Reits

[Intrinsic_Value]

IV,

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


Thanks.

I will add another point here.
If you have stocks you have homework.

You are either a trader or an investor.
If you are a trader, there are basic 'market protection mechanisms' that 'insure' your position.

If you are an investor, then its basic homework.

When a market is in a secular bull phase its easy, everyone makes money.
But i question whether the market is still in such a phase, in fact the GLOBAL secular bull market may have finished in 2000 .

Refer back to my stragic investment view 2010.
In either case i'm still happy i can make money in either scenario.

 

[Intrinsic_Value]

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

Not anymore, investment thesis ceased to hold upon release of the half year distribution. Position exited at 24c and will wait for the annual report later this year before deciding what to do.

 

[Value Emperor]

Not anymore, investment thesis ceased to hold upon release of the half year distribution. Position exited at 24c and will wait for the annual report later this year before deciding what to do.

Thats interesting because I became a holder today at 22.5 cents.

Will it make a good investment now?

Time will tell.

The potential for the update provided today was, I believe, already priced in.
There were enough warning signs.
The lack of interest in the industry and property sector exacerbated the fall today and it may be one of those times it pays to ignore Mr Market and look at the numbers -

2 cents per share epu. 1 cent of this is retained to pay down debt which is good for the long term as it reduces LVR but also expenses. The other 1 cent paid out as a dividend.

I expect much of the same in December , but then they should be right to carry on with 2-3 cents half yearly dividends from then on.

So at 4 cents earnings per unit, the current NIV of 52 cents is realistic. I wouldn't pay that but I'm more than happy to buy in gloom at a 57% discount as there's enough buffer for me to be comfortable.

I might need to ignore Mr Market for a while but I didn't want to wait for it to become even cheaper.

 

[Intrinsic_Value]

Thats interesting because I became a holder today at 22.5 cents.

Will it make a good investment now?

Time will tell.

The potential for the update provided today was, I believe, already priced in.
There were enough warning signs.
The lack of interest in the industry and property sector exacerbated the fall today and it may be one of those times it pays to ignore Mr Market and look at the numbers -

2 cents per share epu. 1 cent of this is retained to pay down debt which is good for the long term as it reduces LVR but also expenses. The other 1 cent paid out as a dividend.

I expect much of the same in December , but then they should be right to carry on with 2-3 cents half yearly dividends from then on.

So at 4 cents earnings per unit, the current NIV of 52 cents is realistic. I wouldn't pay that but I'm more than happy to buy in gloom at a 57% discount as there's enough buffer for me to be comfortable.

I might need to ignore Mr Market for a while but I didn't want to wait for it to become even cheaper.

You could well be correct value emperor.
My margin of safety was the yld together with the average length of maturity of the existing leases.
I bought last year at 24c, i have received 8c odd in distributions in the last 14 months odd, so my return is ok.
But with the distribution now dropping to 1c i prefer to exit and wait on the sidelines.
(warren buffets dont swing until you get the right pitch).

One issue you should consider is the gearing.
At 50% every dollar in asset devaluation will have a $2 negative effect on NTA (there are also the asset value of the water rights which swing around)
From memory the leaseholds were 20% above market value, i dont know the valuation effect this has on the underlying property values when they get revalued.
Just something to consider.

Again you could very well be right.
I prefer to wait now until the annual report to go through things in finer detail.

Another big hint:
look at directors transactions, directors dont hold many shares in this company, although the management company does.
If you see directors start to buy significantly at some point in the future it could represent a very good opportunity.

 

[Value Emperor]

You could well be correct value emperor.
My margin of safety was the yld together with the average length of maturity of the existing leases.
I bought last year at 24c, i have received 8c odd in distributions in the last 14 months odd, so my return is ok.
But with the distribution now dropping to 1c i prefer to exit and wait on the sidelines.
(warren buffets dont swing until you get the right pitch).

One issue you should consider is the gearing.
At 50% every dollar in asset devaluation will have a $2 negative effect on NTA (there are also the asset value of the water rights which swing around)
From memory the leaseholds were 20% above market value, i dont know the valuation effect this has on the underlying property values when they get revalued.
Just something to consider.

Again you could very well be right.
I prefer to wait now until the annual report to go through things in finer detail.

Another big hint:
look at directors transactions, directors dont hold many shares in this company, although the management company does.
If you see directors start to buy significantly at some point in the future it could represent a very good opportunity.

You seem to have studied this a fair bit IV. Its good to see.

I don't have enough of these to worry about too much. A small fraction of my main sleeping giant RNY.

My simple valuation of CWT is based on the fact that a few years back CWT was paying 10 cents in dividends per year. They have around the same amount of property and although I expect rents to fall and occupancies to decline. The industry will eventually recover and when it does, gross earnings may not reach their heyday levels, but I feel a 20% permanent reduction is realistic. If you take gearing into consideration, thats a 40% reduction in net earnings or around 6 cents a share.

Thats around 25% earnings per year which I can live with. More if the industry gets back to normal (I don't expect this but will welcome it) and if its gets worse I may still make 0-10% return.

I don't care about devaluations affecting the equity unless it breaches covenants. If this was a concern, I don;t think CWT would even be paying a 1 cent dividend.
They are one of the few REITs that have not needed a capital raising. I would welcome one of these at the current price! Although holders who paid more might not like it.

 

[Ridin-High]

Done abit more reading and purchasing lol, i've decided that shares are now going to be aprt of my portfolio. At the moment it's just buy/hold/collect dividend from companys which show a promising future.

Collecting the dividends/distributions is much easier then managing the resi property, but i see both have their place in my portfolio for different reasons

Resi property = equity cows.
Shares = Cash flow cows.
Cash = insurance on the cows

Now just going to focus on growing the heard. Adjustments will happen in the future as i learn

Regards,

RH

 

[Ridin-High]

Ohhhh one question i forgot to ask,

If i choose to participate in a companys dividend re investment plan, will those new shares show in my commsec account or?

Regards,

RH

 

[steveadl]

Yes, the new shares will appear in your ComSec account the day or so after the dividend payment date.

 

[oracle]

Resi property = equity cows.
Shares = Cash flow cows.
Cash = insurance on the cows

Love it....especially last analogy.

Cheers,
Oracle.

 

[Ridin-High]

G'day all,

Just wanted to run this past the share guru's.

I'm looking at a margin loan to leverage into LIC's with long term growth outlook and
ETF's

My goals from this is to achieve long term growth over the cost of burrowing the funds, my outlook is 10-20yrs.

Is what im looking at doing on the right path in the share people's minds to achieve my goals or have i got it horribly wrong?

Lol

Regards,

RH

 

[steveadl]

You've mentioned ETF's a couple times. The ETF's that I've checked out in the past have all got pretty ordinary yields. If you are borrowing to buy these, especially at 9%+ ML rates, then you'll need them to achieve a pretty high growth, just to break even on your margin interest.

I appreciate you're looking long term which is good, I'm just questioning the use of ETF's with your above strategy due to the poor yields. LIC's on the other hand you're already talking better yields.

 

[Piston Broke]

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

G'day all,
Just wanted to run this past the share guru's.
I'm looking at a margin loan to leverage into LIC's with long term growth outlook and ETF's
My goals from this is to achieve long term growth over the cost of burrowing the funds, my outlook is 10-20yrs.
Is what im looking at doing on the right path in the share people's minds to achieve my goals or have i got it horribly wrong?

Nobody with a vested interest is going to give you unbiased advice.
That's life, you just have to do your own research and make your own decisions.

My simple valuation of CWT is based on the fact that a few years back CWT was paying 10 cents in dividends per year.
...and if its gets worse I may still make 0-10% return.
...I don't care about devaluations affecting the equity unless it breaches covenants. If this was a concern, I don;t think CWT would even be paying a 1 cent dividend.
They are one of the few REITs that have not needed a capital raising. I would welcome one of these at the current price! Although holders who paid more might not like it.

They are making losses and still paying didivends, which means they are paying out money they never made ie "going broke" imo.
Btw worse case is -100%.

 

[Intrinsic_Value]

G'day all,

Just wanted to run this past the share guru's.

I'm looking at a margin loan to leverage into LIC's with long term growth outlook and
ETF's

My goals from this is to achieve long term growth over the cost of burrowing the funds, my outlook is 10-20yrs.

Is what im looking at doing on the right path in the share people's minds to achieve my goals or have i got it horribly wrong?

Lol

Regards,

RH

Nothing wrong with investing in REITS or ETF's with a 10-20 year view point.
Such long time horizons allow for reasonably passive buy and hold (but still need to check on the underlying investments to make sure the managers are doing their job and not setting you up for a blow up).

Plenty wrong with using margin debt with a 10-20 year view point.
Why? because that debt is mark to market every day, the financers dont give two hoots about your investment horizon, only that the LVR ratio's stay under their maximum ratios.
Failure:
you have 24 hours to come up with the money to rebalance to maximum ratios or they sell your stock and come after you for any short fall.

If you want a 'safer' way of debt financing shares, use equity from residential property, this way you only need to cover the cost of financing.

 

[Intrinsic_Value]

. If you are borrowing to buy these, especially at 9%+ ML rates, then you'll need them to achieve a pretty high growth, just to break even on your margin interest.

Margin lending companies are starting to fight for market share again.
Depending on the size of the loan you should be able to get some form of discount to 'quoted' price.

I'm on 7.9% at the moment.

 

[Ridin-High]

Thanks for the feedback.

I'll address each person.

Stevedl - Yes i agree the yields on EFT's are much lower then other single stocks and reits that i have had a look at. I've had a look at some LIC's which have a slightly higher yield.

Leverage and compounding after a 10-20yr period makes what seems a high short fall to cover now relatively small down the track.

I was doing some numbers the other night, a case study to speak.

A share that was valued in early 90's in a LIC was around 1.50 per share, now is currently 4.80 (did reach high 6's before gfc)

say purchase 100k of them @ 1.50 = 66666 shares
Current Value = 66666 x 4.80 = $320,000

Interest on 100k loan over 20 yrs (using 9% I/R) = $180000
Minus tax rebates on my tax bracket = $126,000

Profit from shares (not taking into consideration the interest) = 220,000

$126,000 divided by 20yrs = $6300
Profit 220,000 divided by 20yrs = $11,000

So im giving $6300 to get $11,000

6300 in the bank paying 8% interest = 6804
LOL wow alot of numbers their for anyone interested in having a bo peep

That's how im looking at it Steve, The same theory i use for residential property investment.

Intrinsic value - So minimizing the risk on a margin loan would just be to keep the LVR lower.

I was looking at the "newb" documents they have on the commsec website and they give some advice to aviod margin calls.

They have a little table which shows

If the security you are burrowing against has a margin lending val of 70%

If you gear 50% LVR = Share value has to drop 33% before margin call
If you gear 40% LVR = Share value has to drop 47% before margin call
If you gear 30% LVR = Share value has to drop 60% before margin call

I did some calculator bashing to see actually how much money that means i have to tip in if those scenario's happen.

Should their be something else i should be considering? (Just wanna cover the bases)

Now the 7.9% I/R is that a fixed rate from awhile back, a variable rate with a discount because of the size of your loan, a rate in which you have prepaid interest?

CBA atm is 8.85% variable, this includes .5% discount if applying before a certain date.

Thanks for everyones advice/tips/thoughts so far

Regards,

RH

 

[Ridin-High]

Seems like i missed PB.

Yeah i agree that a persons own due dilligence is the most important. But yeah i always need that reminder when going into something new lol.

Cheers

 

[D.T.]

Quickly reading those returns, looks like they take into account capital growth but not dividends? Is this intended?

Also, basically any equity that existed in early 90's that still exists would have a great return. Key word there should be still exists.

 

[Ridin-High]

yeah woops forgot dividends, probably look alot better once you factor those in lol.

what you mean any equity that still exsists?

Regards,

RH

 

[D.T.]

As in, it's been 20 years. Alot of companies / funds / trusts don't last that long

 

[Intrinsic_Value]

Stevedl - Yes i agree the yields on EFT's are much lower then other single stocks and reits that i have had a look at. I've had a look at some LIC's which have a slightly higher yield.

EFT on property will include WDC, what proportion of WDC is the total 'weight' of the EFT on property.

Intrinsic value - So minimizing the risk on a margin loan would just be to keep the LVR lower.


If you gear 50% LVR = Share value has to drop 33% before margin call
If you gear 40% LVR = Share value has to drop 47% before margin call
If you gear 30% LVR = Share value has to drop 60% before margin call

And if the LVR changes?
out of curiosity what was the movement in LVR ratios during the GFC?????

some held some didnt, pitty those that invested based on constant LRV that didnt hold their pre GFC lending ratio's.

Now the 7.9% I/R is that a fixed rate from awhile back, a variable rate with a discount because of the size of your loan, a rate in which you have prepaid interest?

no just straight vanilla type variable loan. in fact its less than this for above $1million, below $1 million its this rate.
My loan fluctuates above and below this level.