When it comes to investing, I’m a relative “newbie”. I started only in 2012, and it is pretty funny when people assume that because I blog then I must be a stock market veteran or something like that.
Having said that, I do feel that my reaction towards the Greasy Panda (awesome name) is rather muted. It is during bad times when people start getting paranoid and second-guessing their decisions. Don’t succumb to it!
Rather than focus on your red numbers every day, take the time to chill and engage in non-finance related stuff. If not, read more and up-the-level of your investing skills!
In the realm of investment, my primary focus is on index investing whereas my (small) secondary focus is on REITs. Well, we all have our own poison.
Till date, I haven’t written much about REITs but this year, I’m considering chipping in with a couple of short posts to supplement what I’ve been seeing on the SG blogosphere. Besides, blogging about something typically allows me to gain a deeper understanding of the topic – win/win situation!
I’m not a good technical writer so I shall keep things in simple, layman language. Cool? Now, nothing too serious and no stock picking, but I might give selective examples from time to time.
Are You Paying Too Much?
Dividend yield is the number one consideration for many REIT buyers, but another important number we should be paying attention to is actually the manager fees. A REIT usually will have one or more properties, and would thus appoint a manager to well, manage the pool of properties. Below is a table from The Straits Times from July 2015 illustrating the fees paid by REITs.
A basic understanding of REITs fees, as I know it, are as follows –
- Base fee
- Performance fee
- Acquisition fees – buying properties
- Divestment fees – selling properties
While the base fee, acquisition/divestment fees are pretty standard affairs, performance fees are calculated based on different criteria by different REITs. For example, fees could be peg to various metrics such as gross revenue, net property income or dividend per unit.
One would think that a metric such as gross revenue could be abused in the sense that the manager simply buys more and more properties with no regards for their true value. Quantity over quality?
In theory, pegging fees to a metric such as DPU would be the “right” thing to do, since it aligns the manager’s interest with the investors. Or is it?
Every Metric Can Be Abused
Consider the hypothetical scenario of a REIT which is issuing bonds to raise funds, because a huge amount of debt is due for repayment. Assume that the REIT has decided on two options –
- Issue 6-year bonds at 3.5% per annum
- Issue 3-year bonds at 2.2% per annum
Obviously, it is cheaper to issue 3-year bonds. Maintain higher DPU, investors gain and great for the manager too. Common sense right?
However, sometimes we need to look at the situation from multiple dimensions. Let’s factor in the outlook.
What if it is a volatile environment in which interest rate is extremely likely to spike over the next years? Suddenly the 3-year bonds is looking less attractive when we take a long term view. Perhaps the manager feels that it is more prudent to take the opportunity to lock in 3.5% for a longer period of time, even though it will result in lower DPU increase for the unit holders.
On the other hand, an incompetent (or greedy) REIT manager may pursue DPU growth mindlessly for short term gains. I’m not saying any REIT is behaving as such, but simply saying that any system can be abused.
The Most Important Factor
To me, it all boils down to a good REIT manager that has the experience and competency to juggle both the short term and long term interests of the investors. When evaluating the attractiveness of a REIT, the most intangible factor of how “good” the REIT manager is may turn out to be the most important factor. How “good” is your REIT manager? Dig through its past actions and you may find some clues for yourself.
Compare the two different REITs debt maturity profile below – a world of difference isn’t it? One REIT’s profile is monstrous and stretching all the way to 2027, while the other is looking very different with the bulk of it due (gasp) in this year.
Remember what I said about having a multiple-dimension view? Just because the two debt profiles look like heaven and earth in comparison doesn’t mean one of them have not idea what they’re doing. We must always look at the big picture. Homework for you – guess the two REITs above that belongs to the same sector.
Some REITs have proven to be rather resilient in this new year. Need more REIT reads? Check them out below –
More Than Index Investing
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