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AK: About REITs—Think Mee Siam When You Think about Optimum Profits
Aspire, Thought Leaders | 09 September 2015
Articles (41) Profile

Not long ago AK had a chat with an interested reader regarding the topic on REITs. The Reader is addressed as “F”, and below is a slightly edited version of their conversation, in which AK explained the difference between “maximum” and “optimal” using the example of a Mee Siam stall.

F: AK, I’ve read your posts on S-REITs and AIMS AMP REIT. Given the conservative outlook for the industrial sector and the decline in Singapore’s economy, I’m sure they will undeniably be affected. What are your thoughts?

AK: Affected, in terms of their unit price, or their operations? And what do you mean by “conservative outlook for the industrial sector?” Also, decline in Singapore economy, like how?

F: I mean their operations—Rentals may not remain at optimum capacity, and the management statement in their accounts receivable.

AK: What is “optimum capacity of rentals” then?

F: 100 percent (occupancy).

AK: That is maximum occupation.

F: Maximum is optimal mah.

AK: Nope.

F: No?? But why would you want to have empty units?

AK: I didn’t say that either.

F: Ok, I’m confused.

AK: If you own a store that sells Mee Siam, and let’s say you have the capacity to cook 1000 plates of Mee Siam a day, and that you sell at only $1 a plate. Are you optimising profits when the consumers are actually willing to pay $2 a plate?

F: No.

AK: Wouldn’t it be better to sell at $2 a plate and maybe just sell 800 plates a day?

F: Yes, but if I can sell 1k for $2 each, it would be even better.

AK: Of course. But the point I am making is that it is never as simple as a matter of achieving full occupancy equals optimum performance. These two might not mean the same thing.

F: Ok, but the management has conceded themselves that performance might be weaker in the coming fiscal year. What are your thoughts?

AK: I will leave them to do their jobs. So far, they have performed very well, and I hope that they’ll continue to deliver. Our job as investors is to monitor. As long as the investment performs to our satisfaction, there is good enough reason to stay invested. What is good enough will depend on what we want out of an investment. If you don’t feel comfortable enough to be invested, it is best to stay out.

F: Hmm…I’m just wondering if (share) prices might go lower in light of a possible decline in revenue. It’s got value, but I’m uncertain about what is a good price to enter.

AK: I will leave the speculation to the speculators.

AK is a Singaporean stock market investor and a popular blogger. His blog was created with the intention of educating investors and sharing his investing journey with the target of having a more secure financial future in an uncertain world by creating a stream of reliable passive income with high yields.

Please click here for more information about this author.

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