Saturday, November 1, 2014

REITs: Credit Rating and Yield Mispricing?

The other day I was curiously just wondering to myself, is there any link between the credit rating of REITs and their corresponding yield?

It would make sense that the best credit rating REITs would also have the lowest yield, since they are the "safest", while REITs with lower credit ratings would have a higher yield. I would imagine it is something similar to bonds, from the investment grade spectrum, down to the junk stuff.

I reference a post that I made early on about credit ratings, as well as Wiki's table for Credit Ratings to help me come up with the info below. I also used the data from Reitdatato get the yields.

First, the Investment Grade stuff:


Followed by the Non-IG stuff:


Can you spot any "mispricings" based on credit rating alone? 

Some of these REITs seems to be yielding a bit high compared to their peers within the same credit rating group, no? MapleTree GCC and SoilBuild seems to look awfully attractive on this chart, don't they?

This chart like this makes me feel like going out and picking up some of these counters, especially the ones within the same grouping but with higher yields. However, credit rating and yields shouldn't be the only thing prospective investors should look at. I personally think that P/NAV is the very important metric to look, but there are many more things to consider as well.

Then again, perhaps the stock market doesn't really care about things like credit rating, since shareholders are equity holders, not credit lenders. I would just imagine the companies with the best credit ratings would also be the best companies to own as a shareholder too, is that something too far off to reason?

Anyway, this is just something that I was thinking about to myself, and since I went out to gather the different information from all over, I just thought I'd share my findings.

4 comments:

  1. Hi MH,

    Thanks for sharing your research. Personally, i do not think credit ratings can influence investors' appetite for the REIT, and hence influence the price and yield.

    There are other factors which may have a bigger impact. For example, the sector which the REIT belongs to (industrial, commercial, retail, hospitality, or healthcare) as well as things like familiarity bias might play a bigger impact on the price.

    Just my opinion.

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    1. Hi S-Reit System Investor,

      I think familiarity bias does play quite a big impact on price! I do think sectors play a large part too, since the more defensive ones are usually more bid than the more cyclical ones.

      I agree, credit ratings doesn't seem to show a very strong correlation that is useful. It does correlate slightly, but definitely not enough to make an informed decision on. Maybe it's only useful as a rough guideline with a wide margin of variance.

      Thanks for your comment!

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  2. Hi GMGH

    Ascendas certainly looks interesting there based on your chart.

    Even though ascendas has one of the best ratings there it probably means they are able to refinance easier at a better rate should they require since their track record is excellent. A little like our credit score to be honest.

    There will somewhat be a positive correlation though I doubt it will be very straightforward.

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    1. Hi B,

      Yes, Ascendas does look very tasty, heh. Easier refinancing with probably lower cost of debt, that would help shareholders right? Kind of a secondary effect.

      I agree there is a positive correlation, but because it isn't so direct, there seems to be quite a big room for variance. Perhaps there is a much stronger correlation to their bond yields, but I think that is a bit out of my league since investments to those kind of bonds are too big for me, haha.

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