Cory Diary : Why is Reits affected by Interest Rate

Often we hear analysts or in forum the perception that Increasing Interest Rate will affects the cost of Reits Loans therefore profitability. However the correlations on table below tells a different story that Reits do generally well in high rate environments .  Hope this settle once and for all, the myth or maybe there is deeper issues within.

Interest Rate Impacts

A well managed Reits will pass the cost to tenant. A too drastic increase within a short period do affect Reits short term as majority of tenancy agreements are still in force but that's not the argument here. Some Reits have build-in rental escalation tied to sales and inflation. Nevertheless, cost is able to pass down to tenant mitigating the impact.

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Yield Compression

What we know is that when investing in Reits, we looks for yield therefore it is logical that we compared it to other products to decide is it worth the risk or seek better returns. In the scenario movement of Interest Rate upwards, it can cause Yield compression. This make us less willing to invest in Reits unless the yield improves further therefore lowering the stock price.

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Competition Examples

Singapore Saving Bond (SSB ) gives 1.5% annualized (each year) for 10 years. Say the rate doubled to 3% and this allows SSB to give higher rate say 2%. Some people who invest in a Reit logically will switch to SSB considering it is basically riskless to capital. Reit price will naturally falls as there will be more sellers.

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In situation of no good alternative, REITs price will generally rises with strong economic and stability as investors are willing to take larger risk. Another comparison though not necessary guaranteed is CPF giving 2.5% and 4% to CPF OA and CPF SA respectively. Though riskless, there are limitations and restrictions.

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Not all Reits are the same. Some Reits risks are insane. Be careful of Yield Traps and Pitfalls. However, if a Strong Reit is unfairly sold down, remember to "Koi Durians" ! This differentiate Veterans from the Green as Fundamentally, the business unchanged.

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If you are interested to know more about Reits. Try this books !

Making your Millions in Reit

Passive Income from Singapore Reits

Singapore REITs as An Asset Class

Playing the REITs Game

You could be well on the journey to Financial Freedom like me. But please DYODD.

Cory

2021-0725

Articles in this Blog is personal take and educational purposes only. Reader should seek their own professional help when making financial decision and be responsible for their decision.

Cory Diary : Why Dividend Investing is so "Exciting"

Remember in my younger days, RM will furnish us with the idea that investment  today, 10 years later sure Huat with annual 10% based on past 10 years track record. And they will show you the charts on why so. What they didn't tell you is not in the contract is not guaranteed and  the other is that they won't be around few years later to service you or you are't around anymore to bother (touch-wood). The key is don't sell in short term. Probably high sales charge or they will still be around and need to answer to you. lol

Fast forward today. Is there anyone really can guarantee good returns after 10 years ? If so, Banks wouldn't need to sell to us. They will be happy to do it themselves.  I am sure institutions will be happy to invest too. Why bother to grow an army of RMs to service thousands of retailers. 

With Reits that is strong and growing, DPU management has become an expected norm. This will last as long interest rates are low or to be better said, borrowing cost is low relative to earning. Hence the term we hear about Income Ratio (ICR).  It has become a performance metric to drive managers too. That's not easy in execution. 


Why Maintain or Growing DPU is so important ?

So when someone tells me DPU YoY only up 1%, I am smiling till my teeth drop already. Why ? Ascendas Reit has run up significantly for a number of years. This year "just" 23% YTD excluding dividend. See chart below of Ascendas Reit with Dividend Effects !

To grow DPU or maintain for 10 years are not that difficult to find nowadays as long we have Good and Credible Managers however this is not given though. The thing to overcome is Price Anchoring. Will we pay for something that is 23% more expensive from a year ago  ?

Seriously, if I have spare money, I would. Reason being Retailers ask is, "Show me the Money - Sustain-ably". The logic is quite simple. Think of the investment as long term. DPU maintain or increase. This is better than bond already. The cash flow generated covers living expenses. If there is reduction in stock price, we need to look at it in context. Is there fundamental change in the business ?

Next, Trump announced Preliminary Phase 1 deal. Probably due to Biden presidential bid took a hit. The Chinese probably feels a little shaken from it. However, this is far from a complete deals. I doubt it will ever till Trump gets re-elected. What this mean is interest rate will remains low for foreseeable future.

So someone asked. Can I buy MCT today ? Very hard to answer. 7 years of dividends from this year stock price increase. One thing I feel that is never late to invest. Break up our purchases just to be vested some and then see whether we need to average down or up much later. Maybe choose other Reits ( lol ). Don't fall into yield traps. Not all Reits the same. Who knows MCT share price can take another 7 years of dividends leap again. Realistically, the key is how low a yield we are willingly to accept. SSB is like 1.7% range for 10 years. Your take ?

Cory

2019-1012

Cory Diary : Reits Investment Logics

When Recession comes, most investments will be affected. This applies to Correction as well.
Interestingly, this are one of the best time to buy. The question is what stock to buy and will we buy ?

In the last recession, Reit stocks price like many other non-reit investments are badly hit. STI Index reflects the poor situation too. If we are to use today thinking, and understand how the mechanics of how Reits work, one would wonder how can things can go so bad in stock prices.

Basically, Cash or the lack of it as everyone "Hides" them when is one of the best time to invest. Many is taught about the gearing lesson and the dilution of it. Buying during this period do goes against Human Nature of trying to run away from the problem. Trying to do the opposite differentiates the man from the boys. Cory froze in Year 2008. Not that bad. :)

In 2008, many stock prices cut into half easily. Will this happen in next recession ? Never say never. However, with ample liquidity today. And better understanding by investment communities on Reits. Chances are we won't be able to see such deep cut for the next ... next ... (never mind... Cory no crystal ball). There will always be exceptions.

In essence, the DPU of Reits or in another relative term with current price such as yield, say 5% as an example provides the cash flow to one financials as dividend. Multiply it with say 5 year periods will be 25%. That's a recession depth. To be more precise, there are compounded effect and the gearing component especially on properties. And the growth factor which cannot be ignored as it can double dividend gains over the 5 years period too if we pick our stock carefully, and safely to optimize our chance.  


Recession Survival Recipe

1. Able to Survive : Gearing, Loans, Occupancy, 
2. Able to perform "V-Shape" Recovery preferred in stock price : Stock Price
3. Continue to profit from the business during this bad days : DPU
4. Strong Sponsor

Not all Reits the same. Cory want to avoid bad surprises and knives cut. The Gem in Reits are not the Yield but the Growth and Stability that it can perform. Yield is the extras.


Cory
2019-1011

Cory Diary : Dividend Play and Timing

Let's take a REIT Stock which gives 7% dividends annually at current $1 tag. Assuming there is no major "calamity", that's 7 cents annually. Interests up few points during the year, how much is REIT impacted ?

1. Borrowing are secured across few years to decade contract. Some on annual basis. Some on fixed rate. Some Reits hedge their borrowing too.

2. Increase in borrowing cost can be passed down to tenants. In Retail is about 3 years contract. And typically contract renewal are staggers across the periods.

3. Some Reits have internal mechanism where rent escalation is tag to inflation and revenue

4. Rising rates mean the Market is able to absorb the increase to prevent bubble. Is not to kill the goose but to ensure longer road of growths.

Based on above, any dip in well managed Reits, are good entry points. Stock price fluctuation will be mitigated by the dividends. So what we have is likely upsides. Every year we leave too much cash in the bank, the cost are a lot more and is a loss in relative term to inflation.. A gap of 5% between interest and dividends for $100K is $5K. How many Ks we have in our Banks ?


Cory
20170411

Cory Diary : REITs Investment

Reits have been in my portfolio for many years. Each year I learn "New Tricks" and pay some school fees. Instead of going through the learning pains, I like to document down what to look for and appears it can be boiled down to 4 pillars

Integrity

This is critical. While there maybe time for speculation, this is not my cup of tea. The other three below are more inter-connected.

DPU

The Managers can do share placement, issue rights, increase borrowing but at the end of the day is how much Dividends Distributed per Share/Unit. An increasing DPU is excellent. A stable DPU is ok in exchange for lesser risk.

Yields

Distributed Income/Current Price. If I am happy with the yield, that price is good price to invest.

While I may wait for opportune moment per chart, the timing will not be too long as price correction could be mitigated by dividend distributed. 

Capital Gains

Chances of higher stock price in the future requires active management of smart managers. This create a forward buffer for my investment. Capital gains should be accorded same recognition as initial amount invested. Money is money regardless gains are capital or not.

Cory

20170202

Cory Diary : CAPITALAND MALL TRUST 4Q16

Investing in CMT is one of a kind. It can hardly go wrong  if you have taken a peek on it's portfolio of assets. The issue with it will be the actual return after stock price fluctuation. And so investing in CMT is more important in the entry price and the yield Maths will work itself out.

The quarter annualized DPU is 11.46 cents. Yield about 5.92%. This is despite Funan undergoing redevelopment. Management has stated moving forward to focus sustainability of the DPU. I guess that will be the benchmark.

Assuming Stock market tank, the maximum capital loss price will be around $1.82 after dividend will result in 6.1% yield assuming dividend able to maintain. Will you buy more or hold or sell ? This logic is important because stock price can continue to go lower to $1.7 as a test case. That will be about 23 cents loss or more than -11%. However Yield will go up to around 6.5%. If CMT fundamental is solid, do stock price matter for a dividend player mid to long term ? In fact for a million dollar asset invested, you will get 65K which some will be elated instead of just 58K currently.

What will the stock price and yield be after the funan site has re-developed complete ?


Cory
20170128


Notes:

"CMT’s current portfolio comprises 16 shopping malls which are strategically located in the suburban areas and downtown core of Singapore 

- Tampines Mall, Junction 8, Funan (formerly known as Funan DigitaLife Mall), IMM Building (“IMM”), Plaza Singapura, Bugis Junction, Sembawang Shopping Centre, JCube, a 40.0% stake in Raffles City Singapore (“RCS”) held through RCS Trust, Lot One Shoppers’ Mall, 90 out of 91 strata lots in Bukit Panjang Plaza, The Atrium@Orchard, Clarke Quay, Bugis+, a 30.0% stake in Westgate held through Infinity Mall Trust (“IMT”) and Bedok Mall held through Brilliance Mall Trust (“BMT”)."

"CMT owns approximately 14.1% interest in CRCT, the first China shopping mall REIT listed on the SGX-ST in December 2006.'

Cory Diary : When higher Dividend has a Price

Just when I thought 2016 will be the year my Dividend will finally dipped since embarking on dividend strategy, year-to-date I have hit another all time high (updated for privacy) . So what happened ?

Thanks, but not thanks, due to "anticipated" Neretal special dividend of 15 cents but with more than 20 cents dent to the Share price after ... a heavy price to pay for indeed if you are someone who has been tracking this counter. Is definitely not a Saizen. And I am not pleased.

If anyone think that dividend strategy does not work locally, think again. (updated for privacy).

Will I be able to maintain this new level of dividend next year ? Probably considering my portfolio is still not optimise. Still some work to do. Another is the high cash level which I have been deliberating on to use. Quite an amount in foreign currency which has hedge S$ currency weakness.

Good news for this two weeks will be my income currency has appreciated 8% relative to Singapore dollars. The bad news is that the rate is dynamic and many of my assets are Singapore dollar denominated including loans.But then interests rate is moving up. And my portfolio is muted towards the Trump Rally to my dismay. One good thing out of it is that our labour cost reduced by 8%. And property in relative terms has become cheaper by 8% too. This is really good for Singapore reeling from high cost of labours and property prices.

Talking about interests rate. Reits got skinned recently and I dipped for some. So glad to be back in the 6%-10% yield range. In the Telco front is a slaughter.I have avoided Starhub and M1 specifically for the past year. Singtel I feel is ok because whatever go down likely will come back up. It is more sentiment for a diversified and strong counter. Will there be special dividend after coming one ? oh no ...hope not another Neratel. There has been huge outflow of money from developing world back to America pushing the DJIA to another high. I would be prepared for the tide returning.

What's more ?

Busy weeks on travel. America is still a land of plenty, and waste. Consumer market rule.
Salary and Bonus assessment period. :)

Cory
20161125

Cory Diary : Dividend Dimension

Why Dividends ?

Keep my CEOs on their toes
Best proof of returns
Income sustainability

(updated for privacy)

No turning back on the Twin Pillars Strategy - Dividends & Growths.
Q1 2014 has been slow due to divestment of some Reits counters. Of course is still in the earlier part of the year. Building portfolio back up with strong cash companies. I will have to catch up to beat 2013 dividends but not going to lose an arm or leg for it.

Cory

17th April 2014

Cory Diary : Reits 2014

Despite my preference for "fixed income" and being a "landlord", the leverage mechanism of Reits and Management have been trying this days. Facts - Reits are mainly in downtrend and is hitting home with starts of QE. Interest Rates are not even in the picture yet. Things will be tough this year as well if the strong ones are also doing fund raising.

There are still few gems out there but is not a guaranteed profitability net-net. Meaning after Rights, Placements, Dividends and Market Value, are we better off is a big question mark.

Managers are securing funding to lower their gearing. Meaning no additional returns from the funding exercise. Isn't this much worst than investing in a lower yield property than current DPU ? Not sure i should classify it as one of ultimate worst sins.

The Property Market has hit the ceiling. We should be expecting book value hitting north but the market pricing seems ahead on that giving us a value proposition that is actually sliding with lower price and value.

I still view Reit a key segment in my portfolio but there is also a time for everything. At the mean time, do look at the trend chart and draw your own conclusion.

Happy Reit'ing !

Cory
19th Feb 2014