Are REITs Doomed?

Begging the question, are REITs doomed? It is fitting to have this in our minds recently, with a number of Singapore-listed REITs (or S-REITs) going to the very lows for, at least, the past two years. According to the iEdge S-REIT Index¹, the freefall started sometime in August 2022, after a period of zigzagging that occupied much of the period from June 2020.

Yet, if we look back a little further in the same index, the elephant in the room is the massive drop between February and March 2020. We knew what happened during this time, but very few people were harking that REITs are doomed (on the contrary, the famous panic line uttered was “everything is doomed”, or some variations of it). The difference between then and now is attributed to two of the common investment biases at play, which are recency and anchoring, and the main fuel is, of course, interest rates.

 

Interest rates, as I had written a few times (here and here, to name a couple) have a profound effect on the entire market and economy. The ripple effects of rising interest rates, ceteris paribus, will lead to higher cost of debt and, in a more long-winded fashion, preference for short-term bonds and bank deposits as the go-to choice of parking one’s capital (which I will go into later). This would result in REITs getting hammered (or doomed) as the asset class is associated with being sensitive to interest rates, since they are usually geared and their seemingly-so high yields are challenged by very safer instruments.

 

Which is why the recency and anchoring biases are at play here. 

 

Headlines and topics from financial media, blogs, forums, etc., were constantly harping on REITs and their generic inverse relationship with interest rates in the past few months. Obviously, being bombarded with this news and information, it would be occupying our brains for a while. This is recency bias. Closely following is anchoring bias, where investors would (usually) base on the assumption of higher interest rates equates to bad omen for REITs.

 

A Business Times report on 15 March 2022² stated that close to 75% of S-REITs’ current debts are either on fixed rates or hedged through floating-to-fixed interest rate swaps. This meant, in general, that high interest rates do not really impact much on the debt profile, at least in the short term. Provided high interest rates do not prevail for the next three years or more, this aspect is somewhat mitigated by the S-REITs.

 

Speaking of the narrowing REIT risk premium (i.e., the difference of yield between REITs and a safe-haven asset) due to rising short-term bond and bank deposit rates, from some investors’ viewpoints, for REITs to be competitive with a current yield rate akin to short-term bonds and bank deposits, REIT prices would need to go down, and very low down. Though we know going to zero is almost impossible, but for some REITs they represent a very huge discount to their respective book values.

 

Although such safe instruments are in vogue, one must remember that only a few years ago, their yield and rates were considered low by many investors, and (you guessed it) people flocked to REITs. The lesson here is obvious: for any financial instrument, every day is not a Sunday.

 

Frankly speaking, REITs looked appetizing now.

 

Now the big counter question cometh: what am I going to do?

 

A few things that you need to know and do. On the “know” part, as I had stated above, there are no “forever Sundays” financial instruments (and asset classes/regions and countries/sectors and industries). On a related note, there are no “forever Mondays” in economic conditions, too, as we all know at the back of our brains that things will get better, sooner or later. For this, “do” diversify; going into your investment portfolio on a well-diversified basis would at least provide lesser losses than a concentrated one.

 

On interest rate hedging employed by the S-REITs, while it is done on a whole front, it pays to read further each REIT’s debt profiles, which are available from their annual reports and presentation slides, and factor into your fundamental analysis. If this is not your investment style (i.e., passive), then consider going into one of the five REIT ETFs available (which I had shared a bit here).

 

While writing this, I had read about the hints on lowering future rate hike numbers. This may spell good news for REITs in general. So, they may not be doomed at all?

1 – iEdge S-REIT Index. SGX. https://www.sgx.com/indices/products/sreit (accessed 22 Oct 2022).

 

2 – Li, Candace. S-Reits hedge against rising interest rates. The Business Times. 15 Mar 2022. https://www.businesstimes.com.sg/companies-markets/s-reits-hedge-against-rising-interest-rates (accessed 22 Oct 2022). 

An Open Letter To New Investors

Dear new investors,

If you had started your investment journey within the last two to three years, it is a bumpy ride to begin with. When things were starting to get rosy, COVID-19 had shaken the world, not just on the physical health front, but also on mental and economic fronts, too. Yet, there is a silver lining amongst this period of gloom, with work from home, or WFH, related counters experiencing a boom (especially the technology sector).

 

Just when we thought things were going back to normal, we were inundated with a series of unfortunate events and happenings: the global supply chain squeeze; inflation soaring with spiking of interest rates trying to combat it; rising energy and commodities prices; geopolitical situations, and so on, which directly and indirectly caused the financial markets tumbling back to COVID-19 times, and some alluding it may get worse.

 

When your first step into the investing world was this tumultuous, it was natural to feel fear, panic and confusion. You might have had a sort of mismatching of expectations: “investing was supposed to be smooth sailing, as what my family members/friends/peers had experienced before, but it was not to be when I started”. You may be wondering what you had done wrong, or whether your luck with investing is out of sync. The stock that you had just bought gone down X percent, and the REIT that you had recently entered had made you lost Y dollars. Yes, I had seen these lamentations going on around me, in real life and on virtual platforms. It is understandable to have such reactions, which could range from mild pessimism to outright despair. 

 

However, as with all things, markets and economies go through a cycle. Right now it is on the downhill route. When will it bottom out, or resume going up, is anybody’s guess, but they are going to happen someday. In the meanwhile, remain calm, continue to invest (either through periodic contributions or to seek out opportunities in such times) and ride out the storm.

 

As investors, we should not be concerned about returns over one day, one week, one month or even one year. Investing is a long journey, which I had always reiterated, and it should last at least ten years. This period, although trying, will represent only a short event in your investment path. Therefore, do not let the general situation hamper your thoughts and well-being. 

 

As cliché it may sound, and difficult to carry out in practice than in advice, but it works most of the time: keep calm and carry on.

 

Yours truly,

 

The Bedokian.

What And Where Am I Looking At Now?

Granted that I do not write about individual counters frequently (save for the “Inside The Bedokian’s Portfolio” series), I had decided to pen down what and where I am looking at now, as a form of airing and sharing my thoughts. A huge disclosure and disclaimer here that we are presently owning these counters and doing an averaging up/down. Do your own due diligence and research before entering.

The recent hammering of the equities and REITs asset classes, plus the preference of depositing capital in short-term bills and bank deposits due to the shrinking risk premium and rising interest rates, had seen prices of erstwhile favoured counters plummeting. It is at such times that we can find some buying opportunities, given the perceived cheap prices they are now.

 

I will share three counters, plus two bonuses, on where we are likely to deploy our capital next as part of our active rebalancing management.

 

What And Where #1: Apple (listed in NASDAQ)

 

As with most other counters in the technology sector in 2022, Apple’s plunge was no exception; its price had dropped around 24.1% year-to-date (YTD). Reasons attributed to this fall are many, among them the impending recession that is coming, the slowing down of iPhone production, etc.

 

Despite the negativity, Apple is still in a strong financial position for the past three to four years: it has an increasing free cash flow (FCF) position; its earnings before interest, taxes depreciation and amortization (better known as EBITDA) is increasing, albeit slower within the last two years; and its total liabilities were constantly within the same range (see Figure 1 below).

 

Selected Financial Figures	TTM	2021	2020	2019
FCF	107,582	92,953	73,365	58,896
EBITDA	129,557	120,233	77,344	76,477
Total Liabilities	278,202	287,912	258,549	248,028

 

Fig.1: Selected financial figures of Apple. Figures in millions. Apple’s year end date is 30 Sep (Source: Yahoo Finance, Seeking Alpha).

 

Going into price movement, Apple’s decreasing YTD was not really in a straight line, but rather in an up-down fashion. If a YTD figure was to be taken at January, March and August, it would not have been as low as -24.1%, but rather -1.7% at best.

 

Traditionally, Apple’s best quarterly EBITDA numbers in a calendar year were at the quarter ending in December, a trend which I had observed since 2010, as this period is associated with year-end holiday shopping. Based on guesstimates, the trend should follow through for 2022, and this may spell yet another jump for Apple’s share price by that time.

 

Bedokian’s Apple Average Price/Share: approx. USD 75.39

 

What And Where #2 & #3: Frasers Centrepoint Trust & SPH REIT (listed in SGX)

 

The relaxation of COVID-19 rules meant that in-person shopping and dining (and tourists) were back in vogue and revenge. In other words, the retail segment is back. However, rising interest rates meant higher cost of loans, and the narrowing margin of risk premium meant investors would want to be compensated with a higher yield for the extra risk taken. In my opinion, these two major factors contributed to a fall in REIT prices throughout.

 

Taking into consideration the raised points above, I would use three major metrics for the selection of favourable retail REITs in our portfolio to add: low price-to-book ratio (P/B), low gearing and respectable yield. Frasers Centrepoint Trust (FCT) and SPH REIT came into my spotlight (see Figure 2 below).

 

REIT	P/B Ratio	Gearing	Yield (trailing)
FCT	0.94	34.5%	5.569%
SPH REIT	0.99	30.3%	6.000%

 

Fig. 2: Selected figures of FCT and SPH REIT (Source: Reitdata.com, with P/B ratio calculated from available figures).

 

These two were selected based on their locations of their properties (FCT primarily in heartlands, and SPH REIT possessed Paragon in the Orchard Road shopping belt). Furthermore, for FCT, it is an uncommon occurrence for its price to go below the net asset value, hence it is a good opportune time to load further.

 

Bedokian’s FCT Average Price/Share: approx. SGD 2.04

Bedokian’s SPH REIT Average Price/Share: approx. SGD 1.02

 

Bonus #1: Russell 2000 Covered Call ETF (listed in NYSEARCA)

 

The Russell 2000 Covered Call ETF (RYLD) is a dividend-generating counter that uses covered call strategies to generate income. As I had shared here before, the compromise of covered call ETFs is the limited upside of the share price, in exchange for relatively higher dividend yields, so this style of investing may not be for everyone (thus, being categorized as “bonus” here). Think of it as a high interest account with no capital guarantee.

 

Anyway, the YTD price had gone down 23.8%; even with a trailing dividend yield of 12.41%, it is still suffering from a loss of 23.8 – 12.4 = 11.4% or thereabouts. In my opinion, it is feasible to add into this counter as this is much better covered call ETF compared to the rest (I will write more on this ETF in a later article).

 

Note that RYLD is sitting inside our trading portfolio and not our investment portfolio, due to its options characteristic.

 

Bedokian’s RYLD Average Price/Share: approx. USD 21.63

 

Bonus #2: iShares FTSE China A50 ETF (listed in HKEX)

 

In my 2022 preview (here), I had talked about venturing into China, and my selected proxy is the iShares FTSE China A50 ETF (2823.HK).

 

2022 had not been kind to the Middle Kingdom: extended lockdowns due to a zero-COVID-19 policy, the big property developer busts, geopolitical tensions, etc. Regardless, my guesstimate for the next decade would see China as continually growing as it is going to become a more complete economy with its still manufacturing base available, a rising middle class to sustain consumerism, and their seemingly autarkic technology sector.

 

I had selected the 2823.HK due to the A-Share holdings and the diverse sectors. I will write more on this ETF in a later date.

 

Bedokian’s 2823.HK Average Price/Share: approx. HKD 18.08

 

Conclusion

 

When the markets open later today, we are not sure how these counters’ prices would go. Internally I had set different levels of entry prices to commit different tranches of our capital (hint: the 10-30 rule¹) over the course of next few months, but when prices are recovering above my entry price, we would hold back and probably divert the funds to the others, or just stay put.

 

All data and information stated above are as at 30 Sep 2022.

 

Disclaimer

 

1 – The Bedokian Portfolio (2^nd Ed), p131-133

Keep Calm And Carry On

Equities are tumbling, REITs are falling, long term bonds are battered, commodities prices are inching up and, despite the inflation, cash is king.

In other words, your Bedokian Portfolio might have turned on its axis.

 

In the current economic situation where there is an armed conflict, a commodities crunch, supply chain issues, inflation, interest rate hikes, threat of a huge recession, etc. It is kind of scary. On the other hand, it kind of felt surreal as well. Never mind that our investment portfolio value is going down, maybe by 5%, 10%, 20%, or so on.

 

I had explained earlier that it is not a surprise where one's diversified portfolio is suffering a downturn, because that is how it is, at least for the short term. To me, an investment portfolio's runway should be at least a decade long, so (as I had always said) such moments are nothing but kinks in a long journey.

 

For passive Bedokian Portfolio investors (like Bob currently), you may have not even noticed all these things going on, for your rebalancing could be done probably once every quarter, half-year or annually, where you would transact according to the weightage of the portfolio and the price as at that time.

 

For active Bedokian Portfolio investors (like myself), you would probably look out for opportunities in the markets, buying up sustainable securities belonging to different asset classes that had fallen from their mean/value and/or selling those which had risen above their averages, while rebalancing your portfolio at the same time

 

Giving in to panic and fear is the last thing on an investor's mind. We should instead look for chances and sensible bargains. Notwithstanding the different macro, geo-political and socio-economic situations and scenarios, are you feeling the same thing back in February – April 2020? And with it, did you remember what happened after that?

 

Short of a nuclear doomsday event or an alien invasion (or both), the markets will pick up and continue churning after a period of downness

 

Keep calm and carry on.