Do REIT's offer good value currently?

10th Aug '20 by danjamesbaker

8 comments 2029 reads

Real Estate Investment Trusts ("REITs") are a good way of diversifying a portfolio and gaining property exposure but with the trading liquidity that property funds do not offer. With a number of property funds suspended since the onset of COVID-19 due to material uncertainty clauses being inserted into valuations of the underlying properties, investors have been locked into these funds and cannot take out their money. Last week the FCA put forward a proposal that investors would have to inform the fund 6 months in advance if they wanted to redeem their holding.

A significant number of REIT share prices have been battered since COVID and still sit at very large discounts to NAV with uncertainty over valuations, especially in retail, and also the concern that tenants could use CVA's to get out of leases. This has been exacerbated by the recent demise of Intu Properties, who collapsed under billions of pounds of debt after they failed to agree terms with their bondholders. Some REITs however sit at a premium to NAV due to the sectors they invest in, such as Tritax Big Box Reit (LON:BBOX) and £SUPR. The former is in the much sought after sector of big box warehouses, where companies store products ready for distribution to other areas of the company or direct to consumer, and the company are close to finalising development on a new facility near the M25, which will be one of the biggest big box warehouses in London. The latter has been almost a risk-free asset during COVID, with the REIT collecting all of its rent from supermarkets that have remained open throughout and who have been one of the only 'winners' from COVID.

I have taken this approach to look at the different REITs for my own investing, so I don't hold a position in any of these yet. However, given more uncertainty is yet to come (material uncertainty clauses have only been removed from industrials, warehouses, supermarkets and some office space) in terms of valuations, I have stressed the NAVs of these trusts using the below haircuts to valuations to give a 'worst case' look at valuations:

Hotels - This sector has been particularly ravaged from COVID due to the lockdowns applied and this has been evidenced by Travelodge applying for a CVA a few months ago (multiple trusts below have exposure to Travelodge). Although the year of…

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Mkeenan88

10th Aug '20

Hi Dan,

Difficult to predict how REIT's will perform over the next few years but here's my two cents.

The work from home genie is out the bottle. If I could do my job from home, why the hell would I go back to the office? 5 days in the office is surely gone for a sizeable percentage?

This will put downward pressure everything associated with the commute to and from work and businesses you interact with. I believe we are about to see a massive insolvency problem because of the oversupply of useless commercial space.

In the morning you might use car/bus/train. Pick up a coffee en route to office. Buy lunch, after work you might go for a pint.

A drop in footfall is trouble long term for businesses and I believe commercial space is now a race to bottom.

In terms of construction I am looking at how quickly housebuilders adapt new homes to the change. Luxury housebuilders with a vision should be soundproofing a room or building an outhouse suitable to work from.

I am trying to predict quick adapters to the change vs looking for bargains in REIT's.

Macro

NAREIT (https://www.reit.com/) define the REIT sectors as:

- Office REITs: YTD TR = -23.42%

- Industrial REITs: ytd tr = +15.02%

- Retail REITs: YTD TR = -39.72%

- Lodging REITs: YTD TR = -53.07%

- Residential REITs: YTD TR = -16.49%

- Timberland REITs: YTD TR = -7.18%

- Health care REITs: YTD TR = -22.78%

- Self-storage REITs: YTD TR = -3.51%

- Infrastructure REITs: YTD TR = +17.98%

- Data center REITs: YTD TR = +33.73%

- Diversified REITs: YTD TR = -31.28%

- Specialty REITs: YTD TR = -22.09%

So I would say that it really depends on whether you want to buy into strength, or whether you want to buy weakness for its recovery potential?

raggedtp

11th Aug '20

Very interesting, and thank you for sharing, Dan. Have you looked at Rdi Reit (LON:RDI) in this light? I am personally looking at swapping from them to £AEWU.

danjamesbaker

As someone that now has been working from home since March I can tell you that it's driving me insane! The feedback I have seen from many at my company is that people still want to go to the office but maybe a little less (say 2 days a week from home) so although I certainly think office values will fall, there will always be use for them, even if that becomes alternative use space.

RDI is on a 49% discount to NAV currently and running it through the same model as above gives a NAV of £1.44, a 39% discount, but I would argue that is probably justified at the moment. More than a quarter of the portfolio is in UK hotels where they are receiving no rent from their RBH-managed portfolio and have seen rent reduced significantly for the Travelodge portfolio. There is also a big chunk in London office space which would concern me and rent collection is 70%, which is considerably lower than peers. However the fund does have £80m cash on the balance sheet and they are disposing of non-core assets to reduce leverage, which is around 42%. There is also no dividend currently with RDI.

Aew Uk Reit (LON:AEWU) is probably a safer bet given the high exposure to industrials, strong cash on the balance sheet and a good divi yield.

Thanks for the reply, Dan. Yup, on balance I think I'm with you. I have hung on because fo Starwood Capital buying in hugely recently, which seems a vote of confidence, and raised my price target to £1.10. There doesn't seem much of a capital gain to hope for from Aew Uk Reit (LON:AEWU), although certainly looking safer. I love yield, but have come a bit of a cropper at times because it leads to recovery stories that don't pan out...

Wilbraham

Interesting article, thanks! Couple of complete numpety questions:-

1. How is NAV calculated? I'd guess latest professional ('red book') willing buyer/seller valuation from a qualified surveyor. Is this updated quarterly, half-yearly, or what? Crucial, have NAVs been downgraded in recent months post C19?

2. Who decides these haircut %s? Is there some industry consensus?

3. Is debt also haircutted in some cases - eg recognising that everyone should share the pain?

4. Your stressed NAV figures are still way above the effective share price. What is this telling us? I accept there's illiquidity discounts etc but how does the current discount to NAV compare with historic REIT norms? Could we also argue that 'the market knows best' and back out the underlying haircut % in this way? Could it be that in some cases (shopping arcades, car showrooms, in the middle of nowhere there's really very little value other than land which may or may not be repurposed?

Thanks!

bullhead

11th Mar '21

Have always tried to have a portfolio diversified across different asset classes namely Real assets, shares,emerging markets,technology and private equity with a small amount in cash/gold/Bitcoin in what I would consider to be the real asset class I have held Tritax Big Box Reit (LON:BBOX) since 2014 in which time it has performed well long term steady growth rising divi (accepting a slight dip this year) It is exposed to exactly the class of property asset that in my opinion can only increase in demand in the future and is the class act in that area there is some increased risk with its movement into developing land to build its own warehouses but also more upside

Would be interested in other peoples views the results released yesterday are well worth a read I watched the presentation by the CEO and CFO yesterday on Zoom which should be available somewhere (though I couldn’t find it )

Do REIT's offer good value currently?

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Danjamesbaker

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