Time value of money

There has been a flurry of IPO’s in 2017 and given prevailing market sentiments have been well received thus far, all but REIT’s that is. Here are all the Reits listed on the SGX in 2017, Netlink trust (17/7), Keppel KBS US Reit (9/11) and Cromwell European Reit (26/12).

For a security class whose value is so tightly linked to its yield, there were some obvious reasons for this phenomenon. All 3 IPOs had a delayed dividend payout of about 6 months to 1 year from listing. Hence, as a yield investor, one could wait and observe the first quarter financials before deciding if the Reit was worth its price.

Unsurprisingly, all but Keppel KBS Reit opened unchanged, with Cromwell even falling below IPO price. But now, after the first reporting season, all are trading above their IPO prices as the dividend payout date looms.

This phenomenon begs a few questions..

Q1: Does this mean all high yielding securities are worth subscribing to? Given that the closer payout dates loom the more certain the Reits value?

I guess not, one does not have to look far to remember HPH reit. Hyped up as owning a portion of Lee Kah Shing’s empire, the stock quickly became one of the biggest falling knife’s in the business trust universe when it became certain that it’s yields were never going to live up to its price.

Q2: Is one season’s financials sufficient to determine the growth trajectory of the securities in question?

I think in the short term, a good earnings report might show that a stock is relatively undervalued (low P/E). But i guess more effort needs to be used to determine if the yields are sustainable or likely to rally further.

I remember in 2016, when i was picking my first Reit that i tended to compare one against another to check on their relative valuations. For example, among Reits within the same PE band, i would compare yield, net gearing and financing costs to come to a conclusion on the outlook of the Reit.

The subsequent rally in 2017 proved that this was somewhat flawed. Institutional and yield seeking investors require a level of certainty on distributions. In 2017, the counters that rallied the most were the brand named Reits with sound fundamentals in growth sectors with quality assets and large AUM. One has to remember that while economic factors weigh a good deal, good quality properties can continue to experience positive rental reversions, when the overall market remains weak.

In conclusion, Folks who want good quality high yielding Reits at the right prices have their work cut out for them. They will have to discern if the current environment makes a for a perfect storm for the Reit and whether it ride the storm to sunny days again.

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