented by construction arm and with future cash inflow from TOP, company should be able to sustain a 5% yield. However given this conservative mgmt, likely to be only 4.5% in the long run

St******- Hospitality in Australia has been able to provide 3.5% annually as dividend.

Other possible dividend stocks outside of property - include CMpacific (7.5%), Valuetronics (about 5.5%), Challenger (full year dividends likely to be 2 cents or 4.5% yield), YZJ (4.5%), Keppel corp (4.2%), Penguin & Sunningdale (expected 4%)*, the last two are my expected forecast, Singship (4%) & TTJ (3.8%)

In general, these companies pay down their debts or are almost debt free. Secondly, their yields are match able to REITS despite 1) not being obligated to pay out a certain %, 2) Dividend payout less than 60% or 3) face a high and direct interest rate risk. This is simply because they have cashflow generative businesses. I believe a combination of CMpacific, Penguin, KSH, Keppel corp, Sgship,YZJ will outperform any six REITS (in terms of dividends + capital gains in share price - rights) .

First of all, you are assuming (in term of dividend + capital gains in share price). I may agree with dividend, capital gain is more like gambling to me since nobody know that right side of the graph.

REITs dividend is mostly from rental income, under contract with tenants, so I can almost assume and project the FY rental. looking at the averages WALEs I can determine the average contract expiry.

Do know that under MAS regulations

1. REITs had to pay at least 90% net income as dividend in order to enjoy tax incentive.
2. REITs are not to involve in development (construction) of property more than 10% of their total asset.

Anyway, the whole idea of REITs is Singapore want to free those developers' cash so they can continue building and building. Nowadays who can really just come out few hundred million and buy a mall/office/industrial/hospital/hotel? once a while we see those big company...but to grow like mapletree logistic 112 warehouse in less than 10 years... I doubt any company can do it.

[roxhockey]

Sometimes, we human make simple stuff look complicated. attached is the impact on dividend if the interest rate raise

There's two impacts of an interest rate rise on REITs:
1) lower earnings due to higher interest costs
2) higher cap rates / lower valuations due to an increase in risk free rates

#1 is relatively small and quantifiable, and that is what your piece (&many others) is focused on, so you see quotes like 'it doesn't matter because REITs have hedged already'. The #2 issue is much larger and difficult to estimate.

To illustrate the point with an extreme example, if SG govt bond rates were 10% then no one will value a shopping mall with a 5% discount rate - the value of the property (& thus the REIT, extending things) would fall by more than half.

[smallcaps]

To me, investing in REITS is same as investing in any other property company. Need to have an opinion on prospects for that particular property class and get it right.
No magic beyond tax benefits occurs just by stamping a property company with a REITS classification, the same fundamental risks are still there. The way REITS are marketed/analysed, does however seem distorted to me. It is similar to simply using cash flow to value a company, while conveniently ignoring the net earnings which is affected by depreciation, and hoping that PPE would somehow magically recharge itself over time without injection of capital. If buying REITS, then better to treat it same as any other equity and study its fundamentals, or maybe even more carefully, since REITS are almost guaranteed to be highly geared and earning low returns.

[cfa]

To me, investing in REITS is same as investing in any other property company. Need to have an opinion on prospects for that particular property class and get it right.
No magic beyond tax benefits occurs just by stamping a property company with a REITS classification, the same fundamental risks are still there. The way REITS are marketed/analysed, does however seem distorted to me. It is similar to simply using cash flow to value a company, while conveniently ignoring the net earnings which is affected by depreciation, and hoping that PPE would somehow magically recharge itself over time without injection of capital. If buying REITS, then better to treat it same as any other equity and study its fundamentals, or maybe even more carefully, since REITS are almost guaranteed to be highly geared and earning low returns.

Yes , Reits are property companies , but they are more landlords than developers , thus incomes are more consistent.

[specuvestor]

^^ My 2cents on the above

Firstly I have stated before that conceptually REITs are long term viable products that disintermediate between retail yield alternatives and property companies' return requirements, and not just another financial engineering product.

Since the days of first REIT CMT, the idea like Mohican pointed out is to provide a consistent cashflow with predictable yield. Since then of course market expectations forced more asset enhancements and structured REIT to come out, most infamous being Suntec, which Ho Ching spoke against and hence City Dev dropped the REIT back then.

But bankers and corporates started to understand the ATM nature of this disintermediation. Then as cashflow becomes more unpredictable it is packaged as business trust and then stapled security. It has become increasingly complex. Tycoons in recent years were the most ardent fans of using these ATMs

Now you have REIT co-investing in a development with uncertain cashflows, instead of the usual buying existing assets from the sponsors with predictable cashflow albeit high RNAV. The risk profile is changing. Sponsors are no longer using them just for pure ATM but also as "insurance" ie risk sharing.

Tycoons are playing with the rules with more and more patterns coming out. They are starting with 30% now... if market is receptive and regulators are nonchalent this % I suspect will be creeping up. All's well until a development flops and we see who is naked, much like the skeptical gloom overhanging the Business Trusts nowadays.

http://www.valuebuddies.com/thread-2256-...l#pid94995

[rainmaker]

^^ My 2cents on the above

Firstly I have stated before that conceptually REITs are long term viable products that disintermediate between retail yield alternatives and property companies' return requirements, and not just another financial engineering product.

Since the days of first REIT CMT, the idea like Mohican pointed out is to provide a consistent cashflow with predictable yield. Since then of course market expectations forced more asset enhancements and structured REIT to come out, most infamous being Suntec, which Ho Ching spoke against and hence City Dev dropped the REIT back then.

But bankers and corporates started to understand the ATM nature of this disintermediation. Then as cashflow becomes more unpredictable it is packaged as business trust and then stapled security. It has become increasingly complex. Tycoons in recent years were the most ardent fans of using these ATMs

Now you have REIT co-investing in a development with uncertain cashflows, instead of the usual buying existing assets from the sponsors with predictable cashflow albeit high RNAV. The risk profile is changing. Sponsors are no longer using them just for pure ATM but also as "insurance" ie risk sharing.

Tycoons are playing with the rules with more and more patterns coming out. They are starting with 30% now... if market is receptive and regulators are nonchalent this % I suspect will be creeping up. All's well until a development flops and we see who is naked, much like the skeptical gloom overhanging the Business Trusts nowadays.

http://www.valuebuddies.com/thread-2256-...l#pid94995

Is it really true that Reits are into co-investing properties development. So far, this is the first time I heard about it. My understanding is they can buy a completed property and then rent it out or asset enhancement but definitely not into property development. Could you let us know which Reits are into co-investing properties development? Seem shocking news.

[safetyfirst]

To me, investing in REITS is same as investing in any other property company. Need to have an opinion on prospects for that particular property class and get it right.
No magic beyond tax benefits occurs just by stamping a property company with a REITS classification, the same fundamental risks are still there. The way REITS are marketed/analysed, does however seem distorted to me. It is similar to simply using cash flow to value a company, while conveniently ignoring the net earnings which is affected by depreciation, and hoping that PPE would somehow magically recharge itself over time without injection of capital. If buying REITS, then better to treat it same as any other equity and study its fundamentals, or maybe even more carefully, since REITS are almost guaranteed to be highly geared and earning low returns.

This is my favourite post when it comes to analysing reits, reflects all my thoughts on the need to consider depreciation, when most people only focus on cashflow