Forum Topics Remember the debt--REITs
Solvetheriddle
one year ago

Listening to "our own" Wini and Mark Moreland talk about REITs and valuations today, i cant help myself to add something.

the thing to keep in mind is the level of debt and the leverage that this debt has on overall equity valuations esp in this sector.

an example to show the issue

say a property is worth $100 and a comp is sold at a 17% discount so $83. this valuation is a stand alone valuation of the property as far as i can recall.

now lets include debt, under the (unusual) way REITs account for debt, being debt/(debt +equity) as a ratio REITs are usually around 40%. that debt to equity would be 66% under how other companies usually show their debt calc (40/60) not 40/100.

now lets assume the value of the asset falls 17% to $83, the debt remains $40. the remaining equity is 83-40=43 not $60. equity therefore declines not 17% but 43/60-1=28%.

becomes a lot more scary. leverage works both ways.

im usually interested in taking a contrarian bet and waiting it out, but not in this case. just a view could be wrong.


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shadow
one year ago

@Solvetheriddle - keen to know where and what you listened to I'd love to find out more! :)

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Hackofalltrades
one year ago

There are some very good comments from Christopher Joye here -

https://open.spotify.com/episode/1hYDAt6ZZFSeQ4rujpkgUR?si=df0d3de592e04111

He basically thinks commercial REITs are in a lot of trouble.

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edgescape
one year ago

Or (cash_before - (asset - debt))/cash_before -1

Pretty self-explanatory really. .

A quick way to do this is -0.17*100/60 where 100 is the asset, and 60 is the equity.

So you use Asset/Equity multiplied by the change in asset value to get the loss.

On subject of commerical office RE, I mainly work from home and hardly go to the office due to personal circumstances. And also there are network restrictions at the office where I can't readily jump into customer networks either via SSH tunnel or VPN. Frankly I can't understand the paranoia.

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Solvetheriddle
one year ago

@shadow nothing special just the ausbiz stock calls, they were talking about DXS at that point.

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Byrnesty
one year ago

The problem with the current discussion regarding commercial REIT’s is that it lumps all commercial property into a uniform entity.

Premium office space is currently in high demand. Vacancy in premium space is tightening. Charter Hall quote vacancy rates of 1.2% and 1.5% in their two unlisted premium office funds.

For companies eager to encourage employees back to the office a premium grade office facility with 5 star amenities (end of trip facilities, wellness facilities, gyms, child care, cafes, open spaces, natural light etc etc) located in a vibrant city location with access to public transport will always be in demand. The demand will support increasing rents and valuations.

A ‘B’ Grade office with no amenity will have trouble finding tenants and vacancy rates will impact valuation.

CBRE have reported that of the 220 tenant relocations in the last 2 years, 66% have relocated into higher grade premium facilities at increased rents. Demand for premium offices has actually increased since the beginning of the pandemic. Demand for lower grade offices has fallen in most areas resulting in the doom and gloom predictions.

Shopping centres display a similar story. Local neighbourhood centres are trading well and holding valuations as well as the regional 'destination' centres (ie Westfield). The shopping centres that fall somewhere in between are more likely to be under performing.

A little for nuance is required in the commercial property discussion.


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