Re: Bad Idea: Borrowing to Invest
Posted: Fri Jun 21, 2019 6:34 am
I enjoy talking about stuff like this but if it causes you guys distress, maybe I should mention that I am within my risk profile and am still in the accumulation phase of my life.
From reading some other threads I have come to understand TokyoWart that you are likely much further along in life. As such you should of course be off-risking.
Anyway, I am old enough to have grown out of my "snarking on web forums" phase so I will avoid replying to that comment about contract duration.
Responding to challenges to the investment thesis seems like a reasonable sanity check so I'll try to reply to what has been said.
Future NAV of a solar REIT is more predictable than one might expect. NAV being the assets under management, and those assets being solar panels plus a little land means NAV will slowly go down overtime by the rate of depreciation on the Panels. A panel's life is 20 years, which is why the Mega Solar fixed price contracts are such a duration. There are cases where NAV might change if the fund makes a public offering or buyback. If the REIT is trading at a premium to NAV, such as the largest regular REITs are, then issuing more units will increase the NAV for even existing investors. Likewise if the fun is trading at a subsidy to NAV then selling assets and buying back units would increase NAV.
What I think you might care more about than NAV though is the unit price. This is mostly a ratio of the NAV but itself can fluctuate. For example if a fund is managed well the unit holders might be willing to price the fund at a premium. This is the case for the big Japanese commercial REITs, they tend to trade at 1.2-1.3 NAV with a 3-4% return. Meanwhile you might have a startup fund like Mirai Corp which due to its newness and smaller size trades at only a small premium to NAV and thus has a higher "risk premium", which is just a way of saying that it is giving a 5-6% return.
Notice though that the raw rate of return of the real estate in those funds is mostly the same, all funds try to charge similar to the market rate.
Side note: this is why the Oedo Onsen REIT is paying such a higher yeid. Investors do not trust that the Oedo Onsen Hotel company, which 100% owns the REIT's management company, will put the investors first. As well that Oedo Onsen is the only tenant of the REIT brings low-diversification risk.
Solar REITs have less downside than regular REITs, but also 0% upside. There is no scenarios where the panels generate more than they were designed to. Nor is there a chance of the energy company's asking to pay more. Thus while their raw rate of return of 7-8% looks high, when you price in the depreciation (-5%) they are actually returning more similar to the large regular REITS.
PS: That article you linked does indeed word it poorly, it makes it sound as if the existing mega solar plants will have their contracts changed. There is of course nothing of the sort happening. A few years ago the government moved to issue Mega Solar contracts based on an auction with the goal of reducing the issued prices. This does not affect existing contracts. My suggestion is you should read multiple sources and do your own research before you go into investments. If you want to research mega solar either reading the japanese articles/press releases or this site might be better: https://tech.nikkeibp.co.jp/dm/solar-power-plant/ <- they have journalists who actually know/understand what they are writing and not just poorly rewriting press releases.
PPS: How much leverage is appropriate for your individual situation is more important than trying to get the biggest loan possible. Use the Kelly Formula to know what is appropriate and ensure your own operating cashflow can maintain the debt.
From reading some other threads I have come to understand TokyoWart that you are likely much further along in life. As such you should of course be off-risking.
Anyway, I am old enough to have grown out of my "snarking on web forums" phase so I will avoid replying to that comment about contract duration.
Responding to challenges to the investment thesis seems like a reasonable sanity check so I'll try to reply to what has been said.
Future NAV of a solar REIT is more predictable than one might expect. NAV being the assets under management, and those assets being solar panels plus a little land means NAV will slowly go down overtime by the rate of depreciation on the Panels. A panel's life is 20 years, which is why the Mega Solar fixed price contracts are such a duration. There are cases where NAV might change if the fund makes a public offering or buyback. If the REIT is trading at a premium to NAV, such as the largest regular REITs are, then issuing more units will increase the NAV for even existing investors. Likewise if the fun is trading at a subsidy to NAV then selling assets and buying back units would increase NAV.
What I think you might care more about than NAV though is the unit price. This is mostly a ratio of the NAV but itself can fluctuate. For example if a fund is managed well the unit holders might be willing to price the fund at a premium. This is the case for the big Japanese commercial REITs, they tend to trade at 1.2-1.3 NAV with a 3-4% return. Meanwhile you might have a startup fund like Mirai Corp which due to its newness and smaller size trades at only a small premium to NAV and thus has a higher "risk premium", which is just a way of saying that it is giving a 5-6% return.
Notice though that the raw rate of return of the real estate in those funds is mostly the same, all funds try to charge similar to the market rate.
Side note: this is why the Oedo Onsen REIT is paying such a higher yeid. Investors do not trust that the Oedo Onsen Hotel company, which 100% owns the REIT's management company, will put the investors first. As well that Oedo Onsen is the only tenant of the REIT brings low-diversification risk.
Solar REITs have less downside than regular REITs, but also 0% upside. There is no scenarios where the panels generate more than they were designed to. Nor is there a chance of the energy company's asking to pay more. Thus while their raw rate of return of 7-8% looks high, when you price in the depreciation (-5%) they are actually returning more similar to the large regular REITS.
PS: That article you linked does indeed word it poorly, it makes it sound as if the existing mega solar plants will have their contracts changed. There is of course nothing of the sort happening. A few years ago the government moved to issue Mega Solar contracts based on an auction with the goal of reducing the issued prices. This does not affect existing contracts. My suggestion is you should read multiple sources and do your own research before you go into investments. If you want to research mega solar either reading the japanese articles/press releases or this site might be better: https://tech.nikkeibp.co.jp/dm/solar-power-plant/ <- they have journalists who actually know/understand what they are writing and not just poorly rewriting press releases.
PPS: How much leverage is appropriate for your individual situation is more important than trying to get the biggest loan possible. Use the Kelly Formula to know what is appropriate and ensure your own operating cashflow can maintain the debt.