Sunday, September 7, 2014

Sunday Weekend Roundup: Visualizing Risk and updating my REIT strategy

This week's edition of Invest in The Sunday Times didn't have any strange tips or advice, so I think it was quite a good read.

One of the more interesting things that I stumbled upon this week is a video interview with Oaktree's Chairman Howard Marks on Reuters.

They were discussing his view on risks, which he talks about in his letter that he sent out to his clients.

What I find interesting is his visualization of risk. He shows the classical risk-reward model that we are all so familiar with:

as well as his visualization of risk:

I think his visualization of risk is really good. However, I sort of modified the first graph to show what I think is easier digested and understandable. 

Instead of thinking of just the expected returns of an investment, investors must realize the RANGE of returns that their investment might give, as well as the PROBABILITY of such returns happening.

Yes, the stock market long run average is 8% returns, but we know that it varies from year to year ping ponging around the upper and lower bounds. By taking on riskier investments, you must realize that you now also assume a much larger downside risk.

A whole range of scenarios might pan out, but in the end only 1 of them will.

I think watching the video interview and having him explain it is really the best thing ever. I feel extremely enlightened after watching his video.

Anyway, onto my own personal REIT strategy, I have to admit that I have been pretty lazy in my analysis these days. However, I really do plan on finding time to spend a long lazy day just crunching in numbers and building my database.

One of the things that struck me that I ought to do is to make a P/NAV graph for the REITs that I am looking out for. I remembered about doing this once I saw the chart that Marubozu posted up.

When it comes to investing in REITs, I think the single most important factor is purely P/NAV. That is it. If I only had 1 metric to make investment decisions in REITs my whole life, it would be P/NAV. With that being said, I have been doing a pretty good job in ensuring that my investments are usually purchased at a discount to NAV. However, I think what can be improved is that instead of looking at P/NAV as a static time frame and comparing it to others in the industry, it would be a lot more useful to have the individual name's historical P/NAV over time.

From his graph, some of the names that are near their low in P/NAV are:

Ascendas H Trust
Cambridge Industrial Trust
CDL H Trust
Far East H Trust
MapleTree Industrial Trust
Sabana REIT
Saizen REIT

The ones that look the most promising to me are Ascendas H Trust, Cambridge Industrial Trust, MapleTree Industrial and Sabana REIT.

I will be looking towards coming out with a full fundamental analysis of these 4 companies soon, including metrics like P/NAV, cap rate and whatever other metrics I find useful.

Maybe I will come up with my own historical P/NAV graph for these few stocks if I can find the information easily.


  1. Hi GMGH

    Have you ever thought why these reits you mentioned are always trading below their nav even in a positive reits environment such as low interest rates? If they cant go above the nav at such positive environment when would they be able to do that? Just a little to.think about ;)

    1. Hi B,

      Yes, I have thought about it and I do find it somewhat strange. I think the best examples for REITs that have always trading below NAV are Fortune and Saizen.

      I am not sure, but my reasoning is that the cap rate of their properties are not sufficient at NAV for Singapore investors to take the risk of overseas assets which do not generate yields which they are used to. Their price is therefore adjusted down to deliver higher yields which investors find sufficient, which roughly is in the 6%+ range in the Singapore REIT market.

      For example, the 4 residential J-REITs in Japan are Nomura, Advance, Kenedix and Comforia. These 4 residential J-REITs give out 3.6% - 4.4% dividend yield. Although they have a bigger market cap, I don't think the "small" cap discounting of Saizen REIT at a yield of 6.7% is quite warranted. If Saizen was trading in Japan, I would imagine the price to be bid and yield to drop in the 5.x% range, meaning it is trading at close to NAV. Residential REITs at 5% are actually still attractive if compared globally where residential REITs are yielding about 3.5%. Even a property owner today renting out their residential property would be hard-pressed to get net yields of over 3.5% after considering related fees and expenses.

      I think that Singaporean REIT investors are just used to a high 6+% yield. Since they demand this sort of yield, lower cap rate assets are always selling at a discount to boost the yield regardless of the safety attributes of their segment. However, I am not sure if Singaporean investors realize that the REIT yields in Singapore are one of the highest worldwide. Even in yield friendly Australia, average yield is about 5%.

      Perhaps because our REIT market does not have as many niche segments as other markets, all REITs are somewhat desired to produce 6+% yields regardless of their segmentation and hence, specific segment risks.

      B, what do you think is the cause of depressed P/NAVs in some of the REITs? I think the catalyst for a higher P/NAV would be when investors realize just how attractive REIT investing in Singapore is compared to our global peers. Our REIT industry's P/NAV would probably shift up gear to move from the current value of 1, to about 1.2 which is common in the US market.

  2. Not sure were you already in reits during 2008.

    If not, you may like to check with those guys who were in reits during 2008 to have some ground understanding. What really matters for reits.

    1. Hi Uncle CW8888,

      Unfortunately I was still doing NS at that time, fantasizing with my bunkmates to buy a second hand car for $15,000 and drive to camp together, haha!

      Do you know who are the guys that were in REITs during 2008? Then I can find out what matters!

  3. If I'm not wrong, NAV = total asset - total liability. where the value of total asset is varies due to yearly property valuation.

    1. Hi Anon,

      Yes, you are correct, NAV is the total assets minus away the total liabilities. Property valuation does make the asset values fluctuate, so the NAV is definitely not a static number.


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