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"E-book" by AK

Second "e-book".

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Online shopping, retail S-REITs and Starhill Global REIT.

Monday, March 20, 2017


Online shopping is gaining strength rapidly and even an IT dinosaur like AK buys stuff online. From my own experience, I would say that online shopping is attractive because of two factors:

1. Convenience. Delivered to my home with either very competitively priced delivery fee or free delivery.

2. Cheaper. For the same item, I have saved as much as 30% buying online than buying in a brick and mortar shop.


So, if a shop in a mall is selling stuff that could be found online, unless the mall is conveniently located and unless they are priced competitively, that shop is going the way of the Dodo. It is just a matter of time.

Shopping malls must fill themselves more with shops that offer goods and services which cannot be found online for one reason or another. After all, there are things which online shops cannot do or cannot do well.

Therefore, despite the growing reach of online vendors, I believe that some shopping malls will continue to do reasonably well and some readers might remember that I have been waiting to invest in CapitaMall Trust (CMT). 

However, I have not been able to get in at a price which I am comfortable with because Mr. Market likes pedigree and, just like Frasers Centrepoint Trust (FCT), even now, CMT is trading at around its Net Asset Value (NAV) and both are offering very similar distribution yields in the mid 5%.

REITs, unlike companies, pay out most of their cash flow from operations to their investors. They do not pay dividends from their earnings. They distribute income. They do not have retained earnings. 

One way REITs grow, without placing too much demand on shareholders (think rights issue) or diluting minority shareholders (think private placements) is to ensure that there is genuine growth in the value of their assets which would in turn give them more leeway to fund more growth through using debt. It is a virtuous cycle, one that hinges on the growing value of assets. I think we can agree that CMT and FCT have done rather well in this area.

However, given the uncertain retail environment for some time now, although well run, I would like to invest in CMT and FCT at a meaningful discount to NAV and if they offered higher distribution yields.

Asset values in good times would appreciate but in bad times they could come under pressure. So, buying at a discount to NAV makes sense to me unless we feel that asset values can only go up and never go down.

Although I have been mostly looking at CMT, I have also looked at FCT and Starhill Global REIT (SGR).

I like CMT and FCT. I am more familiar with their malls. However, I am not comfortable with getting in at current prices. 

I am not as familiar with SGR's malls (i.e. Wisma Atria and Ngee Ann City) and not all their malls are in Singapore which, by the way, is a good thing. 

However, trading at a meaningful discount to NAV and offering a distribution yield closer to 7%, to me, SGR is priced more attractively.

There are a few more factors which pushed me towards investing in SGR:

1. More than a third of SGR is owned by the sponsor, YTL Group. This helps to ensure a greater degree of alignment of interest with minority unit holders.


2. The management is looking to sell the REIT's Chinese and Japanese assets to concentrate on what they consider the REIT's core markets of Singapore, Australia and Malaysia. Now, reducing concentration risk is good but having a handful of assets in China and Japan probably isn't beneficial and would, in fact, add disproportionately to operating costs.


3. The relative weakness in SGR's performance is probably going to be temporary because of redevelopment works in an asset in Australia and a delay in a new tenant moving into its asset in China.


Looking at SGR's DPU for the last quarter, annual DPU, all else remaining equal is about 5c which gives us a 6.85% distribution yield based on 73c per unit. 

However, if there were to be more hiccups, income could be affected negatively and I am knocking off 5% from DPU to 4.75c to take this into consideration. 6.5% distribution yield is good enough for me while I wait for an improvement in performance.

I am not buying into SGR because I think its outlook is fantastic. For sure, they will face challenges.

I am buying into SGR because, taking advantage of its recent price weakness, I feel that there is some margin of safety.

SGR is an investment that is likely to generate a fairly good yield for the price that I paid.

Related posts:
1. CRCT added to my portfolio.

2. CMT and when am I nibbing?

4 comments:

desmondsph said...

I have the same thought but not sure if I am right especially I had CMT and FCT already.

Your post is timely and show that a newbie like was right.

will look into buy it at 0.74 and below, hope tomorrow will come to my TP

AK71 said...

Hi Desmond,

I feel that Mr. Market might be overly pessimistic. Time will tell. :)

redponza said...

Hi AK, I have monitored this counter for several years, its DPU growth has slowed down significantly past quarters.
With that kind of growth, I will demand a 8% yield.
In comparison, I think Croesus is much more attractive in recent terms.

AK71 said...

Hi redponza,

I like Croesus Retail Trust very much and it is one of my largest investments right now. :)

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