Obviously I have too much time on my hands today, but it is...

Obviously I have too much time on my hands today, but it is pretty hot to go anywhere, so here it comes.

An explanation why I think the highest geared REITs are the pick at a transition point from bear to bull market.

I emphasize this example is NOT using exact MIX figures, but it is pretty close. I just chose round numbers to simplify math.

Consider a REIT (call it XXX) with 500 mil shares, which has 750 mil worth or property and 400 mil of debt.

Having an equity of 750-400 = 350, Net asset backing (NAB) per share is 350/500=70c. Gearing is 53%, which is pretty standard and not too scary.

In a bull market, where RE prices are expected to rise further, the SP will be probably north of 70c.

Suddenly, a financial crisis unfolds and values of RE drop. The 750 mil worth or property is discounted by a third and the RE assets are now valued only at $500 mil. Since debt is still at $400 mil. XXX's NAB is now $100 mil, or (100/500)=20c per share. In addition, because market is expecting the prices to fall further, (knowing that an additional 20% fall will wipe out all equity altogether), XXX SP is priced for extinction at well below 20c, at a fraction of NAB being 4-5c. Gearing is now at a rather scary 80% making it pretty hard to refinance expiring loans. If there are defaults or refinancing issues, you can halve this SP from that point so it wouldn't surprise if XXX traded at 2-3 cents.

The crisis however ends and valuations start rising. As you can imagine, the scenario that may unfold is the exact opposite image of what happened during the crisis.

Of course this is best case scenario and in case of MIX we still have the tricky issue of RBMS1 refinancing. But I can clearly see a multi-bagger potential here with a good enough probability for me.

Cheers