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Thursday, March 22, 2018

MREITs: Looking Attractive Again

This morning we saw Bursa instituting sizable buy-ins for 3 REITs that had dropped substantially over the past few days or weeks. This means that some fund(s) have been so aggressively selling down that the fund(s) had oversold the REITs. Does this mean the selling will end soon?

Note: For the benefit of those who are new to the stock market, a buy-in is instituted by the exchange if the seller of a security failed to deliver because of he doesn't have the security. Buy-in is normally carried out on T+4 and sellers who wish to sell to a buy-in must have ready security to deliver. The exchange will penalize the "short-seller" by levying a penalty equivalent to 10 bids on the security's last closing price. This penalty is then passed onto the successful seller to the buy-in. Thus, selling to buy-ins is a fairly popular sport among remisiers but the chance of success is no better than striking Magnum 4Ds.


Picture: Buy-in on Bursa (Source: BTX)

The charts of the above oversold REITs are given below. IGBREIT is at the uptrend line at RM1.47; PAVREIT broke the uptrend line at RM1.70 in November 2017; and SUNREIT just broke the uptrend line at RM1.65 two days ago.


Chart 1: IGBREIT's weekly chart as at Mar 21, 2018 (Source: Malaysiastock.biz)


Chart 2: PAVREIT's weekly chart as at Mar 21, 2018 (Source: Malaysiastock.biz)


Chart 3: SUNREIT's weekly chart as at Mar 21, 2018 (Source: Malaysiastock.biz)

The size of this morning buy-ins and the fact that 3 of them were REITs are pretty interesting. As you might have read, Feb has raised its benchmark fund rate from 1.5% to 1.75% yesterday. The interest rate hike is being carried out for many reasons, such as stronger economic growth and increased inflation rate. But what lie behind the plethora of reasons to raise interest rate is the equally important need to conserve bullets to fight the next recession or financial crisis. If interest rate remains zero-bound, Fed will have limited room to maneuver in the event of any economic slowdown or crisis.

If you look at the long term charts for 10 and 30-year Treasury yield, they are still in a downtrend, albeit risen fairly substantial off the low.


Chart 4:  10-year Treasury Yield as at Mar 21, 2018 (Source: Yahoo Finance) 

 
Chart 5: 30-year Treasury Yield as at Mar 21, 2018 (Source: Yahoo Finance) 

What does Treasury yield have to do with MREITs? Well, REITs are viewed as fixed income instruments, which move in an inverse correlation to the interest rate movement. If interest rate rises, the income produced by REITs will be worth less. Thus this will lead to a drop in the value of the REITs. This article from Forbes magazine makes the case for active management of our investment in REITs, taking advantage of period of selldown of REITs due to interest rate volatility in order to maximize our return from our investment. To wit, it concludes:

When thinking about the asset allocation implications of this phenomena, two things stand out:  First, interest-rate increases in and of themselves are not necessarily bad for REITs, and in fact, when measured over longer periods of time, They have generally been associated with periods of REIT out-performance. Second, REIT sell-offs associated with spikes in interest-rate volatility have often provided active REIT managers with opportunities to add exposure at attractive levels just as fundamentals were improving. The relationship between REITs and Interest rates is volatile and unstable, but this complex relationship leads to both short-term risk and long-term opportunity.

Based on the above, I think it may be a good time to slowly nibble into the beaten down REITs. I have posted above REITs when they were fairly attractive (here). This time I will sunstitute IGBREIT for CMMT while retaining SUNREIT and PAVREIT. The valuation table is given below:


Table: Selected REITs' valuation

Note:
I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.

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