Croesus Retail Trust: Cap rates and growth.

When we invest in a company, it is important to be forward looking. After all, we are investing for the future and not the past. So, although numbers could tell us about the past and the status quo, to forecast performance is a little more difficult.

However, if there is some consistency, then, there could be some measure of predictability. This is probably one reason why many like investing in real estate because their values and rental rates are sticky in the short or even medium term.

Related to this, we often hear people talking about cap rates and some readers have asked me before what exactly are these. Well, cap rate is short for capitalisation rate.

Basically, it is a property's net income as a percentage of its purchase price. So, it is a measure of investment yield. This yield is part of the total return on our investment.

Net income? Yes, you might have seen the acronym NPI before and this stands for Net Property Income. It is basically gross income less expenses. Looking at NPI is more meaningful than looking at gross income, for obvious reasons.

Naturally, we would want to have as high a cap rate as possible if we were to buy a property as investors. This would mean getting as high a net income as possible and/or as low a purchase price as possible.

In a recent interview with Croesus Retail Trust's CEO, he said that it is getting harder to buy real estate in Japan at a bargain as prices have been rising. He also said that the Trust has to move at a faster clip in acquiring another asset.

Clearly, rising property prices will reduce cap rates, all else remaining equal. However, as economic conditions improve and with initial evidence of rising rental rates in the midst of falling vacancy, property prices are more likely to rise than to fall. Expectations are that net income will improve.

So, do I think that Croesus Retail Trust will be delivering a higher distribution yield over the next 12 months? With positive rental reversions at Mallage Shobu expected, everything else remaining equal, yes.

I also suspect that Croesus Retail Trust will be announcing an acquisition soon because:

1. They extended until 31 March 2014 their first right to negotiate for the purchase of the following properties: Mallage Saga, Forecast Kyoto Kawaramachi, NIS Wave I and Luz Omori.

2. They issued a S$100 million MTN last month.

The question is which property would the Trust buy?

Although Croesus Retail Trust is smallish in size given that its initial portfolio of 4 properties has a valuation of JPY 52.5 billion or about S$669 million in total, what can they buy with only S$100 million from the MTN?

Of the four properties in its current portfolio, there are two properties which are closer to S$100 million in valuation:

1. AEON Town Suzuka: S$ 112 million
2. Luz Shinsaibashi: S$ 119 million

Very likely, the Trust's next purchase will be similar in value to these two based on the size of the MTN issued. Of the four properties for which their rights of first refusal (ROFR) have been extended, I wonder which one would it be. Whichever property the Trust decides to buy, however, a completed and mature mall will probably be a DPU accretive acquisition.

Having said this, if each of the four malls on the acquisition list has a valuation of more than S$100 million, then, we might see a private placement taking place. If this should happen, we might or might not see any DPU accretion.

If the Trust should want to purchase two or more malls at once, then, I believe we could see a rights issue. Of course, that would allow all existing unit holders to participate and if the assets to be purchased have attractive cap rates, it should be a good thing.

I hope the management of Croesus Retail Trust does not disappoint. Setting a positive tone in the early years of the Trust's operation will boost investors' confidence and the Trust's standing.

Related post:
Croesus Retail Trust: Substantial shareholders are buying.

Partnering Mr. What and Miss. How.

I was inspired to write something to provide some light reading for the weekend after reading some stuff on Facebook this morning.

It is not just what you say but how you say it.

It is not just what you ask but how you ask it.

The "what" determines the content.

The "how" determines the response.

When we have something to say or to ask, think of the manner in which it could be delivered. Think of the "how".

Of course, the "how" is probably tied to our motivations.

Do we wish for a positive outcome or do we wish for a negative outcome?

If there is a mismatch between our motivations and the outcomes, then, there is something wrong with the "how".

So, how do we deal with this? What?

What we want to do is to be more mindful of the "how".

We should always pay more attention to the ladies.

Of course, I am just talking (and later reading) to myself as usual.

Related post:
To let go or to hold on to a position?

Silver Bullion Coins (Part 2).

I shared photos of some silver bullion coins more than a year ago in November 2012. Seriously, time flies. It doesn't feel like it has been so long.

Anyway, those were Canadian Maple Leaves.

Now, I am sharing photos of some other silver bullion coins that I have:

Part of my stash:

For my thoughts on why it is important to own some gold and silver bullion, click on the related post below and follow the links. I hope you will find it worth your while.

Related post:
Silver Bullion Coins.

Croesus Retail Trust: Substantial shareholders are buying.

On 28 January, I blogged about why some retail investors were badly burnt investing in Croesus Retail Trust. This was shortly after I blogged about why the Trust at the price of 87c a unit then was a very good investment for income.

In the blog post of 28 Jan, I said that persistent selling by almost all the substantial shareholders as the Trust's unit price rocketed through the roof to touch a high of $1.18 a unit and then retreated was the main reason why many retail investors were burnt.

The dumbest reason in the world to buy a stock is because it's going up. - Warren Buffett

The only substantial shareholder that consistently increased their stake was Target Asset Management as the Trust's unit price retreated from the high. They increased their stake at 98c, 95c and 96c in May, June and July 2013, respectively.

On 4 February 2014, Target Asset Management increased their stake again by another million units at an average price of 87.35c per unit. Now, they have an 8% stake in the Trust.

For anyone who does not know:

Target Asset Management was established in Singapore in April 1996. It specializes in equity investment in Asian markets. It practices value investing philosophy.

 

The Company was founded by Mr. Teng Ngiek Lian, a former Managing Director of Morgan Grenfell Investment Management Asia and Managing Director of UBS Asset Management, Singapore. Mr. Teng has more than 45 years of industrial and investment experience in Asia.

Source: Target Asset Management.

 

 

Of greater interest to me is the more recent 2.54 million units bought by AR Capital Pte. Ltd.

AR Capital Pte. Ltd. sold down their stake in the Trust from October to November 2013, some at an average price of 86c a unit and I wondered why. They still held a 6.73% stake in the Trust after all that selling.

Recently, on 14 February, AR Capital Pte. Ltd. became a buyer and bought 2.54 million units at 92c a unit. Yes, 92c a unit. I am baffled.

Why did they sell low and buy high? Many possible reasons come to mind but your guess is as good as mine.

After this recent purchase, AR Capital Pte. Ltd. now holds a 7.32% stake in the Trust.

I took a look at AR Capital Pte. Ltd.'s website. It looks more professional than Target Asset Management's. Very nice. See for yourself: here.

AR Capital was founded by Leong Wah Kheong, who has 28 years of equity investment experience. Prior to starting up AR Capital, he spent 20 years with global asset management firm Schroders, where he was the Chief Investment Officer for Asia Pacific ex-Japan equities from 1996 until his departure in 2005.

Could we be seeing the start of the return of stronger buying interest in Croesus Retail Trust? Honestly, I don't know.

However, I do know that there will always be windows of opportunity for investors to buy good income producing assets at prices that offer good value for money.

These investments could possibly turn out to be for keeps.

Related post:
Croesus Retail Trust: Why some were burnt and burnt badly.

LMIR: Gearing ratio and margin of safety.

A reader asked me why did LMIR's gearing ratio go up so much. It was 34.3% in the last quarter ending 31 Dec 2013 while it was only 28.2% in the quarter ending 30 Sep 2013. That is a 21.63% increase!

There is a simple explanation.





LMIR issued new debt in October 2013 and this was reflected in last quarter's report. The money raised was used to retire a loan facility in January 2014 which was, of course, not reflected in last quarter's report. This was why the gearing ratio jumped.

You might remember that I said that a good thing happened:

"When I blogged about LMIR in August last year, I said that the REIT's term loan maturing this year in June worried me but this concern was addressed when they used the proceeds from the issuance of a 3 year bond to repay the term loan a few months early. This also lowered the REIT's average cost of debt from 6% to 5.3%. A big improvement."

So, we should see gearing ratio come down again the next time LMIR announces results, everything else remaining equal. 





However, if the Rupiah were to continue weakening, gearing ratio will continue to increase. The REIT's assets are denominated in Rupiah but their debt is denominated in S$.

To illustrate this point, look at the presentation slides for 3Q 2013.

Debt at the end of 31 December 2012 and 30 September 2013 was the same at S$472.5 million. However, the gearing ratio went up from 24.5% to 28.2%. This was because property values fell in S$ terms.

Comparing 3Q and 4Q 2013 presentations, we see that property values in S$ terms fell again by 6.4%. 

So, with this in mind, it should not surprise us if the gearing ratio stays above 30% in the next results presentation even after taking into consideration the retired loan facility mentioned earlier.

Although I have said that the Rupiah will recover and that it always does, it is anyone's guess as to when it would recover. 





Whether LMIR will continue to be a good investment will depend on its future performance which is very much dependent on the Rupiah's future performance too.

Having said this, even if the Rupiah stays at the current level, we are likely to see DPU in S$ terms recovering in the next quarter as financial expenses normalise and I have estimated that a DPU of 0.66c is realistic. Is this attractive enough though?

Well, if we were attracted to LMIR because of the estimated 8.6% distribution yield in the recent past, then, we would probably want the same 8.6% yield to be attracted now. 

With a prospective DPU of 0.66c a quarter, to get a yield of 8.6%, unit price has to fall to 30.5c a unit. That is quite a bit to fall from the current 40.5c.

If we were to include the 10% savings from a reduction in the average cost of debt, we could see a DPU of 0.7c in the next quarter. To get a yield of 8.6%, unit price has to be about 32.5c.

So, as anyone can see, unless we are expecting a dramatic decline in unit price, I think an 8.6% distribution yield from an investment in LMIR is probably wishful thinking now, no matter how we slice it. This is the new reality.






If an investor says that he is quite happy with a 7% yield, then, he could get it by investing in LMIR at 40c a unit. 

However, if a 7% yield is all he wants, he could get it from some other S-REITs in Singapore without having to worry about foreign exchange issues. 

If he were to invest in LMIR, he would do well to demand a bigger margin of safety.

For anyone interested in investing in LMIR now, I would say that there really isn't enough margin of safety (i.e. need much higher distribution yield) although for anyone who has been vested for a long time at prices much lower than now, there is probably lesser harm in holding on since he would have benefited from many rounds of income distributions and would also be sitting on some paper gains.

Related post:
1. LMIR: 4Q and FY2013 results.
2. LMIR: There and back again.

LMIR: There and back again.

I have not done any contra trades in a long time. Well, I did one today and lost some money in the process. Good heavens! What has happened to me?

Well, you might remember that I made a decision last week to buy some units in LMIR at 40.5c a unit. It was motivated by the fact that price had fallen significantly from when I sold a big portion of my investment in the REIT exactly a year ago and how distribution yield was an estimated 8.6% at 40.5c a unit. Arguably, it wasn't expensive.

Unfortunately, things went awry and based on the latest results, the annualised distribution yield is only 5.53%.

I always try to look ahead to see if a business could do better and I surmised that LMIR could see a higher DPU in the following quarter which could push annualised distribution yield up to 6.51% (based on unit price of 40.5c) at least.

However, even 6.51% would miss the 8.6% distribution yield which I estimated and which was an important motivation for me to add to my investment in the REIT.

Since the expectation that came with adding to my long position in the REIT was not met, I should logically think of selling. So, after chewing on this over the weekend, I decided to sell what I bought last week, booking a contra loss of a few hundred dollars in the process. Another fee paid to Mr. Market.

LMIR has done passably well as an investment for income in the last few years and it has been good to me. It is still one of my top 5 investments in S-REITs and my remaining long position is still very much in the black. However, whether LMIR will remain a relatively good investment for income will depend on its future performance.

There could possibly be a better time to increase my investment in the REIT.

Related post:
LMIR: 4Q and FY2013 results.

PCRT: Full divestment.

In a recent blog post, I compared Croesus Retail Trust and Perennial China Retail Trust, explaining why although both are business trusts, the former is a better investment for income.

I avoided Perennial China Retail Trust at its IPO in 2011 believing that the distribution yield did not compensate investors sufficiently for the level of risk which they were being asked to take on. I only initiated a long position at a much lower price of 47.5c a unit much later in the middle of 2012.





I did that because I believed that the level of risk had reduced significantly and that the distribution yield of more than 8% or so was sufficient compensation while I waited for the Trust to deliver better results.

About a year ago, I mentioned that the earn out deeds which the Trust was distributing income from will be exhausted by end of the year 2014 and that the management must work harder to ensure its portfolio of assets pick up the slack. When I blogged about the Trust again in November last year, some encouraging progress was made.

In the latest announcements by the Trust, although I am pleased to see that progress continues to be made, I am very concerned that, by the management's own admission, the situation in Shenyang is still challenging. I recently shared this concern with some friends over a lunch gathering too. Shenyang Longemont offices, completed in 2012, is still less than half occupied by the end of December 2013.





So, where is the Trust's income coming from? Its 50% share of the properties in Shenyang contributed $2.25 million in Q4. Perennial Jihua Mall in Foshan contributed $1.28 million in Q4. Assuming that the Trust makes no progress and keeps the status quo, these properties should generate a gross revenue of some $21.56 million this year.

The 5th and last property in the Trust's IPO portfolio is Perennial Qingyang Mall in Chengdu. This is to begin operations in April 2014. This is a bigger mall than the one in Foshan and has secured 85% leasing commitment thus far. If we were to assume a similar level of revenue as what has been achieved by Perennial Jihua Mall in Foshan, this mall could contribute $5.12 million in yearly revenue or more.

So, realistically, the Trust's IPO portfolio of properties should be able to generate some $26.68 million in gross revenue on a full year basis. This is a conservative estimate, all else remaining equal. Not too shabby especially if we consider the fact that there is still quite a bit of vacant office and retail space to be filled.

However, there are costs to take into consideration. In the department of costs, there are recurring costs and one off costs. I will take in just the recurring costs in this analysis because they will impact results on a more enduring basis.





Trustee-Manager's fees, I estimate these at $6.8 million a year once Perennial Qingyang Mall in Chengdu is completed. Finance costs, I estimate these at $10.28 million a year. Assuming that there are no one-off costs in the full year which, of course, is most unlikely, these two major recurring costs would already amount to $17.08 million a year.

Remember that, in earlier blog posts, I mentioned that Perennial China Retail Trust could half income distributions to unit holders once the earned out deeds are exhausted by end of 2014? Now, using the numbers I just presented above, that statement could have been too optimistic.





In an unrealistically optimistic scenario, the Trust could be distributing $16.4 million of income to unit holders a year. Of course, this does not take into consideration possible further improvement in occupancy. However, it also does not consider costs apart from the Trustee-Manager's fees and finance costs. In such an instance, hypothetically, how much income is that going to translate to on a per unit basis?

Right now, the Trust has a DPU of about 3.8c a year. This translates to about $44 million a year for the Trust. So, proportionally, we could see DPU fall to 1.41c a year in 2015.

Now, when we are reminded of the fact that Perennial China Retail Trust said at its IPO that they would distribute at least 50% of distributable income to unit holders, DPU could then be as little as 0.71c in 2015.

Bear in mind that the Trust has two other malls under development, Perennial Dongzhan Shopping Mall in Chengdu (80% share) and an integrated development in Tongzhou (10% share). The former is to be completed in another year or so while the latter in another 2 or 3 years.

Progressive payments must be made and the Trust could either resort to more debt or tap the cashflow generated by its portfolio of completed assets. Which option would the Trust adopt? I don't know but I do know that DPU will take a big hit in 2015 no matter which option is adopted.

Now, what?





My assumption made last year that DPU, in the worst case scenario, will drop by half in 2015 and thereby delivering at least a 4% yield on my purchase price of 47.5c per unit has been very much undermined.

I do not know if the Trust will do better in the next couple of years but for me to stay invested would require a lot more than just faith in the management that they will deliver in future. I need to be adequately paid while I wait.

Last year, I partially divested my investment in the Trust at 61.5c a unit. Today, at XD, I divested my remaining investment at 50c a unit, booking a very small gain of 5.26% but I will receive the 1.9c per unit of income distribution as well.





This is probably a good time to remind myself of something Warren Buffett once said:

"Have the purchase price be so attractive that even a mediocre sale gives good results."

For anyone still vested in PCRT, I hope the Trust does deliver eventually and that its operating assets will do well enough to generate enough income for distributable income to be maintained. Otherwise, a big reduction in distributable income could also possibly lead to a big decline in stock price.

So, what do I think is a fair value for PCRT? I won't give a number but the day PCRT is able to offer me a reasonably attractive distribution yield using only 50% of its distributable income and at the same time maintain a relatively strong balance sheet, I could be interested again.

See: 4Q Financial Statements.
See: Presentation Slides.
See: Appendices.







After writing this blog post, I found that the latest issue of The EDGE has an article on Perennial China Retail Trust in which Pua Seck Guan revealed that he is looking into the possibility of liquidating some of the Trust's assets in order to continue funding payouts to investors to avoid disappointing them in 2015 and beyond. With this strategy, he hopes to continue giving a DPU of 3.86 cents per annum.

Although it is reassuring to a certain extent that there is a plan to maintain DPU, we have to remember that a plan like this, even if executed successfully, is essentially a return of capital. It seems to me like a desperate measure amidst very challenging conditions.

If we wish to invest in income generating properties and get a meaningful yield on our investment, I believe that there are better options available, options which would not have to resort to asset sale in order to fund future payouts.

Related posts:
1. Perennial China Retail Trust: 1H 2013 DPU 1.9c.
2. Perennial China Retail Trust: Progress in Q3.
3. Croesus Retail Trust and Perennial China Retail Trust.

Tea with Solace: Frasers Centrepoint Limited (FCL)

A Peek into Frasers Centrepoint Limited (FCL)

Frasers Cpt (FCL) has been spun off by F&N, the real estate division carved off from its operation business. It was listed on the SGX Mainboard on 9 Jan 14. The stock opened at $1.61, reaching a high of about $1.70 a couple of days later before retreating to the current price of $1.41 to $1.42.

FCL operates as an international real estate company. It owns many properties that we are very familiar with. It has major stakes in two REITs – FCT and FCOT.

Souce: FCL 1Q14 Results Presentation. Click to enlarge.

Financial Highlights

Revenue increased by about 87% and PBIT increased by about 63% Year on Year. The strong set of 1Q14 results showed year on year gains in all segments. Strong overseas development sales were the key driver.

Development PBIT rose by about 121% year on year. It was led by Australia with the completion of One Central Park (CP) and Park Lane Block 5A in Sydney. As for China, around 750 units were sold in 1Q14, but the overall residential market remains cautious in China. In Singapore, Overall prices declined 0.9% q-o-q in 4Q13. Around 15,000 new homes were sold in 2013, 32% lower compared than 2012

Given the increasingly cautious sentiment in the local property market which has been affected by cooling measures, Frasers Centrepoint’s strategy of venturing overseas can put it in a good position for further growth,

There was also an increase in commercial rents and room rates with higher contribution from One@Changi City . Construction of Waterway Point is progressing well, slated to be completed in 2015.

Currently the Net Asset Value per share is $2.15. At current price of about $1.41, it is about 35% discount to its NAV. I am vested at this price

I resisted entering when it was trading at $1.50 or $1.60. Recently, I make a comparison of similar real estate companies listed in Singapore. On average, they are trading at about 0.75x book value. At current price of $1.41, with about 35% discount to NAV, I feel comfortable vested in FCL properties. Valuation is attractive in my opinion.

FCL has a net debt to equity of about 50%, which I am uncomfortable with. Recent media reports suggest that FCL will launch a hospitality trust, which could raise S$600m. Once they spin out the hospitality REIT, they should be able to move some debt off their books. This asset recycling move is beneficial to FCL similar to what OUE and SPH have done in recent times.

This move can fund new acquisitions and allow them to be asset light. This strategy also allows them to earn more REIT management fees and improve its commercial portfolio.

Potential Risks

FCL has a small free float of only about 12%. This does not sit well with large investors. Hopefully, this will change over time. Increasing FCL free float will improve investor participation and narrow the valuation discount. This remains a uncertainty and likely to depend on market forces.

Another potential risks lies in the majority shareholder. In this case, it is Thai boss, Chaoren, holding a direct stake at 76%. It is of utmost important that the Thai towkay's interests are aligned with minority shareholders.

What are the things the management can do to the detriment of minority shareholders? They can set unreasonably high directors remunerations or, worse still, IPT (Interested Person Transaction) which will solely benefit the majority shareholder instead of all shareholders. I believe IPT risk possibility is low but still it is a risk.

As Warren Buffett said, integrity of management is very important. This is an area which I have to pay attention to.

Conclusion

I believe at current valuation, FCL is attractive, trading at about 35% discount to its book value of $2.15. The portfolio is spread across residential, commercial and hospitality properties in markets such as Singapore, China and Australia which reduces the risk of downturn in any particular country dragging down the whole company. It has a good history of increasing its profits and assets. FCL also has a potential catalyst in the form of REIT listings in the near future,

Key risks like free float and management integrity still remains. The financials of FCL look extremely attractive and there is huge potential upside to go but it also holds hidden risk that goes beyond financial statements.

While many people are proclaiming doom for the real estate, my strategy is to invest at attractive valuation and sit tight to wait for events to unfold. I like to stay invested in good counters for longer period of time. All counters are good investments at the correct valuation.

I came across a recent quote from the papers which best explains my strategy in holding this stock.

"We believe that if you don’t believe in holding a share for 10 years, then don’t even think about holding it for three days… Speculators can still get their thrills through other means. But let’s not make the mistake of confusing investing with gambling"

- Mr David Kuo, Chief executive of Motley Fool Singapore.

Some other guest blogs by Solace in ASSI:
1. King Wan Corp. Ltd.
2. Common Sense Investing.
3. Getting ready for investment.