Going REITs Shopping Again

The markets were reeling from the latest not-so-good United States (US) consumer price index results and geopolitical jitters. With a recent capital injection and the resulting asset allocation skewness of our Bedokian Portfolio, plus a perceived delay of US interest rate cuts, it is time to go shopping again for the real estate investment trust (REIT) asset class.

Back in October 2023 I had shared on which REIT we had entered. This time round I will share what we had gone in or planning to go into, our rationale, and our average and entry prices.

REIT #1: Frasers Logistics & Commercial Trust (FLCT)

Based on the latest business update in January 2024¹, the gearing and interest coverage ratios were at 30.7% and 6.2 times respectively, with 76.8% of its borrowings under fixed rates, which indicated a healthy debt profile vis-à-vis other REITs of the same logistical, industrial and commercial sectors. The logistics and industrial arm of FLCT had maintained a 100% occupancy, though the (still) worrying trend of a not-so-robust occupancy rate for its commercial properties, especially for its United Kingdom (UK) properties, is there. The recent passing of UK law of allowing employees to have the legal right of working from home from the onset of employment could likely exacerbate the commercial space situation there.

Despite the downtrend, we believe that the logistics and industrial part still holds relevance in the future markets and economy, and bring about better rental reversions. We had initiated a position of SGD 1.04, with a total average price of SGD 1.07. 

REIT #2: Frasers Centrepoint Trust (FCT)

FCT need no introduction as being the king of suburban malls in the north, east and northeast. Recently in March 2024, FCT had upped its interest of Nex mall to 50%², funded by private placements and debt financing. Accordingly, the acquisition would provide an accretive 1.5% in the distribution per unit³, and the gearing ratio would be at 37.8%⁴ (assuming divestments of Hektar REIT and Changi City Point were adjusted into the financial statements ending 30 September 2023). 

Overall, FCT’s retail malls enjoyed an occupancy rate of not less than 99%, proving the resiliency and relevance of suburban shopping malls in Singapore. Our current average price for FCT is SGD 2.05, and we are planning to enter it around the range of low to mid SGD 2.10s.

REIT #3: Nikko AM – Straits Trading Asia ex Japan REIT ETF (CFA)

OK, this is not really a REIT per se but a collection of REITs from the Asia ex-Japan region. It is part of our core-satellite strategy of having exchange traded funds (ETFs) forming the core and individual counters making up the satellite portion. When there was only three REIT ETFs back then in 2018, CFA was selected due to its diverse REIT holdings in terms of countries and sectors. We had recently bought in CFA at SGD 0.783, and our current average price is SGD 0.953.

REIT #4: Paragon REIT (Paragon)

Honestly, for this round, Paragon is more of a “want” than a “need” for this round of additions, but I will give an honourable mention in this post. Paragon's low gearing ratio, healthy occupancy rate (at least 98% across properties) and its retail profile provided a form of resilience. Recently in February 2024, after a long period of speculation, Paragon had rejected to buy Seletar Mall from its sponsor as part of its right-of-first-refusal⁵. 

While in my opinion the establishment of another foothold in the Singapore suburban mall landscape (after its foray into Clementi Mall, which to me is a good move) was gone, but with their explanation of that it is a dilutive acquisition, plus the uncertainty of the interest rate situation (their last known interest coverage ratio was about 3.5 times), prudence is key in such conditions.

Conclusion

If you had noticed, Reits #1, 2 and 4 were mentioned in my October 2023 post, so this was just a rehash. Frankly I had been prospecting other REITs to enter but eventually decided to just look at the present holdings and determine their current health and price to enter. It is alright to just add on to one’s existing portfolio and it is not necessarily to look for new ones to enter simply because it is a must to get it.

1 – 1QFY24 Business Updates. Frasers Logistics & Commercial Trust. 30 Jan 2024. https://flct.frasersproperty.com/newsroom/20240130_214656_BUOU_QWI72KXHOX61KRIR.1.pdf (accessed 14 Apr 2024)

2 – Completion of the acquisition of the remaining 49.0% interest in each of Nex Partners Trust and its trustee-manager as an interested person transaction. Frasers Centrepoint Trust. 26 Mar 2024. https://fct.frasersproperty.com/newsroom/20240326_212947_J69U_JBZQX6UOU2EAHM9N.1.pdf (accessed 14 Apr 2024)

3 – Circular to unitholders in relation to the proposed acquisition of the remaining 49.0% interest in each of Nex Partners Trust and its trustee-manager as an interested person transaction, p30. Frasers Centrepoint Trust. 4 Mar 2024. https://fct.frasersproperty.com/newsroom/20240305_225314_J69U_L8NR94BDT0MKA9D7.2.pdf (accessed 14 Apr 2024)

4 – ibid, p32

5 – Lim, Jessie. Paragon Reit rejects Cuscaden Peak Investments’ offer to buy The Seletar Mall. The Straits Times. 29 Feb 2024. https://www.straitstimes.com/business/companies-markets/paragon-reit-rejects-cuscaden-peak-investments-offer-to-buy-the-seletar-mall  (accessed 14 Apr 2024)

 

Windfall And What To Do With It (Investment Wise)?

Sometimes we may have the chance, whether known (e.g., endowment payouts, inheritances, etc.) or by luck (e.g., lotteries), of obtaining a windfall, which is the sudden drop of cash or capital onto one’s lap. It is a pleasant surprise to get one, but the main challenge comes immediately after, which is what to do with it. On a personal level and being materialistic as most humans are, the urge to splurge on things that were both wanted and needed is there, such as the fancy car one desired, a meal at a high-end restaurant, and/or giving money away for altruistic or ego reasons, or both. The examples cited are not far-fetched as I had witnessed them personally, and in some instances the windfall dried up as fast as it came, and the recipients just went back to their normal lives.

One of the etiquettes that I had learnt about personal finance is that finances are personal. Unless being requested, I would not advise in what they wanted to do with the monies and/or capital, and even if they did, it is just an advice and up to them whether to take it or not. Admittedly deep inside me, I may be lamenting on the way how the windfall recipient is spending on some deemed frivolous stuff, but I also remember that those are their monies, not mine.

 

Windfall Planning

Though sounded a bit absurd, I do have a “windfall planning” spreadsheet in place to guide me on what to do should it fall onto my lap. I had initiated this after seeing the aforementioned examples about people not knowing what to do windfalls and then just spend it off, mostly without thinking. Though the numbers vary, but the splitting percentages are about the same across; portions to charity, contributing to family, partial/full settling of long-term loans, etc., and of course, investment. For this post I will focus on the investment part, because gaining a windfall is one thing, holding it sensibly is another.

 

Deploying The Windfall For Investment

The deployment would very much depend on the stage of investment one is at. If the recipient is a total newbie, then the windfall would be better off being in a safe institution such as the government (via Singapore Savings Bonds and treasury bills) or in a bank (as a savings or fixed deposit) for the time being as he/she is learning more about investing.

If there is sufficient investing knowledge obtained, then it could be used to start a portfolio consisting of one’s preferred asset class allocation. This can be done immediately to capture the current characteristics of the asset classes as at a particular economic situation, or done gradually over a year’s time if immediate is not comfortable.      

If an investment portfolio is already in place with the set asset allocation, a windfall would bring in cash injection that would enlarge the cash portion of the portfolio (in terms of The Bedokian Portfolio). Theoretically, it would be preferred to deploy the capital immediately to rebalance back to the desired allocation levels, especially for passive investors like Bob, and to avoid cash drag. However, for an active, active-passive, or passive-active investor with some individual counters and exchange traded funds (like me), he/she could deploy quickly in the latter and keep some for the former, as the counters may not be in the “price is right” range.

Related post:

Gaining And Holding

On The Degrees Of Diversification

Apart from commodities and cash, the Bedokian way of diversification, if it is to be done, is from top to bottom: asset class, region/country and then to sector/industry. Some of you may be wondering, why the further diversification below asset class has to be in that order.

 

Region/Country

Generally, an asset class in a region or country will perform differently from another. For instance, the table below shows the stock market (i.e., mainly of equities asset class) returns of various countries between 2009 and 2023 (Figure 1):

Fig.1: International Stock Market Returns, 2009 to 2023. Source: Novel Investor (www.novelinvestor.com). Click to enlarge.

Looking at some years, we had the extreme case of 2015 where the Danish index gained 24.4% while the Canadian index dropped 23.6%. In the year 2018 which all indices were negative, the Finnish one was only down by 2.2% while the Austrian one suffered -27.1%.

The same goes for real estate investment trusts (REITs). According to data from NAREIT (Figure 2), for the regions of North America, developed Asia, developed Europe and emerging real estate showed different returns for the years 2021, 2022 and 2023.

Fig.2: Excerpted from REIT Performance 2023 Q3, with 2021, 2022 and 2023 YTD shown in last three columns. Source: NAREIT Quarterly REIT Performance Data (www.reit.com). Click to enlarge.

Bonds wise, using another matrix of different regions/countries (Figure 3), the differing results were like that of equities’ in Figure 1:

Fig.3: Fixed Income Country Returns, USD Hedged, 2009 to 2022. Source: Alliance Bernstein and Bloomberg (www.alliancebernstein.com). Click to enlarge.

As what the heading said in Figure 3, no country wins all the time.

 

Sector/Industry

Why and how each region/country’s asset classes behave differently is very much impacted by the next layer of diversification, that is sector/industry. The proportions of the sectors/industries are different in the economies of various regions and countries, and this in turn drives the outcome of returns of that area. Socioeconomic, geopolitical, and regulatory factors also play a part in the overall scheme of things. Thus, Country A’s banking sector may thrive more than Country B’s; Country C’s property market is worse off than Country D’s, and Country E’s government bonds are higher yielding than Country F’s due to the former’s lower ratings.

Putting it to real life examples, Figure 4 shows the comparison between the United States (US) and China healthcare sector, with convergences and divergences throughout a 10-year period. Another reality is on REITs where US office property sector is facing a crisis whilst Singapore’s are having a better outlook, so far.

Fig.4: 10-Year Comparison between US Health Care Select Sector Index and S&P China A 300 Health Care (Sector) Index (USD). Source: S&P Global (www.spglobal.com). Click to enlarge.

 

Exception: Thematic Investing

The main exception to the above diversification order is thematic investing. Blending both region/country and sector/industry, exchange traded funds (ETFs) that use thematic investing tend to bundle in companies from sectors/industries that are part of the theme, regardless of their nation of origin. Using an ETF which we are vested, the iShares Global Clean Energy ETF (ICLN)¹, it contains companies from the information technology, utilities, industrials, etc. sectors/industries from countries such as the US, China, Denmark, India, etc. 

 

Disclaimer

Disclosure

The Bedokian is vested in ICLN.

 

1 – iShares Global Clean Energy ETF. iShares. https://www.ishares.com/us/products/239738/ishares-global-clean-energy-etf (accessed 31 Mar 2024)

Rate Cut, Whenth?

One of the most anticipated moments in the market would be the announcement of a rate cut by the United States (US) Federal Reserve (Fed). In the recent Fed meeting held around a week ago, they are expecting to go through three rate cuts in 2024. This news had sent the markets to a rally (at least for the US and our local Straits Times Index). While we feel some exuberance over this, we need to be cautious, too, on how the actual thing may unfold in the months to come on interest rates. Below I will describe four snippets on why we should not be too held up by excitement and exercise some prudence in our investment decisions.

Picture credit: Pexels from pixabay.com

#1: Markets Are Forward Looking

This is typically a given, as expectations are a major driving force in determining the market sentiment. Some of these expectations are calculated by analysts, e.g., a fall in x% in interest rates would reduce y% of interest costs of a company or industry, thus providing an additional z% of profits. Other expectations, however, are fuelled by blind optimism which are usually baseless and this may cause them to be overblown. If the super-optimistic target is not reached after reality sets in (e.g., rate cuts did not happen, see #2), then the price or index will fall hard.

 

#2: Rate Cuts Expected

When one expects something, the person is holding the hope that it should happen. As this is real life and not a fairy tale, the word “hope” is one of the dangerous words to use in investing, for one does not know whether it will happen or not. It is important to know that the Fed makes interest rate decisions by looking at economic data such as inflation and unemployment. A plan is made when certain conditions are met, but if during its execution something else crops up then it must be readjusted. This meant there is a possibility that the Fed may rescind on their three-cuts schedule.

 

#3: Cuts Are Not Drastic

Even with rate cuts imminent, it is likely not going to be reduced by a huge number each time. The Fed had mentioned that the cut, if it comes, would be on a gradual approach, so if the no-cut scenario in #2 does not happen, then it is probably a gentle step-down rather than a big drop.

 

#4: Effects Of Cuts Take Time

Though a rate cut signifies cheaper borrowing costs, this effect takes time to realise as some of the current debt held by companies and real estate investment trusts (REITs) were based on rates during the last couple of years. This means at least for another year or two, the companies and REITs are shouldering the high cost of borrowing until the debt could be swapped or restructured to the current lower rates. Hence, looking out for strong balance sheet and cash flow are important during one’s analysis of a security in question, like whether it can sit out comfortably in the next few years or so.

 

What Now?

REITs had been hammered, and treasury bills and fixed deposits were getting popular in the last two years, all thanks to a high interest rates. If you are an active investor, and if your portfolio allocation allows it, you may want to consider looking at the above two, for the former they may not stay low for long, and for the latter they may not stay high for long. For REITs, as I had highlighted in #4, it is preferable to go for the healthy ones, like with lower gearing and in a region/country/sector which is thriving come rain or shine, e.g. Singapore retail scene, provided the price is right.

 

Related post:

ZIRP Is An Anomaly

Gaining And Holding

There was an interesting point brought up during one of my group investment discussions:

If a crypto trader had earned millions back in early 2021, did he/she ever thought of exiting the volatile positions and put them in a, say, dividend portfolio to earn cashflow?

 

Putting the crypto context aside, this could mean other scenarios, too, like:

 

I had a 2,000% gain on Nvidia over the past five years, and now I want to exit and invest in a portfolio to preserve it. How to go about it?

 

From my anecdotal observations and readings, the above two italicized situations are very far and few between. The reason is simple: with their given risk appetite and methodology, investors/traders would stick to what they are familiar and comfortable with. A switch to investing for safety, like cashflow (e.g., dividend investing) for a trader is like a total shift of paradigm and mindset for them. Especially when the accumulation stage, i.e., raking in those millions, occurred over just a short time (five years or less), the propensity of continuing the strategy that brought in the dough would be high as the conviction of it works all the time is in their minds.

 

Every Day Is Not A Sunday

 

In a battle, both gaining and holding an objective or position is crucial. If we just keep on attacking and capture places along the way, very soon our resources are stretched, and if we are not careful, the other side would probably launch a successful counterattack which may wipe off our earlier gains. Therefore, in military strategy it is important to learn offensive and defensive tactics to minimise losses and to strengthen the overall positions.

 

The abovementioned can be employed in real life investing/trading as well. The first realization is that for every investible instrument out there, every day is not a Sunday; stocks, cryptos, real estate investment trusts, precious metals, etc. have their ups and downs. Though these may go up eventually over time, but we would not want to go through the heart attacks of experiencing ups and downs too often. 

 

While I do not encourage a full shift and I acknowledge the urge of trading is there (disclaimer: the Bedokian has a trading portfolio), a partial move of gains from the high volatility instruments to deemed safer ones would be advisable for wealth preservation. Thus, it is good to learn other forms and methodologies of investing that in a way lessen the losses, and a good one is to adopt a barbell portfolio strategy of having high risk/low risk assets in equal weights, and/or to create a conservative diversified portfolio with blue chip equities, bonds, exchange traded funds, etc.

 

High-Ho Silver!(?)

Canadian Silver Maples (Picture credit: lecho0047 from pixabay.com)

Gold had recently hit an all-time high of USD 2,190-ish due to the expectations of a cut of US interest rates coming soon. To explain further, a cut in the rates would bring down the demand of the USD, and gold, being typically seen as an USD substitute and non-yielding asset, would go up in value (see my post here for the relationship between gold and USD). 

 

With this, naturally its counterpart silver would be expected to go on an all-time high soon, yet the current price of the grey metal was nowhere near its two zenith points back in 1980 and 2011.

 

The first high was on 18 Jan 1980, when it traded around USD 49.45 per ounce (oz), and that was the result of market cornering by the Hunt brothers (article of this story under the Reference section below), so this was not due to pure economic reasons. The second high occurred on 29 Apr 2011, where silver reached close to USD 49 per oz. Depending on the news source that you read from, this rise was attributed to reasons ranging from the emerging Eurozone crisis, the silver supply chain issues, to the rising demand in its use of solar panels. In both cases, it went back to around their pre-spike price levels after a while.

 

Both gold and silver, though classified as precious metals, have different applications and use cases, thus giving the notion that both are the same and different simultaneously. Gold is mainly used for jewellery and investment, but it also sees some applications in the electronics field. Silver, on the other hand, has a heavy utilization on top of the ones for gold such as photovoltaic cells for solar panels, medical uses and even a component in the upcoming trend of electric vehicles.

 

Silver As An Investment

 

Three main ways of directly investing in silver would be via physical (bullion, i.e., coins and bars), securities (e.g., exchange traded funds (ETFs)) and precious metals savings accounts.

 

For physical bullion, the tips of investing in it would be similar to that of gold’s (see here). However, the premium for silver is higher than that of gold’s. For instance, based on online prices of a bullion dealer, a 1-oz silver bullion’s bid premium is around 15% over spot as compared to a 1-oz gold of 3% to 4% or so. Also, for a given amount to invest, the quantity of silver would be larger than gold, so storage is something to ponder about.

 

If going physical is not your cup of tea, then there are ETFs available, but they are listed overseas and, in my opinion, only a couple are suitable enough (e.g., SLV ETF). In the case of savings accounts, a couple of local banks provide this service.

 

The fundamentals of investing in silver (and gold) are very different from equities, real estate investment trusts and bonds. A popular way is to use the gold-silver ratio (see the write-up here for more information), while others use technical indicators such as lines of resistance and support, among others.

 

How Much Silver To Invest

According to the Bedokian Portfolio, the commodities asset class which silver belonged to stands at about 5% to 10%. There is no hard and fast rule on how much silver to invest in, so in my view it is up to the individual on allocating it with the gold and crude oil, the other two commodities for the asset class.

 

So now begs the question, will we see a high in silver prices like the time in 1980 and 2011? 

 

Only time will tell.

 

Disclosure

 

The Bedokian is vested in physical silver and SLV ETF.

 

Disclaimer

 

Reference

 

Beattie, Andrew. Silver Thursday: How Two Wealthy Traders Cornered the Market. 1 Feb 2024. https://www.investopedia.com/articles/optioninvestor/09/silver-thursday-hunt-brothers.asp (accessed 9 Mar 2024)

Rational Exuberance?

For those who are experienced in the markets, having that “every day is a Sunday” feeling shared by many spelt signs of a possible meltdown looming over the horizon. In other words, the deemed unrealistic feeling that things will keep going up is called “irrational exuberance”, a term made famous by the then Federal Reserve chairperson Alan Greenspan back in the mid-1990s when he was describing the internet bubble, which eventually popped.

Going by English definition, the roots of irrational are purely psychological and emotional, as opposed to rational where objectivity and fundamentals hold key. Throw in the word “exuberance” which means excitement and is already a mental state, we can see why irrational exuberance is something we need to be wary of when it reared its head in the markets.

 

Now back to the blog post title, are we able to have a thing called “rational exuberance”? It sounds paradoxical, as it implies getting excited while keeping a cool mind. Imagine standing next to your favourite idol and yet display a cool composure (i.e. no giggling or hands-on-the-head-with-mouth-open expression) while having a joint photo taken; to me, that is a form of rational exuberance.

 

Yes, you can have those moments of rational exuberance. Playing again by word meanings, we can devote our investment energy in an objective way. One example would be to calmly scout for bargains when the markets are down. Another is to average up a security when the price is going up and you can still calculate its potential of climbing further. In other words, do not be swept by the maddening crowd, but instead going enthusiastically and rationally along the right direction.