If you have picked a route using the LM model, most, if not all, three major risks mentioned earlier will solve itself. But Master route investors do not just leave things to chance. Instead, they will keep track of the Ways and Means of how these risks are being managed and adjust their portfolio if they see a need to. for managing the risks associated with changes in demand and supply trends, the solution is simply to keep yourself updated. You have to know what is happening in the industry in which your reads resided. As for me, most of my reads have properties in the US and in Singapore.
I keep myself updated by reading news on Reuters, Bloomberg and my daily subscriptions to USA today.com. I pay special attention to any upcoming trends that affect my rates per se. Since I know that my retail reads are currently facing threats like the rising popularity of online shopping, therefore, the implication is that I would expect my reads to make an effort to counter this e commerce threat by creating more interactive events, updating their tenants composition and delivering unique shopping experiences to patrons. Other than reading the news, how to tell whether your read is losing its competitive advantage. One sure way to tell is to look at the patterns between rental revision and occupancy rates. Look at this chart on the left.
The blue line represents the rental rates and the yellow bars represents the occupancy rate. If you observe that the rental rates have been falling quarter to quarter for the past one year, even though occupancy is maintained, this may indicate that The industry is getting more competitive and the management is trying their best to keep their tenants from leaving by lowering the rent rates. What this means is that you may continue to hold on to your rate, but err more towards the cautious side, keep track of rental rates closely that it doesn't drop too significantly if it does start to divest your read holdings. Now, if occupancy is falling, but rental rate remains stable or is rising, the chart patterns in the reflect that the management's may not be up to date with pricing, its rent competitively, or it could mean that the management might be changing its tenant composition.
My advice is similar, continue to hold on to your rates, but monitor any management decisions regarding rental rates. But what if the chart shows both occupancy and rental rates falling? This may be indication that the rate you're holding is losing its competitive edge or the industry as a whole is heading towards a downturn. In such instances provided the read also doesn't have any divestment and acquisition plans, I would advise you to reduce your holdings. Please take note that this technique of observing the rent price and the occupancy rate is only applicable to Reed's whose tenants often renew their leases. Alright, before we move on, let's do a quick quiz.
Aaron is trying to manage the demand and supply risks related to his industrial route based solely on this information, should he increase hold or reduce his industrial holdings? Think about this for 30 seconds. Okay, ready, holding all other things constant? The answer is increase. Because of both the occupancy and rental rates are increasing. This might show that Aaron's industrial rates competitive advantage continues to be healthy and resilience, bringing him solid results.
Let's try another quiz. Ruby is trying to manage the demand and supply risks related to her healthcare read. She sees this chart. What should she do with her healthcare reads? Think about this for another 30 seconds Okay, I hope your answer was not to reduce hold or even increase rubies holdings because the answer was supposed to be not applicable. Recall the insights we have learned about healthcare reads.
This type of reads does not revise their price rentals often. In fact, you will probably not see such a chart in any of the healthcare reads. Great. Moving on to conflict of interest. We Is the next major risk to manage? How can we tell if the Reek is buying up inferior properties from its sponsor?
One splited method to detect this clear conflict of interest is to look at past acquisitions and upcoming ones. In my book winning with reads, I mentioned about the concept on yield accretive that whenever a new property is being bonds, if the building is truly yield accretive, it should sooner or later increase the overall portfolio, net property income yield or NPI yield. In short, this increase in NPI yield shows that the management have bought the property at a sensible purchase price without compromising on the existing total yield contributed by the other properties. Of course, as a shareholder, and owner of the business should allow some time for the management to make the new property accretive To summarize, these are the questions to ask yourself based on past acquisitions, did the reads increase its portfolio NPI yield. Will the upcoming acquisition likewise increase its portfolio NPI yield? If not, is there a good reason given?
Do the reads annual and quarterly reports mentioned anything about yield accretive properties and how they go about achieving them? If the answer is yes to all three questions, then the read should not have any issues with conflict of interest related to sponsors. But be aware of any income or rental supports that contributes the new properties yield a creativeness. Some sponsors do this so that it appeals more to the shareholders of the route by jacking up the yield via income supports to make the acquisition of the property deemed as a creative is all But a temporary measure. For example, with income supports, the reads can pay a distribution amount of $37 million, despite the portfolio of properties bring in only $36 million. So where do you think this extra $1 million comes from?
You probably guessed it, the reeds own pocket. And this cannot go on indefinitely. Eventually, the new property has to step up and bring enough rental income to maintain the overall portfolio yield. If it can't deliver, the reeds will be forced to cut its distribution payout. So don't be fooled by income support. Read through the details of every property acquisition plans.
As for a conflict of interest that arises from management performance fees. Ideally, you want to see the real managers performance fee move in tandem with net asset value. Or distribution per unit and not gross revenue. In other words, if the net asset value or distribution per unit increases, management's fee also increases and vice versa. Therefore, look out for changes made to the corporate governance in the route such that it ensures that these paid to read managers are aligned with the interests of investors. There should also be an internal debt limit imposed in the reads governance as well.
Having this debt limit in place would force the management to make each property acquisition carefully and wisely. Remember, as a shareholder, you have every right to suggest improvement made towards aligning both the management's and shareholders interests. With these measures in place, let's move on to tackle the last major reads related risk, which is dealing with interest rate risk. Similar to dealing with changes in demand and supply trends, keeping yourself updated on news regarding interest rate helps. But whether interest rate goes up or down, you should expect your exceptional reads to be prepared for these changes. To know whether your reads are prepared.
Look out for these two profiles, the debt composition and the debt maturity profiles. The debt composition profile looks somewhat like this. Let's focus on the left circle first. The basics of debt competition one on one says that a fixed interest rate loan is a loan where the interest rate doesn't fluctuate during the fixed rate period of the loan. This allows the borrower to accurately predict their future payments, albeit at a higher premium. Whereas the variable rate loans by contrast, raises and fall together with the prevailing answer interest rate now are the circle on the right.
An unsecured loan is a loan that is issued and supported only by the borrower's creditworthiness, rather than by any type of collateral. In other words, the bank or lender has no claim to the assets. A secured loan, on the other hand is just the opposite. The bank or lender has a claim over the real asset because of its borrowings. Looking back at the Reed's debt composition profile as a whole, ideally, you want to see if your read have allocated a higher proportion to fix debt, and that the debts are mainly unsecured with minimal or no covenants attached to them. The combination of these types of loans are the best when dealing with rising interest rate now or the debt maturity profile page.
Remember, this page can be found in the reads quarter report or annual courts. The debt maturity page is rather informative. It will tell you the type of debt being used by the management to fund the buildings when each type of debt will be repaid and the cost of each type of debt. Ideally, you want to see an evenly spread out debt amongst the years which will look something similar to this. And evenly spread of debts show prudence and competence in debt management. Great question time.
What happens if you notice something like this, a debt maturity profile that shows the following would you increase or decrease your holdings of this route? pause the lecture if you need more time to think. Okay, the answer is decreased because of the presence of a huge amount of debt that is about to be replaced. Finance this year or the next and you know by reading the news that interest rates are about to shoot up. You ought to know that this read has refinancing risks. If the reader is unable to refinance this huge debt in time, they might turn to the issuance of rights or conduct private placement.
Both of these activities will result in share dilution. Moreover, even if the reed does successfully refinance the huge amount of debt, it will likely do so at a less competitive rate, which will result in lower net income and reduce dividends, not something you want to hear as a retail investor. Alright, we have done through quite a bit of material on managing real investment risks. Here is an overview of what we have learned. Number one, keep yourself updated and use rental revision plus occupancy charts to monitor the impact of demand. Supply trends on the reeds business.
Number two, use the net property income yield ratio and beware of rental support when dealing with conflict of interest relating to both the management fees and the sponsors. Number three, make use of the debt profiles to anticipate interest rate risks. And that sums up the lecture. Thank you for your attention.