Reits

G'day,

Looking for some resources to educate myself about what to look for when purchasing units/shares in a REIT (Real estate investment trust).

I'm looking for something to provide an after tax yield over my current interest rate on my home loan (currently 6.66% Variable).

I've signed up to Commsec, so i have an account to purchase units now. Just looking for something to assist me in avoiding silly mistakes.

Any help would be greatly appreciated.

Regards,

RH
 
There's quite a few that will give you that yield at the moment - GOZ, IIF, LEP spring to mind.

Not really what you're asking, but personally they're not my cup of tea at the moment. There is generally no franking, so it brings down the effective yield, whilst there are plenty of other good companies out there (imo) that offer a better yield at the moment, as well as franking to give you a better effective yield.

Also be aware of the usual caveats with REIT's such as write downs, some may be still paying unsustainable dividends, debt covenants, lower growth prospects etc.
 
Hi Steve,

Thanks for that.
Could someone explain the terms "write downs" and "debt covenants"

Steve could you elaberate abit more on these companies that you feel are returning better (of course i'll conduct my own DD) but are these not REIT's you talking about?

hehe wow steep learning curve eh.

Regards,

RH
 
OK I'll give it a bash, but obviously don't take my word for it and do your own research blah blah :D

Write downs is when the value of the property the REIT holds are declining. So this has been widespread over the last couple years as commercial properties have been falling in price. The REIT then has to lower the value of the asset on it's books ie. write it down. So the office block that was worth $100M last year has dropped to $80M this year. The company will then take a $20M write down in this properties carrying value which will result in it making a loss for the year (ignoring effect of the rest of the portfolio). However this write down hasn't effect the properties income assuming nothing has changed with it's vacancy rates, so the cashflow of the REIT would remain the same and they can continue to pay you dividends.

This of course would not be the case in a lot of instances at the moment which is what you need to be weary of. On top of the write downs there have been increasing vacancies which will effect the REIT's income. Plus as their debt matures, they need to find bankers willing to roll over that debt into a new facility, and in the current environment that also usually means a large increase in interest costs - which will in turn effect cashflow, and this will effect your dividend.

Also, as a result of these write downs, the REIT may also be put in breach of it's debt covenants with it's lenders - the loan contracts and conditions the lender gave the REIT money to purchase the building with. Covenants include loan to value ratios, interest cover etc. For example they may be allowed a 70% LVR over their portfolio, and whilst they were sitting on 75%, write downs could drag them down to 68% pulling them into default and at the lenders mercy. Then the bankers can really have some fun extracting the cash.

Anyway, the above is by no means a complete explanation, but it should provide you with some basics to do further research on. Whilst a lot of the above has occurred for many REIT's already and is now accounted for in revised earning guidance etc - it shows to be weary of any REIT's still promising very high dividends. Keith has given you some good examples of disaster stories of recent times.

As for other shares, I won't go into huge detail, but a few I like include: BEN (9.2%), DJS (8.7%), GUD (9.7%) and MTS (8.3%).

I'm by no means a professional equities investor - so don't follow my advice! They'll all probably tank! ;)
 
I should add, the yields above are not necessarily accurate at today's prices. I just grabbed the effective yields off my spreadsheet, but you can easily look up the current figures using your ComSec account.
 
the problem is that almost all REITS have overspent (using too much leverage) what they will make for a long time.
And while it may seem the write down of values and sometimes slight decrease in rental income, they are still technically bankrupt.
Their liabilities exceed their assets, their current liabilities far exceed their current assets and they are very highly geared.
It's like taking a punt, but things don't seem to be improving all that much.
That's not to say that companies can't come back from the brink, a while ago I took a punt on Burns Philp but at the time it was the only one on the board and good cashflow.
 
To provide some more information.

- I'm looking at from a long term buy and hold point of view
- Passive type investment, not wanting to commit large gobs of time and effort to managing the flock
- Wanting something that will have some growth over time.

I've done some cyber surfing and some forum reading and i've come across

  • Exchange Traded Funds (ETFs)
Now my basic understanding is that this is a fund that purchases a whole bunch of shares in different companys (you can have a area specific ETF) bundles them together and sells it as a unit to an investor who then has exposure to all those different companys getting an average of their performance.

I had a look and their is 2 of these products listed for REITS

FIX Aii S&P/ASX 200 Financials x A-REITs
SLF SPDR 200 Property

FIX doesn't look like it's been around for long and just started, SFL has been around for a few yr's and according to the DATA on commsec is yielding approx 7.2%

From the financial's

- 30k in offset
- 40k in LOC

Would Spending 70k on the above type of product with a long term view be a newbies mistake? If so can you please advise why?

7.2% yield - I/R 6.66 = 0.54%

0.54% of $70,000 = $378 p.a C/F+

Now to me that look's like a very small amount C/F+ so i would be looking for some growth, Would these ETF'S provide that?

I would be looking at contributing additional funds to something as they become available and looking at this from a long term perspective (10+ years) as im only 23yrs old.

Sorry for the really newb questions, but i sappose if i don't ask i won't learn =)

Regards,

RH
 
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Don't get hung up on yield with REITS and ETFs and spiders. It's a highly manipulated figure. Focus on the quality of the investments/companies within the funds.
 
I've been doing abit of reading through out the day and had some thoughts and learn't some new things. Would like to get peoples opinions on the below.

- REIT's seem to have dropped in value heaps recently (last 2yrs)

- Is their any data/research/analysis online that gives an educated outlook on what's install for the Australian commercial property sector over the coming years. (thinking of it now i'll have a quick look at JLL and colliers websites)

- I'm going to seek some professional advice before committing.

The yield side of the fence im happy CBA website showing 7.6% now i just have to do some digging on the actual growth prospects.

Regards,

RH
 
To provide some more information.

I'm looking at from a long term buy and hold point of view Passive type investment, not wanting to commit large gobs of time and effort to managing the flock
- Wanting something that will have some growth over time.

i'm sure most people pre GFC where thinking the samething.
Check out General Property Trust, one of the most widely held REITS amongst retail investors. The unit price went from something like $5 to $0.6 (did hit a low point of around $0.2). (they have subsequently done an adjustment to their units on issue reducing the number of shares on issue and increasing each individual unit price (something like zimbabwei with its currency)
Now this doesnt even include share dilution from all the capital raisings. One share held before the GFC was a lot less (something like only 25%) after capital raisings.


So the moral of the story is there is no buy and hold. YOU DO NOT CONTROL THE COMPANY, YOU DO NOT HAVE SIGNIFICANT OWNERSHIP WHERE YOU CAN INFLUENCE THE BOARD.

Therefore you have BUY AND HOMEWORK, just like owning any other share (or unit in a REIT). Buy and homework means you regularly check what your company is doing. When it comes to annual report/half year report, you go through all the details including the notes to the accounts.

If you are not prepared to do this you become potential CANNON FODDER.

Disclosure:
I made very good money investing in this stock during the GFC and taking advantage of all the capital raisings, but im out of the position now.


I've done some cyber surfing and some forum reading and i've come across

  • Exchange Traded Funds (ETFs)


  • this is not a bad way to get exposure to the sector as a whole if you feel it will create outperformance against other sectors.


    I would be looking at contributing additional funds to something as they become available and looking at this from a long term perspective (10+ years) as im only 23yrs old.

    mmm long term perspective, i think some of those who had REITS pre GFC will be waiting around 20 years, before they see a return of their capital, never mind a return on their capital.

    Sorry for the really newb questions, but i sappose if i don't ask i won't learn =)

    this is good, you only learn by questioning and questioning and questioning.

    Let me ask you another question,
    you have an exposure to residential property right? i presume this is managed by a property manager right?
    If so do you read the monthly property statements send out by the property manager?
    ie every month you get a report of income in, expenses out.
    Do you read this, or do you just say, nah i'm in it for the 'long term'.

    Next question:
    do you look at your financing position with the bank?
    do you look at your LVR ratio?
    or do you just say, nah i'm in it for the 'long term'.

    Direct property ownership and indirect property ownership through reits is no different. YOU WANT TO KNOW WHATS HAPPENING.
 
Thanks for the nice little kick in the nuts lol.

I look at my property statement see all the repairs and then im like "im in it for the long term" lol.
But seriously yeah some good info their thanks heaps.

My brain is bleeding abit from all the info i've digested.

I'm come back to this thread through out the week.

Regards,

RH
 
Have a look at the Commercial Property Funds thread.

Stocks mentioned in that thread include Orchard, Allco & Centro which are are no longer in existence & Valad is still bumping along @ ~10c.

Centro is still very much in existence and depending on how you play it, can be very profitable too(and this is true for all shares). E.g - I bought centro(CNP) at 9c and sold it few months ago at 34c.

It really depends on ones goals. What might be bad for long term hold maybe good for trading...

Do your own research, that way if a loss is made you will not feel that bad and will put it to learning experience, and if you make profit you will feel like an investment guru :)
 
Don't get hung up on yield with REITS and ETFs and spiders. It's a highly manipulated figure. Focus on the quality of the investments/companies within the funds.

Yes YES AND MORE YES.
Can i emphasise yes enough.

I shoud note here that there are potential arbitrage opportunities looking at lower quality REITS.

Go back through this forum to pre GFC days.
Search for CWT (Challenger Wine Trust), it was quite a popular on this forum pre GFC.
Some people where attracted to the 10% yld when the unit price was around $1-$0.9.

Post GFC its trading around 20-30c.

I took a small position last year (equal to just 1% of the portfolio) at a price of 24c.
Now its an interesting valuation proposition from here.
At 24c my yield is somewhere between 20%- 25%.

However there are two catches
(a) the rentals are approximately 20-30% over market value. With an average lease maturity of 4 years (i think its actually 4.3yrs), expect future rents at the end of lease contract to drop by at least this amount when renegotiated.
(b) the company has debt, being a REIT, it cant hold less than 10% profit. Otherwise it gets taxed at the maximum tax rate. Now there are some future refinancing issues that will come up. To counter refinancing risk, the company is reinstating its UNDERWRITTEN DRP plan. But on such high ylds, this will result in signficant dilution of ownership for those that dont participate in the DRP.

So was this a good investment?????????
The answer is open to debate:D
 
Therefore you have BUY AND HOMEWORK, just like owning any other share (or unit in a REIT). Buy and homework means you regularly check what your company is doing. When it comes to annual report/half year report, you go through all the details including the notes to the accounts.

IV,

If you have a few stocks in your portfolio, then that's a lot of "work" isn't it?

How is this different from having a regular job or being a day trader? - both of which are active pursuits.

How will you ever create a relatively passive income stream investing in stocks?

Or anything for that matter?

What investment class/asset allows you to be relatively more ''hands-off'' and with less time input?

Thanks.
 
IV,

If you have a few stocks in your portfolio then that's a lot of "work" isn't it?

How is this different from having a regular job or being a day trader? - both of which are active pursuits.

How will you ever create a relatively passive income stream investing in stocks?

Thanks.

You buy index funds when 'it makes sense to do so'.

When does it make sense, when generally the asset class is not popular.
Why when not popular?
because its generally at these times that market prices will be closer to something like realistic valuations.

Why realistic valuations?
because the popularity contest is not inflating the asset price.
 
You buy index funds when 'it makes sense to do so'.

When does it make sense, when generally the asset class is not popular.
Why when not popular?
because its generally at these times that market prices will be closer to something like realistic valuations.

Why realistic valuations?
because the popularity contest is not inflating the asset price.

Thanks IV,

So when you decide to sail off into the sunset after making your millions, most of your $ would be in index funds?
 
Thanks IV,

So when you decide to sail off into the sunset after making your millions, most of your $ would be in index funds?

I honestly dont know how to answer this question.

My target is $5 million net assets or $500k of income a year.
$5 million of net assets would require a 10% sustainalble yld to generate $500k. This would not be a passive position (ie i dont think its possible to create a passive income position at 10% ylds in the current environment).

Hence one or the other.
$5 million with still some work, or more than $5 million with less work to generate $500k of passive income.

This is further complicated by tax issues.

If i hit $5 million, i will start to create international asset structures to create more benign tax structures. This has an effect on after tax income, which changes the whole ball game again.
 
My target is $5 million net assets or $500k of income a year.
$5 million of net assets would require a 10% sustainalble yld to generate $500k. This would not be a passive position (ie i dont think its possible to create a passive income position at 10% ylds in the current environment).

Hence one or the other.
$5 million with still some work, or more than $5 million with less work to generate $500k of passive income.

This is further complicated by tax issues.

If i hit $5 million, i will start to create international asset structures to create more benign tax structures. This has an effect on after tax income, which changes the whole ball game again.

Thanks for your insights, that's just helped me clarify my own strategy.
 
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