Low bond yields have in the past been bad, not good, for equity returns.
Posts Tagged ‘yields’
(Or “S-Reits: Is an amber light flashing?”)
Regular readers will know that I’m up to my eyeballs in Reits (AMP, Fraser, Lippo and Ascendas India, ya I know AI is a biz trust, but it’s a Reit except in form). Greedy for the yield, what with inflation at above 5%. And no high salary to fall back on. In fact no salary at all. (((
Generally Reits are up 10% in 1Q, and taz without taking into account the payouts! So I’m not complaining.
But I’m getting concerned abt future total returns (price + payouts) when the expected appreciation of the S$* is given as a reason to buy Reits. “If they [investors] expect the dollar to appreciate … there will be more interest in Singapore-dollar-denominated assets … Reits that are listed in Singapore and traded in Singapore dollars will benefit as well,” someone senior from SIAS Research was quoted by MediaCorp as saying recently. And remember that SIAS is the self-proclaimed watch dog for retail investors!
WTF, ever heard that quite a number of Reits are diversified geographically, or are exposed to a specific country like India, China or Indonesia? If a Reit has oversea income, that income would be “reduced” when translated into an appreciating Singapore dollar.
Anyway, as of last week, DBS Vickers liked Mapletree Logistics Trust, Ascendas India Trust and Frasers Commercial Trust. These were Reits to accumulate ahead of payout declarations because it expected the payouts to exceed mkt expectations.
CIMB favoured CapitaMall Trust and Frasers Centrepoint Trust for their retail exposure and strong growth potential. And OCBC prefered industrial REITS, which offer yields in excess of 8% to outperform.
But do remember that unlike companies, Reits have by law to payout out 90% of their income. There is no such thing as keeping something for “a rainy day”. Something that “dividend stocks” like Haw Par, SPH or F&N do. With a Reit, if income drops, the payout drops and the share price will drop to reflect the reduced payout.
As a Reit investor, you got to sell when the going gets good, or be prepared to hold it through down-cycles and be prepared to cough up monies then for rights issues to shore up the financials. Net-net, could use up the payouts you got in gd times.
*Following the recent announcement by the central bank to allow the Singapore dollar to appreciate at a faster pace.
BT’s CFAer used ‘indicated’ dividends to calculate stocks with the highest dividends and lowest price-to-tangible assets ratios. The list of stocks which emerged are mostly the real estate investment trusts, and property developers. Hong Leong Finance, UOB-Kay Hian, SIA, Venture Corp, NOL, DBS, SATS and OCBC Bank were the non-property related counters in the list for the big caps. Her methodolgy is explained here.
The significance of stocks with highest dividends and lowest price-to-tangible assets ratios is explained here by the same BT CFAer: Buying stocks with the highest dividend yield, but lowest PTB ratio appears to be a winning strategy. Following that strategy over 22 years would turn $100 into $1,575. That’s a compounded annual return of 13.3 per cent a year.
The u/m is an extract from a BT article written by Teh Hooi Ling. Senior Correspondent and CFAer, published on 3 December 2011. It gives some very interesting insights on the yields offered by the various types of Reits, shipping trusts and other business trusts*. (Note some bad news for shipping trusts)
Thanks BT, Ms Teh and the unnamed fund manager, “Merry Christmas and a Happy New Year”.
For investors who are keen on Reits and other business trusts, here is some advice from a fund manager friend on how to go about picking the right ones.
Industrial properties usually have 30-year leases, or 30+30. Assuming a 30-year lease, it means it depreciates at a rate of 3.3 per cent pa, versus one per cent pa for a 99-year lease for a retail or commercial building. So the yields for industrial Reits have to be up to 2.3 per cent pa higher than retail or commercial Reits. Usually however, it is less due to the time discount factor.
‘Ships are usually scrapped after about 25-30 years. I think typically they are depreciated over 15 years or so. Even if ships are scrapped after 30 years, shipping trusts should command a higher yield than industrial Reits because the ship lessee can ‘disappear’ with the ship, but not the industrial building tenant.
‘Hospital Reits like Parkway Reit is a rare breed as its revenue is based on a consumer price index formula. You can think of it as having zero vacancy rate (but the main issue is counterparty risk). So given the same counterparty risk, it should trade at a lower yield than retail Reits, which should trade at lower yields than commercial Reits, given the same tenure (because it’s easier to lease out retail units).
‘In turn, commercial Reits should trade at lower yields to industrial, which should trade at lower yields to hospitality (as vacancy rates of hotels/service apartments can be quite high during recessions).
‘Hospitality Reits should trade at lower yields to shipping.
‘But note that industrial can trade at higher yields to hospitality as the former has shorter tenures.
‘As for Hutchison Port Holding Trust and SP Ausnet, I would value them as companies rather than Reits, as usually the rates they charge are prone to fluctuations – unlike Reits and shipping trusts which usually lock customers up for years.
‘SP Ausnet is not structured even as a business trust and pays its dividends out of net profit rather than cash profit. I think every year, it pays out the same dividend per share even though its earnings fluctuate. I would value it the same way I value SingPost.’
Note that unlike a company, a Reit cannot maintain payouts if it hits a bad patch because, at least, 90% of net income has to be paid out. While this is not true of biz trusts, their attraction is that they promise to pay out most of their free cashflow. Companies usually pay out only a portion of their net income, hence there is something in reserve, if they hit a bad patch, and dividends can be maintained for a while more. Hence the importance to investors of what analysts call “dividend cover” which shows how many times over the net income could have paid the dividend. For example, if the dividend cover was 2, this means that the firm’s profit attributable to shareholders was two times the amount of dividend paid out. Not true of Reits, and biz trusts. Got problems, payouts get cut.
S-Reits are the flavour of the moment. Witness this gushing report.
“The current yield gap between S-Reits and the 10-year government bond is attractive to us at 5.1 percentage points versus 0.8 percentage point during the 2007 boom, and an average of 3.4 percentage points over the past seven years,” said Royal Bank of Scotland analysts in a report last week.
The report put S-Reits yields for 2011 and 2012 at 6.7 per cent and 7.1 per cent respectively. The high yields now being provided by S-Reits are well supported by a stable rental outlook, low interest costs and acquisitive growth potential, the RBS analysts said.
RBS has an ‘overweight’ call on the S-Reit sector.
As reported earlier https://atans1.wordpress.com/2011/08/21/cimb-on-reits/, CIMB is “neutral” on developers as a whole but “overweight” on S-Reits.
So what can go wrong? Nomura Singapore said that one of the current concerns of investors in the Reits space is the potential risk of recapitalisation if asset values were to fall significantly. In simple English, investors are afraid of rights issues if the gearing of Reits goes sky high if property values supporting the loans collapse. This happened in late 2008.
Even if property values don’t collapse, Reits could face banks refusing to renew their credit facilities, and asking for their money back if the banks face a liquidity crunch. This too happened in late 2008.
In a research report dated 10 December 2010, OCBC Research writes most of the Singapore real estate investment trusts (S-Reits) emerging stronger from the financial crisis, with healthier balance sheets, forthcoming acquisition proposals and more asset enhancement works.
Three Reits listed on (SGX) this year, Cache Logistics Trust, Mapletree Industrial Trust (MIT) and Sabana Reit. This was in stark contrast to a year ago when most of the S-Reits were burdened with deleveraging plans, decompressing cap rates and asset sales.
The FTSE Reit sub-index is up 15.9 per cent year-to-date. It has since recovered 145.1 per cent from its trough during the financial crisis in March 2009 and is 38.2 per cent shy of its peak in June 2007.
If we use 2006 levels as a benchmark, the FTSE Reit sub-index still has 25 per cent of headroom before reaching the 2006 summit, and it is only 9.2 per cent above of its 2006 nadir.
Stepping into 2011, we think there is still upside potential for the index to reach 2006 levels, and this recovery momentum is already playing out nicely among some of the S-Reits.
Despite being touted largely as defensive yield plays, we have witnessed some S-Reits (such as CapitaCommercial Trust, K-Reit Asia, Fortune Reit and ParkwayLife Reit) appreciating more than 25 per cent year-to-date.
Going into 2011, we upgrade our rating for the S-Reits from ‘neutral’ to ‘overweight’.
The persistently low interest rate environment is expected to stimulate the property market and continue to drive prices higher.
Together with ‘hot capital inflows’ pouring into Asia, it is likely that spot rental rates and asset prices will continue to be inflated.
At the same time, many Reit managers are capitalising on the recovery cycle for further asset enhancements initiatives and acquisitions.
Being an inflation hedge, we think investors’ interest in S-Reits is likely to remain piqued in 2011.
However, we noted that different sectors may experience different rates of recovery.
In our opinion, the recovery is likely to be more pronounced for the office sector, followed by the industrial sector as the catch-up potential is greatest for these two sectors.
The retail sector is likely to remain subdued with moderate rental escalation, new retail supply with additional 612,000 square feet of leaseable retail space in 2011, and lessened spending power from foreign visitors affected by the appreciating Singapore dollar.
Within our coverage universe, our preferred picks for large-caps are Mapletree Logistics Trust (‘buy’, fair value: $1.00), Ascott Residence Trust (‘buy’, fair value: $1.38) and for small-caps, Frasers Commercial Trust (‘buy’, fair value: $0.18), Starhill Global ( ‘buy’, fair value: $0.66).
S-Reits offer the best yields. Gd, useful article
Much safer than investing in prayer at City Harvest Church? So far no S-Reit manager has been raided or investigated by the cops. God be praised.
Update — excerpt from BT
MOODY’S Investors Service has revised its outlook for Singapore’s real estate investment trusts (S-Reits) to stable from negative, reflecting its view that the sector’s fundamental credit conditions will neither erode nor improve materially over the next 12 to 18 months. ‘The stable outlook is supported by three primary factors: the strong rebound in Singapore’s economy; the stabilisation of rents across the retail, office and industrial property sub-sectors; and the steady performance and lower refinancing risk of the rated S-Reits,’ said Peter Choy, a Moody’s vice-president and senior credit officer.