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PCRT: Full divestment.

Monday, February 17, 2014

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.


Gary said...

Just to understand the lingo - "divesting". Does this means the investor sells his shares he is holding?

AK71 said...

Hi Gary,

Yes, divest is the opposite of invest. :)

qinzheng said...

i am still holding on to it at the moment, hoping for some light at the end of the tunnel... :(

AK71 said...

Hi qinzheng,

Well, there is always a chance that things could improve operationally but it will be an uphill fight.

Actually, a return of capital isn't that terrible an idea. It is, in fact, quite a good although desperate idea since the NAV/unit is much higher than the unit price of the Trust.

The challenge is in finding a buyer who is willing to buy the assets at valuation. That is the true test of whether the assets are worth as much as what is stated on paper.

qinzheng said...

Hi AK,

guess i will just hold on awhile more, anyway my average price is 0.535; so i think will wait till at least it breakeven before i decide my next action.

I am also waiting if i should add up more Sabana, but due to the risk ahead i am holding back...

AK71 said...

Hi qinzheng,

Technically, PCRT looks like there is a chance of a rebound to 53c or so. Well, this is what the charts show now. Whether it will happen or not, your guess is as good as mine. :)

As for Sabana REIT, there is one more bump on the way. This is in the form an expiring Master Lease. Other than that, although the REIT might not be a star performer, it should be undemanding for it to continue delivering current level of income distribution to unit holders. Just hope that the management does not botch things up. :)

Solace said...

Hi AK,

PCRT XD Today?

Then i guess you make a good move to divest and pocket the 7-8% dividends from FY2013.

Based on the facts presented so far, i too have to think about the next step i have to take with regards to this counter.

AK71 said...

Hi Solace,

Yes, it went XD today.

I took a long and hard look at the numbers over the weekend and I didn't like what I saw. I really needed the numbers from Foshan to help give me a full picture.

Like they say, the devil is in the details.

I think that there are less risky investment options out there which could possibly give a similar or higher return than PCRT.

I was lucky it worked out well for me in the last one and a half years.

Solace said...

Hi AK,

You gave too much credits to luck and too little to yourself.

It takes a trained mind to decide that you don't want to take part in the trust IPO and subsequently invest only when safety of margin is great.

It also takes a trained eye to see clearly the directions of the business and to time the sell correctly when the fundamentals have clearly changed.

The outcome is not due to luck(20%) but due your skills(80%) in stock investment.

These are also the skills/qualities and mindsets i want to develop as an investor

AK71 said...

Hi Solace,

Thank you for the encouraging comment but the glowing assessment of my abilities is truly undeserved.

Seriously, I know what I know and I know there is much more I don't know.

Also, I am way too lazy for my own good. If I had been more diligent, I would have avoided many pitfalls and made more money in the last few years. -.-"

Anyway, let us learn together to become better investors. :)

AK71 said...

St. James Holdings Limited announced that it has entered into various conditional acquisition agreements with Perennial Real Estate Holdings Pte. Ltd. or "PREH" and other vendors for the proposed acquisitions of equity interests in certain properties and businesses or "Target Assets" for a total purchase price of S$1.56 billion, which will be satisfied by the issuance of new shares in the company.

The other vendors comprise parties related to Kuok Khoon Hong and Ron Sim Chye Hock, both in their personal capacities, subsidiaries of Wilmar International Limited and Mr Pua Seck Guan.

The Proposed Acquisition is expected to be accretive to the company's consolidated Net Tangible Assets or NTA per share and Earnings per Share.

Post the Proposed Acquisition, the NTA of the Company is expected to increase from S$7.27 million to approximately S$2.66 billion, with 100.0% acceptances of the Proposed Offer.

Simultaneously, the company is proposing a voluntary conditional offer of S$0.70 per PCRT Unit to acquire all the remaining Units of PCRT, which are not acquired as part of the Target Assets, in exchange for new shares of the Company.

Perennial China Retail Trust or PCRT is Singapore's first pure-play People's Republic of China or PRC" retail real estate development trust listed on the Mainboard of the Singapore Exchange Securities Trading Limited or "SGX-ST".


Solace said...

nw i agree, this time luck really play a part.

So, this will be full divestment for me this time round. :)

AK71 said...

Hi Solace,

Yes, luck plays a part in everything! Not every property stock that is trading below NAV gets an offer like this.

Now, I know why Kuok Khoon Hong was buying at 50c when I was selling! -.-"

I would do the same and divest if I were you. Take cash.

Otherwise, you would be given shares in the new company in exchange.

Congratulations! :)

Solace said...

Hi AK,

Thanks! this is indeed a special situation where i did not see it coming. I saw the spike in volume frm 50cents leading it to a high of 0.55. i did queue to sell at 0.55 but it did not reach me. nw everything is clear to me haha.

Anyway, currently i am attending the talk by victor. i am impresed by him and share your views on why he is good. i kaypoh and live nearby sph, so decide to drop by to take a look lol.

AK71 said...

Hi Solace,

You could possibly sell at a higher price on Monday! ;)

You got to see Victor in action today? So envious. :)

Can I ask you for a favour? I would do a review if I had been able to go to the talk. Since I did not go, could you do a guest blog on the talk for ASSI? Only if you have the time to do it, of course. :)

Solace said...

Hi Ak,

No problem, will do up a review and send it to you in a few days time,

For PCRT, one of friend told me that the reverse take over is via payment by shares not payment by cash. I have yet to study indepth yet

If it is true, then it will be more complicated. If not careful, minority shareholder will be given odd lots. Definitely nt the ideal situation

AK71 said...

Hi Solace,

Yup, that is why I think you should divest soon and take cash. Otherwise, you will end up with shares in the new entity.

What will not change is the 70c per unit that is being offered to PCRT's unit holders. So, you could possibly divest close to 70c a unit next week. That is what I think, anyway. :)

Thanks for agreeing to do a review of the event you attended today. Much appreciated. :D

AK71 said...

PCRT: CIMB does not like the latest development.

We view the deal negatively. While we believe the offer of S$0.70 at 1x RNAV and 0.9x P/BV is fair, payment in PREHL shares complicates the issue.

The issue price of PREHL translates to 0.9x P/NTA and 24x P/E, pricey in our view. Existing shareholders converting into PREHL would compromise on yield, accept higher development risks, higher gearing and wait a much longer time for the portfolio to complete development.

While investors can buy PCRT at 0.7x P/BV to be exchanged for PREHL shares at 0.9x P/NTA, we believe PREHL’s shares may de-rate to an average 0.74x P/BV as well.

CMA is trading at 0.87x P/BV, but 75% of its assets are operational, while 77% of PREHL’s assets are under development.

AK71 said...

Opened at 60c and drifted downwards. It seems that Mr. Market does not believe that PCRT is worth 70c a unit.

Consistent with my rationale for full divestment, I believe that the prudent thing to do is to sell into strength and take cash.

qinzheng said...

I divested 50% just a day before of the new! :(

AK71 said...

Hi qinzheng,

55c? That is not bad at all. That is 10% higher than my sell price. Woe is me... ;p

qinzheng said...

Hi AK,

divested @ 0.545, lol. can i ask at what range will you be considering to divest the rest?

AK71 said...

Hi qinzheng,

Unfortunately, I do not have any left. I divested fully already. -.-"

qinzheng said...

Hi AK,

oops,sorry, i was confuse haha, just remembered you partial divest Sabana not PCRT. :)

then maybe u can "advise" what will be a good price to let go? ;)

AK71 said...

Hi qinzheng,

I remember that you are a regular reader and been following my blog for a long time. You know I will never give such advice. ;)

You might want to read this blog post again and the reason why I divested. ;p

qinzheng said...

I'm just trying my luck... :p

AK71 said...

Hi qinzheng,

Aiyoh, you are already very lucky that you didn't sell at 50c like I did... -.-"

Solace said...

sold at 56cents to take the cash. don't get involved in the confusing shares payment.

Average holding price of 50cents, hold for 2 yrs and collected dividends. Not a bad result overall. Full divestment.

AK71 said...

Hi Solace,

I am so envious! LOL!

Congratulations. :D

AK71 said...

Shares of mainboard-listed Perennial China Retail Trust (PCRT) also rose on Monday, closing almost one per cent higher at 55 cents each.


cuie said...

Hi AK, can you please explain in layman's terms "For each Offer Unit: S$0.70, to be satisfied by the issuance of 0.5242 new ordinary shares in the capital of St James at an issue price of S$1.3353 each"? (Source: and Does this mean we can sell our shares for $0.7 and not take any shares in St James? How do we do that if we use the Std Chart online trading platform? Thanks for clarifying!

AK71 said...

Hi Cuie,

Basically, it means that they are offering PCRT's unitholders 70c for every unit they hold.

However, this will not be paid in cash but it will be paid using shares of St James'.

Since each St James' share is priced at S$1.3353, each PCRT unit is only able to get 0.5242 share in St James.

If you choose to sell your PCRT units in the open market, it will take the prevailing market price and not 70c a unit.

You should call your broker if you have any brokerage specific questions. :)

AK71 said...

Perennial Real Estate Holdings, whose properties include Capitol and CHIJMES, made a weak debut on the main board of the Singapore Exchange (SGX) on Friday (Dec 26), opening more than 20 per cent below the notional value of its shares.

Perennial Real Estate - which achieved its stock market listing via a reverse takeover of nightclub operator St James Holdings - recently took over Perennial China Real Estate by issuing new Perennial Real Estate shares valued at S$1.3353 each.

Around 11.20 am, Perennial Real Estate shares were traded at S$1.035, down from its opening price of S$1.05.

Perennial Real Estate - which will have net assets of around S$2.6 billion following the completion of the Perennial China takeover and purchase of a Beijing product - is a Singapore-based real estate developer and manager headed by former CapitaLand retail chief Pua Seck Guan.

Its other Singapore properties include TripleOne Somerset and the House of Tan Yeok Nee, while its China projects include the Chengdu East High Speed Railway Integrated Development and Xi'an North High Speed Railway Integrated Development.


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