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High Yield Portfolio - Update.

Sunday, March 6, 2011

Sometimes, we just stumble upon a good thing. One of my inaugural blog posts when I started ASSI on Christmas Eve 2009 remains the most popular blog post today. I am talking about "High Yield Portfolio".

In October last year, a reader asked if I would do an update on the portfolio and I did. However, it was a "Reply from AK71" kind of thing and were mostly one-liners. See it here.

Have I deviated much from the first time I introduced this portfolio for investors who are more interested in investing for income? Not much. I am still invested in all six counters although the weight of each counter in the portfolio could have changed somewhat.

My largest investment is based on rather contrarian ideas and has attracted some skepticism, putting it mildly. I started investing in Saizen REIT at 13c a unit and I kept loading up.  Even at 16.5c a unit, I bought some. For sure, this is an under-performer in terms of capital appreciation. However, I invested in this with a view that it is grossly undervalued and that things could not get any worse. So, if we take care of the downside, the upside should take care of itself. The annualised DPU of about 1c is much lower than my estimates from a year ago and, at first glance, seems unattractive. I did not take into account the amortising nature of its new loans then. However, when we realise that the DPU could actually be 50% higher if not for the amortising nature of its loans (unlike all the CMBS before), it is immediately apparent how strong this REIT's cashflow from operations actually is. See: 2Q FY2011 results.

My second largest investment is also rather controversial: AIMS AMP Capital Industrial REIT. Reading some other blogs as well as comments left in my blog, I realise how there is still deep seated mistrust of its management. This is despite the fact that it is quite a different animal from its MI-REIT days. It is financially stronger and it has two strong sponsors. It has all its financial requirements well looked after and even managed to refinance its loans at a lower interest rate. Some people say that they were the early investors in the REIT during its MI-REIT days and that they would never recover their money. It might surprise them to know that I was also an early investor but when the REIT was recapitalised, I looked at the numbers and decided that at 20.5c, it was a safe investment promising an almost 10% distribution yield. I increased my investment in the company by some 5x right away and I have recovered all my losses and more since, especially with the rights purchased at 15.5c/unit in September last year. See: Rights issue. Would I buy more now? At 20.5c and with an estimated DPU of 2c for a distribution yield of 9.76%, why not? See: Acquisition of Northtech.

My third largest investment is now in First REIT after its recent rights issue. A blog post of mine says that this one is for keeps and I still believe it is so. See: This one is for keeps. Actually, it is more so now after the rights issue and acquisitions. An expected DPU of 6.4c and the current price of 74c, it will deliver a distribution yield of 8.65%. With gearing low at 15% or so, it has more headroom to gear up for future acquisitions which could bump up DPU. See: FY2010 results.

My fourth largest investment is in LMIR. The investment was premised on a robust Indonesian economy with 60% of its GDP from domestic consumption. However, I do not like the idea of the management losing lots of money in foreign exchange forward contracts. See: Foreign exchange forward contracts. I do, however, recognise that this is a stable passive income generator and exchange rates (Rupiah/S$) should be quite stable from here. DPU for FY2010: 4.44c and at a unit price of 54c, that's a distribution yield of 8.22%.

My fifth largest investment is in SPH. No need to say much here. SPH is one of the highest yielding blue chips I know of. Although it is synonymous with The Straits Times and other publications, it is really its exposure to real estate that I really like. I especially like the fact that it owns and manages The Paragon on Orchard Road. I also like that fact that it is a co-owner of the soon to be completed Clementi Mall. Would I buy more now? The yield is still about 6.5% even at recently traded prices. I might buy more if price were to weaken further. See: Final dividend.

My smallest investment in this High Yield Portfolio is in Suntec REIT. This REIT was something I went in big at about $1.00/unit, give or take few cents, with a view that it would be a beneficiary of the expected improvement in tourist arrival numbers and improving office rentals. Technically, it was also looking good then. I think it is quite boring now with price at $1.50/unit or so. I have divested most of my investment in this REIT and still retain a small investment. Expected DPU for 2011: 9.7c. See: Buy calls.

Do I have any counters I would consider adding to this High Yield Portfolio? Yes, there is one: Cache Logistics Trust. I have blogged about it regularly and did so recently again. Read it here. I could replace Suntec REIT with Cache Logistics Trust if the conditions were right.

14 comments:

Anonymous said...

thanks for this update n sharing.

based on your portfolio mix n different dpu, whats your yield like for the entire portfolio ? i.e annualised dpu vs portfolio @cost or @ market value ?

snoopy168

Anonymous said...

From your previous post, I figure that you considered Saizen undervalued becoz of its deep discount to NAV. That being the case, I am curious why you pass over FCOT, especially when it has a strong sponsor now?

regards,

Touzi.

AK71 said...

Hi SnOOpy168,

I have been asked this before but I have never bothered to do the calculations.

OK, off the top of my head, based on my cost, I think the portfolio yield for me is about 8.5%. Based on today's prices, it is somewhat lower at 7.7%.

If I were to tweak the investments in First REIT and AIMS AMP Capital Industrial REIT upwards, I could increase the yield easily.

It is all very much up to the individual. :)

AK71 said...

Hi Touzi,

I suggested the High Yield Portfolio in Dec 2009. At that time, FCOT's future lacked clarity. It is different now. See:FCOT: Turning around.

I still have a small investment in FCOT, similar in size to my investment in Suntec REIT, based on cost. I made a nice sum from FCOT's rights issue, selling away the nil-paid rights then, as I was unsure of its future. It was quite a big issue, I remember, in more ways than one.

I think FCOT today is a fairly safe investment although I have a preference for industrial S-REITs and blogged about it: Office S-REITs VS. Industrial S-REITs.

Certainly, one could include FCOT in one's high yield portfolio. I just chose not to. :)

Dividends Warrior said...

Hi AK71,

I also have First REIT, Suntec REIT and SPH.

One difference though, I have CACHE.

Your portfolio is rather REIT heavy. Why not invest in other high-yielding companies like Starhub and M1?

Anonymous said...

hi AK;
As you state in First reit; with the recent "increase" in rights issue will the dividend payout still be at est 6cents (2010) or maybe half?

Anonymous said...

just to the get the feel what the seasoned players's portfolio are doing.

@ 6 - 8 % are very acceptable yield for a newbie like me.

Naturally, I'd wished for Temasek's 16-17% (under TSR of http://www.temasekreport.com/2010/overview/year_in_review.html). But then this SWF is another story of it's own....

Thanks AK, keep up the good work & frequency.

SnOOpy168

AK71 said...

Hi DW,

I understand REITs and feel comfortable with them. In a low interest rate environment which is likely to be strongly inflationary, I guess REITs would do relatively well.

Telcoms which are rather defensive in nature would probably do well too. However, I am not conversant with their businesses. So, I avoid. Perhaps, in future. :)

AK71 said...

Hi Anonymous,

First REIT's DPU for 2011 is estimated at 6.4c by its management. This is post rights. So, it won't be half. ;)

AK71 said...

Hi SnOOpy168,

If I can get a consistent 8% yield on my investments. I am beating inflation by a fair bit. That is good enough for me. :)

Anonymous said...

For Saitzen, which i was once owned some shares, you are always quoting "due to the amortising nature..", is it that the previous CMBS need to pay only interest hence more cash available for distribution?

For AIMS REIT, I would prefer to be only lightly invested as I deem the industrial property sector to be highly cyclical, hence its DPU is likely to be volatile over the medium to long term period

oldm@n

AK71 said...

Hi oldm@n,

Yes, commercial mortgage-backed securities (CMBS) are like bonds. No prepayment or partial payment is allowed.

Apart from residential properties, all other forms of properties would be subject more to business cycles. Although, healthcare properties could be less affected as well.

I do not know what the situation would be like in the next few years but at the moment, investing in industrial properties S-REITs is pretty rewarding and I like to put my money where it would be treated best. Things could change in future, of course. ;)

Anonymous said...

Hi AK71,

I happen to come across your blog and enjoy reading your posts. I have the same investment philosophy as you and have been striving to build up my passive income stream over the last few years.

Currently I also have a portfolio heavy in reits and trust, with top holdings in First Reit and Cache and the rest in FSLT, PST, AimsAmpsReit and Sabana.

Hope to learn and share more with you in future.

Cheers,
Busta

AK71 said...

Hi Busta,

Thanks for visiting my blog and for leaving a comment. Good luck to us all. :-)

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