Reits & Insolvencies & Why No More Delifrance For Me

My short chat with my old and wise-man friend prompted an impromptu phone call to Stock Boy today, on the subject of yields and Reits.

For you see, I noticed that every other friend I meet will invariably ask about the best Reit to buy. Their excuse ? Yield.

I realise that almost everyone I know has certain to sizeable allocations to Reits in their investment portfolios which got me to thinking, if Reits are indeed so fail safe ?

This is taking me some courage to write, being no Reit expert, with only 2 Reits in my holdings, one of which is no longer considered a Reit since they announced their buy back and closure – Macquarie Infrastructure Fund, which I had bought at the urging of Stock Boy some years back, at pretty much, its lows of 30 cts. Had bought it, left it and never looked at it again. The only other Reit in my possession is the CapitaCommercial Trust, again on Stock Boy’s advice, bought at a dollar for a decent return to date.

Stock Boy says he is unaware, to the best of his knowledge, of any Reit failure in Asia so far, although several Australian Reits were technically insolvent during the GFC (Global Financial Crisis).

Insolvency can be explained when the debts undertaken by the Reit exceed their assets, leaving shareholders technically bankrupt. This usually happens when the assets suffer a mark down, in excess of the legal buffers in place for excess leverage.

The trouble with Reit debt is that the assets are pledged, for there is no other form of surety a Reit can give to a lender, being a trust.

The quick solution for most of the Australian Reits then, back in 2008-2009 was to “bail-in” shareholders via rights issues, like a hostage crisis (example of Olam rights cum bonds issue this year).

So Singapore Reits have outperformed massively in the past year and even year to date.

Best performing in 1 year (Top 5).

SUNTEC REIT 2.00 56.86
KEPPEL REIT 1.48 48.00

Best performing in 2013 (Top 5)

FIRST REIT 1.36 27.83

Moving down the food chain in 2013.

Let us examine the list of Reits and Business Trusts I managed to drag out and their dividend yields. (note that the yellow highlighted rows are the Business Trusts)

singapore reits and business trusts

Rickmers Maritime looks like the highest so far. Yet, it is a Business Trust, which is not as fail-safe as a Reit, given looser regulations which justify its premium yield. The same for Cityspring.

I also compiled their Debt/Asset ratios for comparison. Using the golden rule of 60%, only the 2 Business Trusts look slightly over geared. It does look like we are in good hands at the moment and even if real estate prices were to take a tumble and knock, Singapore Reits should be able to weather it.

Reits are highly accretive structures, according to Stock Boy. You see, asset yields usually outpace dividend yields by a fair bit. By ploughing into Reits, investors have chased prices up and allowed Reits to issue more capital to buy more real estate and charging higher rents in the process due to their monopoly statuses.

Time to unleash my pet peeve for the weekend.

It struck me hard last weekend when I realised that Delifrance raisin croissant is $3.40 these days. Oddly, I hadn’t noticed it a bit, buying their kaya croissant for my son each week and a raisin for myself. Maybe if they had named the kaya croissant Coco le Beurre, the fact could have escaped me. But croissant costing more than chicken rice is starting to irk me.

And another irking realisation is the fact that Madam MRT has joined Delifrance, or rather, Delifrance’s parent (QAF). And that MRT was more interested in selling walkway room in their stations to the sarabat stalls in Raffles Place for >10k a month per newsvendor than checking their tracks for faults.

Yes. Reits are good return. Yes. Every mall is the same sterile mold these days, with their Delifrance, Body Shop and Crystal Jade, all the way from China to Vietnam to Indonesia, that we feel so at home in any Capitamall.

But for every mom and pop duck rice or Teochew restaurant that they squeeze out of the rent race, the more Delifrance we will have to eat.

I have been very partial to that sultana/raisin croissant since I was a child and it was going at 1.20 or less. Now the raisins look like facial moles to me (where did I get that from ?) – did she have a lot of moles ? No disrespect.

Now, if you ask me if I would buy a Reit that has risen 30-60% in a year ? The answer is no.

Maybe CDL Reit which appears to be a Reit cum Business Trust as confusing as that sounds. Only 11.17%  in a year ? Dividend yield 5.69% ?

I am acutely aware that as I do so, there will probably be one new Delifrance tomorrow and one less old teochew restaurant until we end up with a world with just 4 banks, 4 restaurant chains, 4 grocers, and such, all too big to fail, just like the Reits themselves.