Analysing REITS

[Big Toe]

It is a no brainer that the more logical way to invest now is to allocate a higher amount to fixed income/risk free assets. Whether for REITS or otherwise. Unless the yield of Reits go up significantly OR interest rates go down(not likely anytime soon), it would be wise to avoid.

Unless the business is extremely compelling, best not to have new positions. Just do squat with excess money and collect risk free returns.

[weijian]

@specuvestor,
I thought the descriptions you wrote closely reflects how equity returns eventually reflect the premium changes. ie. When the premium changes from high to low, it is a reflection of investors changing from risk adverse to risk taking. And because the investor who took risk when the environment was "risk adverse", their future returns improve when the surroundings turn "risk taking". In the current environment, the premium is changing from low to high --> a good reflection of folks adjusting their behavior from risk taking to adverse. So the investor who took risk when it was "risk taking", are showing poorer returns as the environment changes to "risk adverse".

@BigToe,
After more than a decade of low/zero rates, it is indeed welcomed to have some "decent" risk free returns. But I would also guard against recency bias (ie. are recent historical low rates giving too much of a credit to the current/future "higher and longer risk free rates"?). Of course, we will soon also witness who has been swimming naked.

Many cash rich companies are showing decent returns from cash (eg. your fav ShengSiong's increasing labor costs have been negated by the returns from its suppliers-funded cash hoard). Mgt of these companies don't need additional expertise to get risk free returns for their cash. Asset/gearing heavy-cash poor REITs are suffering but could they look forward to MAS as the savior like relaxing those gearing rules? After all, rules are set (and then broken) by humans.

[Big Toe]

Longer term interest rate are slowly heading up. There was a significant gap between the short term and long term US T bills previously. But at this very moment the 30yr bills are >5% and thus the spread is not significant. I am no expert in interest rates but the inverted curve yield is going to normalize in time. (ie short term lower than long term) and inflation is unlikely to stay >5% in the very long term. What this means is the investor can put in some funds to work in both short and long term T bill/related funds/ETF. 5% is a somewhat comfortable number for the long term, risk free.

The higher for longer rates will put the conservatively managed businesses with a sizable cash hoard at an advantage. I get the feeling that investors are slightly on edge now and negating this fact. Ie the sell-off of sheng shiong is irrational, cash hoard is growing, business is growing and staying above the $130M level(nett profit). Bearing in mind it was in the 70+M range pre pandemic.

Then we have the other side of the coin, REITs, Property Investment, Cash burning start ups, ... ... Property investment right now is just very very very unfavorable, may it be commercial or residential. Unless one is buying for own use, there is just no investment merit in buying one now. of course your agents will show you how much people have made in the past 3 years and extrapolate it into infinity.

[specuvestor]

So risk premium is explanative rather than predictive you mean?

@specuvestor,
I thought the descriptions you wrote closely reflects how equity returns eventually reflect the premium changes. ie. When the premium changes from high to low, it is a reflection of investors changing from risk adverse to risk taking. And because the investor who took risk when the environment was "risk adverse", their future returns improve when the surroundings turn "risk taking". In the current environment, the premium is changing from low to high --> a good reflection of folks adjusting their behavior from risk taking to adverse. So the investor who took risk when it was "risk taking", are showing poorer returns as the environment changes to "risk adverse".

@BigToe,
After more than a decade of low/zero rates, it is indeed welcomed to have some "decent" risk free returns. But I would also guard against recency bias (ie. are recent historical low rates giving too much of a credit to the current/future "higher and longer risk free rates"?). Of course, we will soon also witness who has been swimming naked.

Many cash rich companies are showing decent returns from cash (eg. your fav ShengSiong's increasing labor costs have  been negated by the returns from its suppliers-funded cash hoard). Mgt of these companies don't need additional expertise to get risk free returns for their cash. Asset/gearing heavy-cash poor REITs are suffering but could they look forward to MAS as the savior like relaxing those gearing rules? After all, rules are set (and then broken) by humans.

[weijian]

So risk premium is explanative rather than predictive you mean?

@specuvestor,
I thought the descriptions you wrote closely reflects how equity returns eventually reflect the premium changes. ie. When the premium changes from high to low, it is a reflection of investors changing from risk adverse to risk taking. And because the investor who took risk when the environment was "risk adverse", their future returns improve when the surroundings turn "risk taking". In the current environment, the premium is changing from low to high --> a good reflection of folks adjusting their behavior from risk taking to adverse. So the investor who took risk when it was "risk taking", are showing poorer returns as the environment changes to "risk adverse".

hi specuvestor,

The quantum of risk premiums are a reflection of underlying investor behaviors. So, the behaviors are explanative. Just like an inverted yield curves that is able to "predict 9 out of the last 7 recessions", my personal opinion is that behaviors are predictive too but with degree of type1 errors (false alarms).

I am a Howard Marks's believer. So along his lines --> we can't know where we are going, but we jolly well need to know where we are.

[CY09]

The rise and fall of REITs and its prices are good examples. Post GFC, REIT prices went up due to the low interest rates. This has happended for the capitaland reits. If one plots the trailining dividend yield year by year against the central bank interest rates, there is a correlation.

Next with the knowledge of the correlation, it is up to us investors to decide what to invest/or not to invest.

<For me, its to invest in REITs because of the interest rate hike/fall cycle>

[donmihaihai]

I see lot of brain powers trying to get ahead by projecting, guessing, deep dive into interest rate with confident.

[weijian]

The rise and fall of REITs and its prices are good examples. Post GFC, REIT prices went up due to the low interest rates. This has happended for the capitaland reits. If one plots the trailining dividend yield year by year against the central bank interest rates, there is a correlation.

Next with the knowledge of the correlation, it is up to us investors to decide what to invest/or not to invest.

<For me, its to invest in REITs because of the interest rate hike/fall cycle>

hi CY09,

Let's see how low/zero interest rates were a boom for financially engineered REITs.

First with lower interest rates, expenses reduce and so they are able to boast their dividends payout. Next, with lower risk free rates, cap rates reduced, increasing their borrowing capacity. With more borrowing capacity, REITs were able to make more acquisitions. Finally, capital was compelled to look for alternative assets for higher yields and REITs fit in nicely, causing dividend yields to compress. With a lower dividend yield, they were able to make DPU accretive acquisitions using their more expensive equity. All these forces could contribute to a virtuous cycle --> More expensive equity --> the more they can execute DPU accretive acquisitions to boost DPU --> more expensive equity.

Now on the reverse side, I guess things will be diametrically opposite - So a triple boost becomes a triple whammy:
- Higher interest costs --> higher expenses --> lower dividends
- Higher risk free rates --> higher cap rates --> less capacity to borrow --> forced to sell assets at higher cap rates?
- Higher dividend yields --> less expensive equity --> unable to financially engineer as well.

But as in all things, the upside and downside are not the same - just like how a 50% loss requires a 100% gain just to break even. Markets can create their own downward spiral in which the asset/company can't escape from. This is especially true for highly leveraged entities.

My guesstimate is that SREIT/trusts' dividend yields have increase anything from low single digit to teens? Market has spoken about the low single digit ones because they probably have assets generating sustainable cashflow (strong tenants, no hidden master leases) and backed by strong/reputable sponsors who stand ready to backstop a rights issue. In the same vein, market has also spoken about those with double digit yields.

[EnSabahNur]

Not to quibble but I think you meant more expensive equity instead of less?

- Higher dividend yields --> less expensive equity --> unable to financially engineer as well.

[donmihaihai]

Interesting stuffs. Cap rate dropped along with interest rate. Eg grade A office down to 4% or lesser when interest rate was at 1 to 2% maybe in the past. If interest rate stay at 4 or 5%. What kind of cap rate is needed when interest rate stay at 5%?

Investment property value is the function of cap rate and rental