Posted by: donmihaihai | November 10, 2008

Of high yields and quality assets.

While I have not followed the Minibond saga closely, I think MM Lee said it right

“Some investors went in with eyes open.”

And do we need an old man to tell us higher return mean higher risk?

“So when somebody tells you, you get 1.5% from the bank, I give you 5%, read the small print carefully because how can they pay you 5% unless they are in dire need of money?”

Now think about it, this has been keep happening for the last few years. How many saver/depositor/investor were running around different banks for different fixed deposited rates and different products that promise higher return? Has the most fundamental of finance/investing — risk and return ever hit their “get rich instinct”? What about insurance buyer, due to increasing independent agent, everyone starts to compare all policies and buy “greatest coverage with cheapest price”….. Now this is a reverse as we are buying a promise to pay in adverse situation.

There must be some old and uneducated in the minibond sage but there must be many that are not. The banks or finance institution cannot run away from mis-selling too. For both case, it is hard to know who is who so I favour a cold-blooded way which mean as long as you are seller/buyer, you are responsible. Another responsible party should be regulator(MAS?) for having reactive governing. If I have a say(of cause I don’t have a say), each foot 1/3 of the bill and get a lesson learnt there.

Anything other than that like paying back all money due to reputation issue is what they want to do BUT I don’t favour those buyer(even if they are old and uneducated) getting back all their money because this will create moral hazard. I rather being heartless than having a problem of having all old people going around searching for high return investment then keeping all the gain but start to act uneducated when investment turn bad.

# Political comments will be deleted.

Talking about high yields and quality assets, I just can’t believe my eyes. There is an article on NextInsight.com on REITS & Shipping Trusts. It is eye popping that out of the 26 REITS/Trusts, only 3 are with a yield of below 10% with the lowest at 7.2% and out of the 19 REITS, > 50% are having a yield of > 15%. The same situation can be say for other infrastructure trusts and shipping trusts with shipping trusts particular higher at 22%, 30% and 36%. Before I continue, if I will to gamble not invest, I would certainly buy the 3 shipping trusts because their payouts are good. In short I am paid to take the risk even in the current situation.

How time change. Just a few years back, all kind of “investors” were crowding every single REIT at the yield of 4 to 6% and now with an average of > 15%, they are being throw away because of well… hmmmm… high gearing… credit crunch… soften property market.. recession.. Well, sound smart huh? If I am a REIT/dividend/property investor, I will just buy a big basket of them then shut off the market news and collect all dividends payment quarterly/half-yearly/yearly and maybe read their annual reports only. I will know which REIT has problem/busted by amount of dividend payment or non-payment. 3, 5 or 7 years down the road, credit crunch over, recession over and property market recovered or back to normal(?) I will bet many “investors” will be knocking my door asking, Can I buy your Suntec REIT at 10% or 7%… I will say Sorry, market price please.

Yes, REIT, Infrastructure Trust and Shipping Trust have their bad points due to the way they are being structured but PRICE is always a factor and when price is good, why not? If some bank offer me low interest loan and fixed payment for say 5 or 7 years, I will take it and buy a basket of REIT and Trust. The spread is very good even if a few busted(which is not easy) or reduce dividends. If I am not wrong, majority or > 50% of the REITs properties are in Singapore which include some of the best location or prime properties. These kinds of properties are not that many in Singapore and now selling at these kinds of yields.. where some at distressed level?

While I didn’t look at any of these REITs, a rational mind will able to tell me the debts, rolling over of their debts are overblown. And while dividend can reduce due to recession or higher interest payments BUT by how much and what will happen when all these is over? With many of those properties, I can walk in any bank and ask for secured loans or call any property consultant and sell it off. I don’t see a problem with that especially those prime locations.

If I will to buy a basket now, I will look for

1) High yields — Base on data from the article, almost all qualify.

2) Quality assets/properties — I think majority pass this test too, which include shipping trusts.

3) Debts — abit tricky here but unless the assets quality is low and all income unable to cover the highest interest payment they need to pay, buying reasonable ok properties at 0.2 – 0.4X BV should work out ok if not very good.

4) Reasonable good management — As long as the management doesn’t destroy the assets will do.

Let me quote “The House of Morgan” again on “apple day”

The Wall Street of 1932 was a dismal ghost town. Securities firms declared “apple days” — unpaid vacation days each month that enabled destitute brokers to go out and supplement their income by selling apples on the sidewalk. Apple vendors appeared at the Corner. Downtown real estate was so depressed that building companies defaulted; astute investors who bought their bonds become the future owners of Wall Street. The misery extended everywhere. Riverside Park was lined with Hoovervilles, and sylvan retreats in Central Park looked like ragged hillbilly hollows. On Park Avenue, ten-room apartments that had been occupied by financiers of the twenties now lack tenants. The new, half-occupied Empire State Building was mocked as the “Empty State Building.”

Even during great depression, there were chances for astute investors. If this crisis is another great depression, then I will not talk about investing, I will be thinking when I can find a new job. But if this is not another depression… who will be the future smart owner of many Singapore high grade properties or infrastructure or vessels?

After I finished… I have not look at them yet.

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Responses

  1. Hi,
    was reading through your article. I agree that there seem to be a lot of dividend plays out there right now.just like to say that the dividend yields, which seem to high at around 30% especially for shipping trusts, might not be maintained in the current environment. With the global recession looming, this will definitely affect the demand for dry bulk, and the markets are discounting the drop in payout.

    Having said that, I admit I have not taken a look at the financials to conclude that the payouts can/cannot be sustained. Also, given more time, the dividend levels might revert as the long term fundamentals for the shipping industry are still intact. growth will definitely fuel the demand for commodities.

    All the best for our investing. Let’s all ponder wisely before coming to decisions.

  2. oops realised I forgot to type something. Anyhow, just wanted to say that even though yields might be 30%, and one might think “how much can these yields drop by?”, we need to understand that these dividends are normally the first to be cut in a tough environment, in a bid to retain cash for the company, as opposed to things like cutting employee wages and other operating expenses.

    Another thing is the bane of accounting. To declare dividends, there must be net retained profits. Then, coupled with cash, dividends can be paid out. The problem in this environment is that retained profits might take a beating or even turn negative, and when this happens, even if the company has cash, it cannot declare dividends. Dividend yield can thus easily turn to 0%. It is the job of individuals to determine whether this case will occur, or whether the business model will allow it to tide through until the moment where dividend yield can once again get back on track.

    Just my 2 cents worth;)

  3. Hi Patrick,

    When I wrote about gambling in the shipping trust, I mean the odds is very good. I think much better than soccer odds given by Singapore pool.

    Let say you got 10K extra for gamble. And the market offer you 3 shipping trusts that give you 100% return in 3.5 years(average) with the following conditions
    1) Holding period not restricted.
    2) Return not guarantee. But

    a) While the return is 100% in 3.5 years, there are unlimited(almost) upside and the period is not fixed. no one except you keep the gain.
    b) Your return can be lower than 100% in 3.5 years and with possibility of losses with the lowest lossing all 10K if all 3 shipping trust become bankrupt.

    I bet the 1st question a good gambler will ask is
    1) What is the historical bankruptcy of shipping trust or ship owner. Percentage ranging from highest to lowest.
    2) What are the probability of shipping making losses from today onward.
    3) etc.

  4. Hi patrick ho,

    Business Trusts pay dividends out of operating cash flow. So, they can still pay dividend even if there is accounting losses.

    Also, companies can do capital reduction to give cash back to shareholders if there is no use for those cash. Yes, it cannot pay dividend if there is not enough retained profits, but there is nothing stopping them to do a capital reduction.


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