Analysing REITS

[Drizzt]

http://www.jtc.gov.sg/industrial-land-an...sales.aspx

Link for JTC land sales. Click on the 'historical Data on IGLS sites sold by JTC".

As I mentioned previously, valuers working for stat boards often use the "market comparison" or "Cap rate approach" to ascertain the fair value of the land to be sold.

Hi CY09, i think the one that i found is more of how much it cost psf or psm to renew at different areas. there was another time i took 2 hours trying to find it, and when i couldn't i gave up.

[weijian]

I will put this interesting article under this thread, since it might be related to REITs in general with their asset manager under siege from activists.

Property fund of AIMS under attack from wind-up attempt
http://www.businesstimes.com.sg/companie...up-attempt

1 thing to note is that LIM Advisors mentioned in the article (whom just successfully winded up another AIMS fund recently) had some action on its own in SGX working on MIIF in 2012. IIRC, it was the start of the fund wind-down, which did eventually created value for those who bought at a good NAV discount.

LIM Advisor's action on MIIF:
http://www.prnewswire.co.uk/news-release...93191.html
https://www.valuebuddies.com/thread-843-page-21.html

Latest news out of the AGM today seems to indicate Samuel Terry has failed: http://infopub.sgx.com/FileOpen/Fund%20U...eID=434669

[ghchua]

Yes, STAM had failed because AIMS can vote for this EGM. In the previous successful windup of AMP Capital China Growth Fund, AMP cannot vote.

[Dosser]

I am (thankfully) not vested, but noticed what a steep cliff Keppel-KBS US REIT has fallen off, from 88c at the IPO a year ago, 78c at the beginning of October 2018, now 56.5c.

REITs have been out of favour this year due to rising interest rates. In the case of this counter, combine that with a bias against REITs with all foreign income, and now a rights issue at a steep discount.

This leads me to ask other VBs what their strategy is when holding REITs and being faced with a rights issue. There are a number of options:

1. Sell the REIT holding cum rights
2. If transferable, sell the rights but keep the original REIT holding
3. Subscribe to the rights
4. Subscribe to the rights and apply for unsubscribed rights

At various times, I have followed each of these routes, depending on the circumstances. I would, however, note that option 4 has often proved a profitable trade, particularly when the rights are at a deep discount. It does mean having to be ready to hold the REIT for a number of years after the rights issue. Typically, the REIT issues rights to expand its portfolio, and it may take time for the new acquisition(s) to be finalised and the additional revenue to be fully reflected in the accounts. As a result, the DPU is often depressed for a year or two.

One side effect of this is that I now generally buy / sell REITs via my brokerage account and hold them directly with CDP, as this is the simplest way of applying for rights/ unsubscribed rights (via ATM).

I anticipate that we will see a good number of rights issues in the REIT space over the next year or two, for acquisitions and to reduce leverage. There were a lot of them in 2009, at the tail end of the GFC.  So, I would be interested to find out how other VBs handle this decision.

[karlmarx]

For a long time I have observed plenty of discussion on REITs -- on newspapers, online articles, forums, etc -- from numerous stakeholders -- sponsor/manager, OPMI, bloggers, SGX, etc -- that the aggregate of views put forth suggests that REITs are generally positive/good. The most frequently cited evidence by all stakeholders in support of the generally positive opinion, is the  positive total returns since the start of the present market cycle. I am less sanguine of what has, in recent years, become seen as the road to riches.


Why REIT?

Traditionally, the owners of real estate properties have made their big fortunes from a high rate of price appreciation. After the prices have risen to a point where the present owners no longer think they can grow at rates as high as they have enjoyed in the past, the properties will be sold to another party. 

If the value of my property is small, there will be a large pool of possible buyers I can convince to offload my property. Having more possible buyers means there will be a higher probability that some buyers will be less intelligent in performing their due diligence, hence allowing me to sell to them at my preferred price.

But if the value of my property is huge -- say, several hundred millions onward -- the number of buyers I will have are probably fewer. And I will probably know them as well; it is a small circle for big property owners. If my property is worth a billion or more -- say, a top grade commercial property in a global city -- then the list of possible buyers are even far fewer. Furthermore, these guys with pockets deep enough to buy my billion dollar property must be pretty smart, if not smarter than me, to have amassed that much wealth. If I am of the view that my property's future value is likely to be less, or not grow much, it is likely that these guys would not have views that are too far from mine. It will not be easy for me to get a good price when offloading my huge property to the equally (if not more) wealthy people I am likely to be (socially) acquainted with. 

Here comes the cavalry...

The securitisation of real estate properties -- in the form which we now know as REITs -- has allowed me to divide my very unaffordable property into numerous bite-sized pieces. I no longer need to sell the whole property, to one or a few concerted parties. I can now sell them by the tile, square feet, or in REIT terms, unit, to hundreds of thousands of individuals. Thus I am freed from the problem of trying to convince my billionaire buyer-cum-friend, who is smart to see that I am offloading an unattractive asset, at my asking price.

With the proceeds from my sale to the unitholders, I can now go on to acquire the next property with higher growth potential. And then, when the time is ripe -- which is when the property has sufficiently matured, or slowed in future growth -- I shall repeat the process again. Ad infinitum. Witness the ingenuity of capital markets. 

...and the leverage

But it would be a challenge to convince would be unitholders to buy a mature property yielding ~3%. That is too unattractive even for the masses of average Joes. If I arrange for 50% financing of these properties, I can bump up the yield to ~6%. That also seems to be the magic number for Joe. Furthermore, it would also mean that I do not have to ask for too much money from would be buyers (unitholders); increasing my chances of offloading my property. 

Shorter end of the stick?

So what have the unitholders got? The promoters will say that the REIT assets are mature and high yielding. But what it really means is that the assets are low-growth and leveraged. These do not seem to be ideal characteristics of a good investment. But of course, not all REITs are the same. 

Some REIT portfolio have assets with better price-growth prospects. Some sponsors are less aggressive in selling (or dumping, if you prefer) assets to unit holders; which means less asking for more money from unit holders. Of those that do, some are selling their assets at less cut-throat prices. But these are done not out of charity, since a bigger pie for unitholders will mean a smaller one for the sponsor. Those that treat their unitholders better -- by not selling poor-quality and/or over-priced assets, and units, to unitholders-- will be able to ask for (more) money from them at some later, perhaps critical, time. 

I suppose the growth of Singapore into a 'REIT hub' and concomitant popularity of 'dividend investing' among retail investors are not unrelated. Big capital inflows could also mean big capital outflows, when times are bad. That said, each REIT -- like each company/business -- should be assessed on their own merits. When the time comes, some REITs may present themselves to be an attractive proposition.

[ghchua]

Hi karlmarx,

Some REIT managers are better in a sense that they are not sitting still after buying those assets. They have made some improvements to those assets via AEIs, redevelopments etc to further enhance its value. Some also participated in greenfield developments which means taking on development risk but in a small way. Some REITs even invested in other REITs.

All in, I guess we should analyze each REIT based on its own merits. So far, I have good and bad experiences investing in REITs. Not all REITs are born equal. We have to make our own judgement call to separate the good from the bad ones.

[karlmarx]

Hi ghchua,

I agree with all that you have said.

Nothing makes sense until we understand the motivations of the actors in any situation. If I don't know who will screw me over, or how they could possibly do it, I will not know what to look out for. And if that is the case, then I am going to be the next patsy.

[realityinversion]

I believe 2019 to be the year of the REITs, given lukewarm economic conditions and easing monetary policy. Institutional investors will seek refuge in dividend stocks and REITs for dividends since earnings growth is expected to be weaker. Bond yields have been falling steadily, which will support REITs since they trade on dividend yields.

[dreamybear]

Interesting glimpse into tenancy agreement clauses which tenants consider unfair. I feel the idea of a common register where retail rents of each mall are made public, will be helpful to small businesses and provide some social fairness in the culture of continued mall asset enhancement to boost returns.

Push for fair tenancy legislation resurrected as Covid-19 outbreak surfaces grouses of tenants (25 March, 2020)
https://www.todayonline.com/singapore/pu...es-tenants

Common people need to work to survive(active income) vs wealthy landlords collecting rents(passive income). In terms of return on effort, it seems rather unfair. Capitalism aside, I am not sure whether REITs are beneficial to society, especially when they are measured by yields.

[thor666]

Interesting glimpse into tenancy agreement clauses which tenants consider unfair. I feel the idea of a common register where retail rents of each mall are made public, will be helpful to small businesses and provide some social fairness in the culture of continued mall asset enhancement to boost returns.

Push for fair tenancy legislation resurrected as Covid-19 outbreak surfaces grouses of tenants (25 March, 2020)
https://www.todayonline.com/singapore/pu...es-tenants

Common people need to work to survive(active income) vs wealthy landlords collecting rents(passive income). In terms of return on effort, it seems rather unfair. Capitalism aside, I am not sure whether REITs are beneficial to society, especially when they are measured by yields.

In my opinion, regulation is overdue. Clause 1 is particularly troubling in my opinion. It limits tenants opportunity for a striving business when the sales are not likely a result of the property owners. There is a hint on the article that market forces are practicing this across different landlords, which is unfair considering that properties can be natural monopolies (no one is likely to travel from Pasir ris to jurong for marketing and shopping). In this regard, Reit or otherwise, such clauses should be made illegal.

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