Rory
I haven’t attended any one-day seminars on REIT’s, but I do have a relevant qualification and, most importantly, I have considerable experience of investing my own money in REIT’s. (I don’t try to advise others on what they should do with their money, but I do try to help them steer clear of bad advice.) I’ve been investing in REIT’s now for more than 10 years and I’m well aware of the vagaries of price relative to net asset value.
For one particular REIT that I’ve held for the last number of years, I’ve checked the numbers. The share price at yearly balance sheet dates has varied from a low of 59% of NAV to a high of 86% of NAV. In contrast to your theory that the share price of a REIT falling below NAV indicates some sort of gloom around asset values, the evidence for this particular company doesn’t bear this out. Yes, when the share price was 59% of NAV, NAV fell by 1% in the following year, but the following year the price was still only 67% of NAV yet the NAV rose by 15% in the following 12 months. When the share price rose to a high of 86% of NAV, the NAV only rose by 4% in the following 12 months.
This sequence of events indicates that there is no definite relationship between the extent of the discount of the share price from NAV and subsequent movements in NAV. I would be loath to extrapolate from that limited experience to make any general comments on the market but I have never heard of any academic studies that supported your thesis. Can you point me to any?
For what it’s worth, I have been reluctant to invest in Irish REIT’s as the discounts from NAV are far too low for my liking. The discounts on UK and other REIT’s are far higher, as the numbers given above indicate. I would think that discounts for Irish REIT's will eventually reach levels similar to those in other countries for stocks of similar size, which is not good news for their prospective share prices.
This will be my last post on the issue. There's little to quibble about here - your observations are accurate and your experiences are real and interesting. However, the frustration you communicate - by demanding certainty in responses - shows a certain inexperience. The following is not meant as a criticism, but the saying that
'a little knowledge can be a dangerous thing' may be apt. In this case, I think you are not seeing the woods from the trees.
In my experience, the most important thing about a stock or fund is the likely rate of growth in the future and how it is priced relative to that likely growth. In the case of an investment trust - which is a fund listed on a stock market - if investors feel the future growth is likely to be well above average they are likely to bid up that fund's price to a premium. Sometimes it is still worth paying that premium because the subsequent growth makes up for it. If the growth does not materialise the price may revert to a discount. But that's not really much different to how investors treat individual stocks. Sometimes investors on masse get excited about a certain company's future growth prospects and pay, say, 20 times earnings when in the past the stock normally traded at, say, 10 times earnings. In that case one might argue that the stock is trading at a huge premium to its historical valuation.
The key in both instances is the actual growth, and, in the case of investment trusts, the growth in net asset value. The share price wanders around the net asset value - sometimes at discounts, sometimes at premiums. But if you get the right fund and it delivers decent growth over the medium to long-term, whether it started at a discount or premium is not particularly important. In other words, the discount or premium is not the primary determinant of returns. In that context, I think your own experiences, which are informed and real, suggest you are more comfortable looking for REITs where investors see no excitement or see a lack of growth (in other words, you sound like a value investor). This creates a lack of demand and the shares fall to a discount. In the case of the Irish commercial property market, both Green REIT and Hibernia REIT were priced at premiums to their balance sheet values (NAVs) since they listed in 2013 as investors in general expected strong growth as the Irish commercial property market recovery took hold. Good growth has been delivered, but the future is now quite uncertain. As a probable contrarian investor you may now be more comfortable with a significant discount, or you may want to see wider discounts given the cloudy outlook. Your patience and understanding of value may be rewarded or you may miss the boat if investors change their gloomy forecast.
Personally, I don't have a strong view one way or the other at present, sometimes I do. In July 2013, we thumped the table for subscribers to GillenMarkets that the great recovery in the Irish commercial property market had most likely begun, and it was time to buy into life company Irish property funds (there were no REITs listed then). We got that right, we don't get everything right.
So, in closing, investment trusts where the outlook for growth is opaque or where the track record of the fund manager has been poor mostly trade at discounts. But well-performing funds which carry low risk and where investors think more of the same lies ahead often trade at premiums to net asset value. The mighty £2.5 billion RIT Capital Partners Trust (ticker code: RCP LN), which trades on the London Stock Exchange, is a case in point; it currently trades at a small premium to NAV. Such investment trusts, of course, are the minority which is why it is accurate to say that the average investment trust trades at a discount. But as I think you'll agree, it's not the full picture.
In the current low interest rate climate, investment trusts that focus on delivering an above average income (dividend yield) that is well supported by underlying revenues into the fund are trading at premiums to net asset value. If long-term interest rates rise those premia won't last, but it's what investors are doing at present and one can subscribe to it or avoid such funds. The Holy Grail is to find a trust that trades at a wide discount - 80p in the pound, say, - and where investors are misjudging the outlook. But, again, that's no different than finding a company whose shares are trading on a below average price-to-earnings ratio and where prospects for growth are about to change or are simply underestimated by the market.
