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REITs: When to buy?

Saturday, December 8, 2012

This is taken from the weekend edition of The Business Times:

Simon Rudolph, Franklin Templeton Investments' portfolio manager for global equities: "We invest in REITs when we can buy them with good yields, but most importantly, at a good discount to the NAV. Real estate has to be about total return and not just income."

"When you buy something at 30% premium to NAV, unless there is a reason it is trading at a premium, it can still go back to par."

This is something that I can identify with and it is something I have always talked about in my blog as something to look out for when deciding which S-REITs to invest in.



Off the top of my head, my investments in AIMS AMP Capital Industrial REIT and First REIT appreciated some 40 to 75% in value in the last 3 years. This is on top of annual distribution yields of 13 to 17%. Readers who have walked the walk with me the whole time could possibly verify this.

So, if we believe Simon Rudolph, does it mean that now is not the time to buy into S-REITs? Well, not the best time perhaps but, for some investors, being able to secure an annual yield of >7% is considered very attractive in the current low interest rate environment. Even a 6% yield could be considered attractive.

We could possibly see yield compression to continue in S-REITs as money continues to search for places where it is treated better. Another 10% appreciation in the unit prices of S-REITs cannot be ruled out in 2013.

A few days ago, a reader made a comment regarding Saizen REIT which is still trading at a significant discount to its NAV. This is a REIT that was unloved and ignored for a long time. It was still the case when I decided that it was terribly undervalued and bought into it. What about now?

Well, being a REIT with properties in Japan and its income in JPY, the bug bear is forex risk. The JPY has been on a decline. It has weakened against the S$ by about 10% in the last 12 months. So, this will affect its NAV and distributable income in S$ terms.

Even so, we could be looking at a NAV of 27c/unit and a DPU of 1.134c a year. A unit price of 17c means a 37% discount to NAV and a distribution yield of some 6.67%.

If we were to factor in a worst case scenario of a further 10+% decline in JPY against the S$, we could expect a NAV of 24c/unit and a DPU of 1.01c a year or a 29% discount to NAV and a distribution yield of 5.94%.

It is perhaps worth remembering that Saizen REIT owns freehold properties and that its bank loans are amortising in nature. The relatively lower distribution yield could be acceptable, therefore.

REITs, when to buy? Obviously, there were better times and there could be better times again but is leaving most or all our money in savings accounts which pay almost nothing in interest a better choice when inflation of 4% per annum is set to be the norm? You decide.

Related posts:
1. Saizen REIT: 2H FY2012.
2. REITs: Simply explained?
3. Inflation is not going away.

9 comments:

SnOOpy168 said...

Hi AK

In my humble experience, there is never a bad or best time to buy. Buy when one feel that the timing / returns / objectives / target is correct.

I had just bought into some of my existing REITs. Silently wishing for those good old low prices of yester-years. While my DCA has gone up, yet it is still below market prices and the dividend $$$ will increase.

Lets hope that I am not acting too irrational here. Huat ahhhh

AK71 said...

Hi SnOOpy168,

I believe you got the gist of my blog post here. :)

Whenever people ask me if XXX REIT is a good buy at XX price, I always ask them to ask themselves if they are happy with the returns, given its fundamentals. Obviously, everyone will have a different answer.

You are very rational. Don't worry. Haha.. ;)

K-Enterprises said...

Hi AK71,

Have not heard about you talking about K-Green for quite awhile. It seems to be stable in a sea of good and bad news. Still good an investment for passive income??

AK71 said...

Hi Kelvin,

There isn't anything new to say about the Trust really. I am somewhat disappointed that it has not taken advantage of its zero gearing level to carry out yield accretive acquisitions or did I miss any announcement?

AK71 said...

Saizen REIT

Price – $0.17
Target – $0.212

Enjoying stable occupancy and average rental rates since 2008, Saizen REIT’s 135 residential properties portfolio in Japan shows clear resilience against macroeconomic uncertainties. Offering a high yield of 7.3%, Saizen not only stands out among its S-REIT peers but also its J-REIT comparables. Amalgamated with cheap valuation as the stock has been trading at a massive 40% discount to its net asset value (NAV), we opined that Saizen is undeniably an attractive buy. We note that Saizen’s unutilised warrant proceeds of around ¥1.4b are sufficient to offset its loan amortisation till FY14. In addition, we believe it will face minimal refinancing risks and have factored in the assumptions of a successful refinancing of loans in FY15-17. Saizen has also renewed its share buy-back mandate on 17 Oct-12 to buy-back 10% of its outstanding shares by the next AGM, thus providing some price support given its steep discount to NAV. Initiate BUY.

– AmFraser Securities (20 Nov 12)

Gary said...

Any comments on Keppel DC REIT??? =)

AK71 said...

Hi Gary,

I have avoided IPOs for years. I will wait and see if the unit price falls, post IPO. If it should fall, then, perhaps, I might be interested. ;)

Li Coo Coo said...

Hi Sir

For REITs bought thru' CPF OA, REITs dividend will go into CPF OA as well right?

Thanks
Lim

AK71 said...

Hi Lim,

Yes, that is correct. :)

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