Are S-REITs Overvalued ?


<Image credit:SGInvestor.io>




If you are having more REITs in your portfolio, the chances that you are beating STI is high as most of the REITs are having good "run" so far. Overall YTD returns for FTSE ST REIT Index is 16.5% vs STI of 7.67%. Since I have more than 42% of REITs in my portfolio, quite natural that my portfolio also outperformed STI by +6.3% with YTD returns of +13.97%.


Are REITs Overvalued Now?






From a long term trend perspective, valuation for S-REITs looks "rich " as you may see that is very close to +0.5SD trend line, a level never seen since May 2013.

You may also notice that the dividend yield for some of the blue-chip REITs been compressed to 4-5% like Capital Mall REIT/ Capital Commercial REIT/ FCT / Ascendas Ind REIT/ ParkWayLife REIT or even Keppel DC REIT.



Base on below chart from OCBC Investment Research S-REIT Tracker:

Overall Dividend Yield had also dropped from 7.1% in Dec 2018 to 6.3% in June 2019, a decreased of  12.7%  as average stocks price increased in the same period.




                                                             <Date: Dec 2018>


Of course, the valuation is still not too extreme like the one we experienced in 2007 (prior GFC) where it hit above +2SD from mean or in 2013 where it moves above +1SD, but definitely is not "cheap" or at a very good bargain at all.

Current high valuation might be due to expectation of low-interest rate from central banks around the world and it may continue to "run" for a while till real economy situation set in.

If you ask me if we should sell our REITs now? I can't give you the right answer and of course don't have a crystal ball to predict the future, but I can tell you that I am still holding more than 40% in REITs as I need the income to meet my daily expenses.

Recently I have increased my % of cash/ bond holding to more than 23% by selling some of the stocks, including 2 REITs, not because REITs are not good, just because I wanted to have more cash now in view of much more uncertainty, from trade war (which may lead to recession) to geopolitical. Of course not to compare with some of my friends who have more than 50-70% in cash, e.g Kyith ( InvestmentMoats.com) or B ( A Path To Forever Financial Freedom) 

One should decide your comfortable level of "cash " holding and not to follow others by FOMO. If you have constant cash flow from active income and at the stage of wealth accumulation, I think is still ok to have more ratio in stocks or equity than "timing " the market, so long as you have some "war-chest" ready to take advantage of Mr Market's mood suddenly changes.


Recent Trade:


Sold: Ascendas HT and Fraser L&I Trust.

- I am happy that both gave me double-digit returns of % in XIRR, especially Ascendas HT with total profit+ dividend of $46,383.

-I may revisit and buyback both REITs in future as the selling is just a matter of re-cycle and re-balancing my portfolio now, no doubt, both are good manage REITs with decent and strong sponsors.






Sold: Global Investment

- GIL was one of my top 3 holdings till last quarter and I am happy to get 9.5% XIRR since 2015, not from capital gain but mostly from dividend received.
- The stock price has gone up much after the company started the "share buyback " scheme a few months back and at one point last year, I was sitting with  -13% in paper loss ( -$16,051) for this counter.




I decided to let go of this counter although it still gives a quite decent dividend, a 7+% yield at the current price. But since this, a fund with the various asset class and I'm a bit worried about their holding of China Domestics Bond and also the CoCos from European Financial Institutions.






What Are Contingent Convertibles –CoCos?  link < from Investopedia.com>

"Contingent convertibles (CoCos) are a debt instrument issued by European financial institutions. Contingent convertibles work in a fashion similar to traditional convertible bonds. They have a specific strike price that once breached, can convert the bond into equity or stock. The primary investors for CoCos are individual investors in Europe and Asia and private banks.

CoCos are high-yield, high-risk, products popular in European investing. Another name for these investments is an enhanced capital note (ECN). The hybrid debt securities carry specialized options that help the issuing financial institution absorb a capital loss.

In the banking industry, their use helps to shore up a bank's balance sheets by allowing them to convert their debt to stock if specific capital conditions arise. Contingent convertibles were created to help undercapitalized banks and prevent another financial crisis like the 2007-2008 global financial crisis.


The use of CoCos are not allowed in the U.S. banking industry. Instead, American banks issue preferred shares of equity."



Although the 6+% of coupon rate from these CoCos looks attractive and juicy if a crisis hit and it drops to "strike price" that the conversion took place, I am not sure if we are getting the real bargain and what kind of financial institution we have invested due to this conversion, cheap may become cheaper during a crisis.

But one thing for sure is the dividend may drop since the company no longer getting the coupon after converting to ordinary shares and huge "impairment" may occur due to lower asset value. Although there might have "margin of safety" or conversion price may be very low that chances are low for CoCos to drop till it's "strike price", but hey, Black Swan could happen during a crisis...

I don't really like to take such risk as I would better buy  DBS or OCBC during the crisis as one of the safest banks in the world.

Anyway, I still want to thank GIL for giving me 9.5% XIRR  after 4 years of holding to it.




Sold: SING POST

-This is just a smaller holding in my portfolio where I try to nimble in 2017 anticipating for quick recovery in their logistic or e-commerce business.
- Even after 2+ years of waiting and collecting dividend, I am still down by -$6230 (an XIRR of -10.2%)

- Although there is ongoing  "strategic review" on their US logistic & E-commerce business recently, I have decided to let go and deploy my capital to some other counters or keep it as "war-chest" waiting for opportunities.





I had also reduced my stake in SING TEL from 6.8% in the last update to 5.2% by selling 16,000 units @ $3.44-3.46 after strong price rebounded in past 2 weeks. I am finally sitting on a profit of $16K ( including dividend) in the first time after holding for more than 3 years. This is in contrast with my investing in StarHub and M1 where I have to let go at lost.

I am not sure if I should sell more as the telco industry is still facing much challenges and competitions. Some analyst expects that dividend to be cut due to higher CAPEX and low FCF in coming years.

Can someone give me some clues?   :D


Cheer !!



Quote Of The Day :


“Life, in part, is like a poker game, wherein you have to learn to quit sometimes when holding a much-loved hand, you must learn to handle mistakes and new facts that change the odds. Charlie Munger

Comments

  1. wonderful...more and more capital gain for this year.

    ReplyDelete
    Replies
    1. Thanks for the comments. Hope it will hold till end of the year.. :D
      Cheers..

      Delete
  2. Hi! Just catching up on your blog after a few months! Same situation here, my losses from StarHub and M1, despite accounting fof the dividends I got, still is significantly over the paper profit from SingTel with dividends accrued! My UK telecom holdings are again at a loss- BT and Vodafone. This is despite money made from the Verizon disposal plus 4-5 years of dividends
    Overall most investors including pension funds, that used to be heavily invested in telecoms, have not done well
    Technological disruption - nothing can be done about it!

    ReplyDelete
    Replies
    1. Hi , Great to see you back after few months, must be going for sabbatical or long holidays ? :D Yup , the telco really not doing well in last few years , many been affected including retiree or pension funds who usually deem telco as safe income stocks. Really hope 5G / IOT or new AI / Big data technology would bring some "light" at the end of the tunnel for this industry.
      Cheers ! :D

      Delete
  3. Personally I don't think Reits are overvalued as they are relative to something. With ever lowing yield in the broad market, Reits are comparable.

    Sold all my Singtel finally. I am still 40% Reits. Build up some cash. Max my SSB, Added some relatively safe bonds too ...

    ReplyDelete

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