SEGRO REIT: exposure to rising interest rates

Quick look at a promising company, its a fast growing UK/EU industrial REIT whose share price is now tumbling.

For debt heavy REITS, one of the first things we look at is interest rate sensitivity.

As of end 2021, they had 3406m pounds of debt vs 15bn pounds of property.  Thats reasonable.

Their debt was well spread out:

Source: 2021 Full Year Results Presentation, slide 44.

And its all fixed rate too.  Looks really good:

Source: 2021 AR, p197

Wait, whats this?  After applying derivative instruments, they had a 1.5bn of variable rate debt:

Thats around 45% of their 3406bn debt being variable.  How can this be?

They have converted 1.9bn of their fixed rate debt to floating rate debt using derivatives....WTF?

~1bn of this only expires after 2026.  So they are not getting out of it anytime quickly.  ~600m expires from 2022 to 2026.

This is why their interest rate sensitivity is so high.  A decrease of 17m for a 1% increase in rates (p203) is about a 5% decrease in CFO.  If we expect UK risk free rates to rise to 4.5 to 5.25% by 2023, while they were under 0.5% in all of 2021, thats a 20-25% decrease in CFO.

I'm throwing this into the "too hard" basket.  Their debt has changed since then, and 2022 results will be out on 17th Feb.  But probably not worth looking at yet.  If I buy a REIT I want predictable cashflows, not a bet on interest rates.

Lessons Learned Trading Bear Markets

Trading bear markets is tough.  This post is about me finding a strategy to short bear markets, in a timeframe suitable for me.

My original plan was to simply short and hold into the depths of the bear market.

I had not counted on how sharp the bear market rallies would be:

Source: Wifey

I haven't covered my shorts, and I added to them last week.  But the last vicious bear market rally has given me some sleepless nights.  My shorts moved from a 70K profit to a 20K loss in 2 months!  I learned that prune juice helps constipation.

My timing wasn't great.  The chart below are my shorts (pink arrows) and coverings (blue arrows):

I can't trade day-to-day in the short term.  And its uncomfortable hodling shorts for the long term.  So I need to trade in the medium term - around the bear market rallies.  How can I do this when bear market rallies are unpredictable?

• Simply wait for the BMRs to occur, and as they do, add more.  Add a little at a 5% rally, more at 10%, more at 15% and some at 20%.
• If the BMR doesn't occur, don't short.  Take the attitude that I'll short if the market gives me the opportunity, but I don't have to.  I always have the choice to happily sit in my dividend stocks and cash, waiting for valuations to go low enough or for the macro outlook to change.  We get the worst results when we feel compelled to do something.
• Take some profits when it feels great.  When the market has dropped like a rock for several weeks, your profits are exploding night-by-night, and you are the king of the world...take some profit - maybe 1/3rd or half of my short positions.  I guess everyone learns this instinctively as they trade.
• Don't look at my percentage allocation (eg: shorts vs longs).  Successful short positions shrink, so at the bottom of a crash, they'll be small positions, just when I should be covering (making them even smaller).  Don't have a "target allocation".

We may be halfway through the bear market now.  As we get closer to its end, hodling shorts becomes a really bad idea.   I need to trade around the bear market rallies.  And start taking profits.  Wait for the next leg down...

With the last few days drop, my shorts are now profitable again.

Maybe this bear market rally ended last week:

Source: Keith McCollough