Sponsored Links

Medisave voluntary contribution in 2018.

I updated a blog on the CPF-MA yesterday: "For those under 65, the Basic Healthcare Sum next year will be S$54,500, up from S$52,000 ...

Past blog posts now load week by week. The old style created a problem for some as the system would load 50 blog posts each time. Hope the new style is better. Search archives in box below.

Archives

"E-book" by AK

Second "e-book".

Another free "e-book".

Pageviews since Dec'09

FOLLOW AK ON FACEBOOK.

Recent Comments

ASSI's Guest bloggers

REITs and rights issues: A zero sum game?

Saturday, December 3, 2011

There has been a deluge of articles on REITs recently and my own blog posts on the subject have attracted many comments although not as many as the blog post in which I revealed my total passive income from S-REITs for the first nine months of this year. ;p

I received comments from a reader, Chopra, regarding my simplistic analogy given in "REITS and rights issues: A Singaporean tale." Read it here.



Hi Chopra,

I did say my analogy is a simplistic one. It was partly a tongue in cheek blog post in response to the rather simplistic picture of REITs painted by certain critics.

Of course, there are other factors to be considered in rights issues before we could make an informed decision on whether they are good, neutral or bad for the different types of investors involved.

To have a blanket statement that REITs will take back all the income distributed to unitholders through rights issues is not only misinformed, it is misleading. That is the primary reason why the article came under fire.

Saying that rights issues are zero sum games is just another way of saying the same thing. So, I cannot agree with you. Some rights issues are beneficial to unitholders and some are not. Just compare the rights issue of First REIT with that of CitySpring Infrastructure Trust not too long ago. You will see what I mean.

Generalisations are often convenient but they are also often inaccurate.

We must realise that REITs give out at least 90% of their income to unitholders. So, they need to leverage up or raise funds through equities to grow. Whether these activities are carried out sensibly is another question but anyone unhappy with such a model should give REITs a wide berth.


I won't go into how much it would cost an investor to take part in each rights issue or to sell their nil-paid rights. I would also not look at the frequency of rights issues. It is like looking at the trees and not the forest. In fact, I do not mind frequent rights issues if they should be consistently or mostly beneficial for me as a unitholder.

Finally, I won't compare REITs and blue chips. They satisfy different investors with different objectives.

Personally, investing in certain REITs has been very rewarding for me. I am also vested in a few blue chips. Certainly, not all REITs are bad and not all blue chips are good. Would I compare their performance against one another? I could compare apples and oranges but I won't. I enjoy both.

24 comments:

Ray said...

well said. :)

AK71 said...

Hi Ray,

Wow! That was a fast comment. :)

Marti said...

This is all true. Still, people invest in REIT because they want regular, stable income. This is the investing concept, this is why they are required by law to distribute much of their cash flow, and this is how it is sold to investors. Some sort of bonds, just a bit more speculative. Not some stocks that requires frequent cash injection!

IMHO there should be a time limit for cash calls (like once every 3 or 5 years) and amount limit (REIT doubling their size is ridiculous!)

Anonymous said...

Hi AK71, I feel honoured for you to write a post.

Mathematically, it is a zero sum game, as described using TERP.

But you are right in pointing out that one can benefit from right exercise if he/she gets excess.

Cheers,
Chopra

Temperament said...

Hi AK71,

CMT & CCT asked for investors' money in 2008/2009(rights issues). Why did they choose at this horrible time during the market crashed? i think most investors who dared to subscribe, is making money even at current CCT's & CMT's market price.
i wonder who(REITS) are going to ask for money if the market crashed this time?

1)Will i just subscribe to the rights

2)Sell mother shares after ex-rights and subscribe to right?

3)Buy more NIL PAID RIGHTS?

4)Sell mother shares & NIL PAID RIGHTs and buy mother shares after ex-rights?

6)Apply for excess Rights?

5)Don't buy at all after getting out?

7)Please share if you have another possibility.

Also can someone help me to understand better which option to choose and why?
Cheers!

Calvin said...

AK 71, exactly.

People should stop comparing blue chips to REITs to see which one is better.

Firstly, not all REITs are the same, just like blue chips are different from each other in all aspects.

Secondly, comparing apples to oranges is meaningless. They are both equally good investment instruments.

Rights issue are just a form of capital raising. There is nothing wrong with capital raising as long as the capital is well used to provide more returns than the capital invested. If people can't even understand this, then they shouldn't be investing in ANY STOCKS for that matter. That's because even blue chips like DBS issued rights.

Calvin
http://www.investinpassiveincome.com

Ray said...

Haha... I subscribe to your blog via email. Everytime u post something, my blackberry tells me :)

Anonymous said...

AK,

Like I said before, every issue will have its proponents and distractors. Its your money, make your own decisions. Don't like REITS, don't invest in them. Like them, tread carefully, it is your money after all.

I have made more money than loss in REITS and business trusts investments. Looking back, investing in REITS or business trust at the IPO stage is the worst time to get in. Valuations are to the issuers advantage. Latest case in point, HPH.

Buy when the valuations are attractive. Sell when the price is at a premium to its valuation. In Ms Teh's article, she is assuming that the shareholder starts investing from IPO and keeps adding money after that. I am sure there are people who do that. If they do that, then it is nobody's fault. Keppel Corp was $12 or even higher 2 to 3 months ago. What is the price now and what does Ms Teh have to say to investors who had held on to Keppel Corp shares since then ? Isn't Keppel Corp among the bluest of the blue ? Tell these investors that investing in Keppel Corp is safer than investing in REITs ? You bought Lippo at 14c or 19c before. Is that a good investment of what ?

Skipper

AK71 said...

Hi Marti,

People who want a regular and stable income without any risk of a cash call should be in bonds. REITs are not for them. Simple.

These people do not understand how REITs work if they complain about cash calls.

I would like the REITs I am invested in to get bigger because there are many advantages of a bigger REIT over a smaller one. To get bigger, they need more funds. No two ways about it. It is not ridiculous but it could appear ridiculous to people who do not understand REITs.

AK71 said...

Hi Chopra,

All the readers who take the time and energy to comment in my blog do me great honour. I appreciate every single comment.

If we disagree on issues, we might learn something from each other though rational debate. If we agree all the time, things could get boring. ;)

AK71 said...

Hi Temperament,

I will assess each rights issue at the time it is proposed. At that point in time, I would examine the circumstances leading to the rights issue and the pro forma numbers. Then, I would decide what to do.

All the options you raised could be considered but it is hard to say which ones are better taken out of context. :)

As for the example you provided, during bad times, if a REIT is able to buy some good quality assets at lower prices, I would like to be a part of it. If the REIT needs more funds and is issuing rights, I would definitely take up the offer. ;)

AK71 said...

Hi Calvin,

Thank you very much for the succinct comment.

During the last crisis, I bought into DBS at $9+ a share. I also participated in the rights issue. It was a very rewarding trade. Trade? Yes, because I divested for capital gains. On hindsight, I should have held on. Haha.. ;p

AK71 said...

Hi Ray,

Ah, so des ne. Sorry, for quite a long time, I thought Blackberry was a fruit. It took me a while to catch on. Yes, I am an IT idiot. :(

AK71 said...

Hi Skipper,

A very incisive comment. Thank you. :)

For many years now, I did not take part in IPOs, taking Warrent Buffet's advice to heart that IPOs are never priced at a discount. They are usually good for issuers and not investors.

Buy at a price we would not sell at and sell at a price we would not buy at. This is putting it simply but it neatly encapsulates what each serious investor should internalise. :)

Anonymous said...

Hi AK,
With the current valuation on City spring, would you take a 2nd look at it again. :)
Rgds,
Rookie

AK71 said...

Hi Rookie,

I have done a blog post in reply to your question. :)

See CitySpring Infrastructure Trust: Worth another look?

Marti said...

Hi AK71,

I can't see the "many advantages" of a bigger REIT, as the economies of scales are very limited. A bigger REIT might attract more investors and hence higher valuation, but that also means lower yield if you want to buy more, and also more volatility. I like small REIT better, it's a shallow pool where the big investors can't play and compete with small people like me.

REIT were created to be a collective and transparent way of owning rental property, they are different than corporations because they aren't supposed to pursue growth (hence the limits on income reinvestment and leverage). My view is that the frequent cash calls are just a way to get around these restrictions, taking from unit holders the income they just received instead of reinvesting it straight away. But if the manager really wants to grow and grow, he should move to a corporate structure and just reinvest the profits like a corporation does, leverage as much as he wants... and pay the taxes corporations are supposed to pay too.

Regarding bonds: the SGD bond market isn't so big, and most importantly the yields are so ridiculously low that most of the time you earn less than inflation. So I don't see it as an option, if I want to get poorer I know more enjoyable ways to do so ;)

AK71 said...

Hi Marti,

I think REITs would always be poor investments for you given your many assumptions. ;)

It is rather extreme to say that if you want to get poorer you can find more enjoyable ways to do so. It gives the impression that investing in REITs with frequent rights issues in order to grow would impoverish investors.

Anyway, I recognise the points you have made although I might not agree with you. :)

Anonymous said...

Hi AK71,

Just to check, did you receive the dividend payable on the 29 Nov 11 for First Reits?? I think mine is not in yet..just to check..

AK71 said...

Hi Anonymous,

Yup, First REIT's dividend received. :)

Marti said...

Hi AK71.

I was saying "getting poorer" in reference to bonds (who pays less than inflation). REIT are a good hedge against inflation because one can hope the underlying assets, and hence the unit price, will at least follow consumer prices.

AK71 said...

Hi Marti,

Ah, that makes perfect sense, of course. Thanks for taking the time to help clear things up for me. :)

Anonymous said...

Hi AK71,
I chanced upon your blog recently and enjoyed reading your postings.

For aquisition of new properties, REITs raise funds because most of their incomes are distributed to the shareholders on quarterly or 6-monthly basis. I would think REITs with lower gearing might raise less from rights / private placements and more from loans.

I've a question on how much spare cash we should keep in bank, to prepare for rights issues etc.

As we build up our exposure to REITs, I believe the need for us to increase that cash holding portion.

For me, I'm currently holding 50% cash (for investment opportunities / rights issues), 30% REITs, and 20% other shares. This is excluding cash for emergencies, day-to-day expenses.

AK71 said...

Hi Anonymous,

I believe your current strategy and cash/investment/emergency funds allocation is what I would have too.

I have nothing to add except that not all rights issues are good and I might actually choose not to take part in some.

Could you include your name or initials in future comments? Thank you. :)

Monthly Popular Posts

 
 
Bloggy Award