Using Reversion to Mean for Reit Investments

Contributed by Warriortan, #investforyourself

In a recent workshop, I came across this theory of applying the concept of “Reversion To Mean” to equity investments. I felt that it made logical senses and since then, I have added this as an additional tool to my toolbox to investing.

So what is “Revision-to-mean” concept?

According to Investopedia, “Reversion to Mean” is the theory that suggests that prices and returns will eventually move back toward the mean or average. This mean or average can be the historical average of the price or return, or another relevant average such as the growth in the economy or the average return of an industry.

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How do I apply it?

I only apply it to Reit and using “dividend yield” as the single parameter to track.

By applying “Reversion to Mean”, conceptually I am believing that the dividend yield of a particular Reit will eventually move back towards the mean dividend yield given time. There are always new situations or changing investor sentiments that will move the share prices of Reits towards the extremes either low or too high irrationally. But once things cool down, things will go to normal and the share prices will adjust back to the mean dividend yield. Those “extreme” moments are actually the best time to buy or sell. Hence, “Revision-To-Mean” becomes a way that will trigger me to think about whether the share price is at a oversold or a overbrought region and thus,  should I take action to buy or sell respectively.

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Some of you may ask why use dividend yield and not not share price. I know some people pay a lot of attention to the 52 weeks high or low and may base their buy/sell decision on that. However, in my opinion, share price itself is not an indication of the return to investors. Dividend yield is and definitely so for a Reit investment.

Furthermore, I believe dividend yield is an indicator of the level of risk that the investors are willing to take with a particular company. Hence, unless there is a structural change in its business, management or strategy, the dividend yield that the investors will demand from the company will not and should not change drastically.

What do I to apply it?

First, I researched for the historical dividend yield of the Reit for the last 3-5 years to determine the upper and lower brackets of the Reit’s dividend yield. Then, I will track the share price of the Reit to calculate the current dividend yield weekly to see where it is located as a percentage between the upper and lower brackets. I will update the upper and lower brackets once a year using the annual report.

Let me share the table I have made for the Reits that I am currently tracking to illustrate how it is done:

(Data updated to 29/4/2017)

Share Price ($) Annual DPU (cents) Current Dividend Yield (%) Highest Yield (%) Lowest Yield (%) Current Percentile
Ascendas Reit 2.56 15.97 6.24% 7.50% 5.00% 50%
Ascott Reit 1.10 6.04 5.52% 9.20% 5.54% -1%
CapitaMall Trust 1.97 11.08 5.62% 6.10% 4.30% 74%
CapitaRChina 1.59 9.84 6.19% 8.10% 5.80% 17%
First Reit 1.35 8.56 6.34% 7.40% 6.10% 19%
Fraser Commercial 1.34 10.03 7.48% 9.20% 4.90% 60%
SPH Reit 0.99 5.60 5.69% 6.10% 5.00% 62%
VIVA ind Trust 0.82 7.17 8.80% 10.40% 8.30% 24%

How do I  interpret this?

 

Let us take the example of Ascendas Reit.

  • As of last Friday, it closed at $2.56 per share.
  • The trailing dividend per unit is 15.97 cents and therefore, its current dividend yield is 6.24%.
  • This current dividend yield will depend on the share price which I tracked every week. The DPU is updated quarterly when the result is out.
  • The highest and lowest yield is dependent on the historical information for the last magnify-icon3-5 years.
  • The current percentile is to show where the current yield sits between the highest and lowest dividend yield points.
  • In this, the current yield is 6.24%, it is at the 50th % point between 7.5% to 5.0% range.
  • If the percentile is closer to 100%, it means that the share price may  have been “beaten” down to a low point that I will consider accumulating while if the percentile is closer to 0%, it means that the share price may have risen to a lofty level that may not be sustainable and then, I may consider selling.
  • Sometimes, it is not the price that has changed but rather the dividend yield has improved or gotten worse. In either cases, it will warrant me to have a closer look and re-evaluate my investment approach to that particular Reit.
  • In my case, the trigger points are 75% and 25%. I don’t wait until it is 100% and 0%.

 

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What are the decisions that I have made recently based on this?

  1. I had sold my small position in Viva Industrial Trust completely, especially when I heard the news that they have issues with the Master tenant at Jackson Place who is providing income support.
  2. I have been accumulating Ascendas Reit, CapitaMall Trust, Fraser Commercial and SPH Reit earlier. Their percentiles have recovered closer to 50% now. So I will now wait and see how things develop from here. See my previous post on SPH Reit
  3. I am planning to reduce my holding in Ascott Reit : see my previous post on Ascott Reit 
  4. I am planning to take profit on First Reit and Capitaland China Retail Trust.

In a nutshell,

I find this a useful way to trigger me to re-evaluate my investment approach to a particular Reit.

I have to state that this is ONLY one of the tools that I used. Fundamentally, we still needs to understand fully the business of the companies we invested, their strategy and management strengths, and delivery of performance. We need to know if things have changed that may make the upper and lower range of the dividend yield invalid.

I hope you find this useful and may consider this as a tool in your investment toolbox.

Have a great week ahead.

 

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17 thoughts on “Using Reversion to Mean for Reit Investments

    1. Technically it is possible but for stocks, there are just too many variables at play. For example, companies like Apple and Microsoft did not declare dividends for years as they need the money to grow, they provide returns to investors via the increase in earnings and consequently the share price. But for Reits, they have to pay out almost 100% of their cash earned and that’s a consistency that we can use to track.

      Liked by 1 person

  1. Very interesting way to evaluate REIT entry and exit. Besides ur criteria mentioned in SPH REIT blog and diversification/growth mentioned in Keppel DC, do you mind sharing what other points u look into fundamental of a REIT? E.g. Income from Paragon is 80% of SPH REIT income; Top tenant income for Keppel DC is 24%.

    Liked by 1 person

    1. Hi Vince, thanks for your comments.
      Well, as you mentioned this is just one way to consider entering or exiting. Evaluation of Reit is no different from evaluation of a listed company. I will first look at the business, is it something I can understand? Is it a growing or exciting business? Second, I will evaluate how well the management is doing in face of competition or capturing opportunities. Then, I will evaluate the financials. Are they highly geared? Do they do any financial engineering? And lastly, valuation – what price would I enter to ensure I have the best chance of success. I hope the above is useful to you. Grateful if you can share your insights and experience too.

      Liked by 1 person

  2. Your blog and comment are very useful, there are always things to learn from blogger like you. So how do you evaluate a reit management? I always heard people say past record, but which “record” they never clarify. Any financial ratio besides gearing/income support you will focus on? For me look at a list of items which include: occupancy, interest cover, fixed debt%, hedge/income in SGD %, weighted average debt maturity, lease expiry and land lease, income diversification from geographical, tenant, property,sector and etc which are “quantifiable”. Btw, SPH REIT got income support which consist of around 1.5% of distribution.

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    1. Thank you Vince. I am glad that you find them useful. The items that you mentioned already give a good list to look at to evaluate a REIT proper. Well, although I think track record is useful but it is not the only one. Business can be turnaround and good people can leave. My time horizon for look back is 3-5 years. Thanks for pointing the information on the level of income support in SPH REIT out. So, what are the Reits that you think are undervalue from your analysis?

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      1. Just to add, indeed there are so much that we can learn from one another. Like a Chinese saying goes “三個臭皮匠、勝過一個諸葛亮”, the collective wisdom from the masses will shine over the brilliance of an individual.

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  3. Lol, not many think like you about knowledge sharing. No offence but there are people who are arrogant to learn or/and selfish to share. In my view, aims amp, first, fcot, ireit, soilbuild, starhill are undervalue but I could be wrong. What undervalue to me might seems overvalue to you due to different perspective and risk appetite. I am still fine-tuning my analysis model calculation. I am happy to share and email screenshot if you are interested. As what you described, teamwork is better than solo.

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    1. If you ask me two months ago, I will have agreed with your list. But with the recent rally, some of them are not looking undervalued anymore to me. The one I may continue to accumulate at the current price is STARHILL. The rest I will wait. Thanks for sharing

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  4. Looking forward to your blog for starhill global reit. Besides starhill and those mentioned in ur blog, any reit u feel is undervalue currently?

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    1. Generally, I think most of them are fully valued after the recent rally. The upcoming rise in interest rate is also not helping … in fact, I am thinking of taking profit on those that I feel have ran ahead of their valuation ✌️

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  5. Might be a good move to take profit first like you said. I am awaiting next interest hike to see any chance to accumulate more.

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