Sabana REIT could see a change for the better.

As we grow older, feelings of deja vu might become a bit more common. It is probably due to accumulated life experience or maybe the mind is just degenerating.

Anyway, when I read that e-Shang Redwood Ltd (ESR) became a substantial unitholder in Sabana REIT about a week ago, I got a feeling of deja vu.

ESR are the people who bought a majority stake in the manager of Cambridge Industrial Trust (CIT) not too long ago and they also own 12% of CIT.

e-Shang Redwood is a pan Asian logistics entity. Don't play, play.

This reminds me of the time when CIT tried to take over the distressed MacArthurCook Industrial REIT (MI-REIT). Chris Calvert, the CEO of CIT, who was then formerly the CEO of MI-REIT used CIT's resources to buy into MI-REIT.

There was a big fight over MI-REIT with the team led by George Wang. Fortunately, George Wang et. al. won the fight and AIMS AMP Capital Industrial REIT was formed.

In my opinion, Chris Calvert did a poor job of running MI-REIT which led to a need for massive re-capitalisation. If CIT had taken over MI-REIT, with CIT's lacklustre performance and controversy over the years, I think MI-REIT would not have done any better.

It is one thing having good assets and another having a good manager. If we have both in a REIT, we have a clear winner. However, if I must choose, I will choose a good manager because a bad one will just squander away good assets.

With Sabana REIT, I have shared how its numbers were really good at IPO and it just went downhill 3 years later. The manager has constantly struck me as self serving and mediocre and this is putting it mildly.

So, in Sabana REIT's case, a change is needed. Some might say any manager is better than the current one but, more accurately, I would say that it is difficult to do worse than the current manager.

When CIT bought a big stake in MI-REIT years ago, it was with the intention of taking over MI-REIT. Now, I believe that ESR has the intention of taking over Sabana REIT one way or another.

I am holding on to a legacy investment in Sabana REIT that is free of cost as well as units from the recent deeply discounted rights issue. So, I am very much in the black. If ESR is going to bring change to the REIT, even better.

Related post:
History with Sabana REIT.

Reference:
Sabana REIT and ESR.

No change to my plan as I plan changes to my life.

Recently, I have not been blogging very much about the stock market or anything to do with investments, I am sure regular readers have noticed. There are various reasons for this but the primary reason is because I have put in place a plan for whichever direction the stock market may go.

If the stock market should trade sideways, I will keep the status quo and simply collect income from my investments. There is no need to trade constantly.

However, recent and future changes in my life are likely to result in less free time in future. I am and will be spending more time with my family, on self-improvement and, perhaps, even travelling.

Although I am not really affected by the current state of the stock market, going by the emails I have received, I know many people are. It is no surprise that many are wondering what to do. Should they hold? Should they sell? Should they buy more?

I always tell people that if they do not feel comfortable investing in something, don't. There is no point in being invested in the hope of making money and getting sleepless nights worrying about how the investment might turn out.

Of course, for the more open-minded and those with more questioning minds, asking questions to understand why the discomfort exists is the way to go. From there, go one step further, ask questions and see if the reasons for any aversion are actually valid. This would point us in the right direction.

Now, regular readers would know that I am heavily invested in certain S-REITs. I continue to believe that the very low interest rate environment which is likely to persist till 2013 is going to be good for REITs.

In an environment where economic growth is more likely to be revised downwards than upwards, REITs' more predictable and consistent income streams are also a big plus. REITs can continue to do well even with a reduction in economic growth or even with zero growth. In prolonged recessions, REITs are also quite resilient even if some tenants go broke because of the many months of rental deposits they collect from tenants.

So, being relatively heavy in S-REITs which provide between 8 to 10% per annum in distribution yield while I sit out the volatility in the stock market provides me with a peace of mind and some meaningful regular income at the same time.

Recently, there were people who mentioned that we have to be concerned with the fact that most industrial properties in Singapore are between 30 to 60 years leasehold in nature. Therefore, the high distribution yields are not perpetual. Of course, they are not perpetual but this does not mean that they do not make good investments in the meantime.

I learned through experience that freehold properties do not necessarily mean that they will do better in terms of valuations or rental income. It only means that they are yours in perpetuity. I can say for a fact that certain leasehold properties have done much better than freehold properties in the last few years. How much a piece of real estate is worth depends on demand. It is quite simple.

With demand for industrial properties, especially high tech industrial types, likely to remain resilient in Singapore, investing in industrial properties S-REITs with stronger numbers cannot go far wrong. In this respect, Sabana REIT has my vote.

What about AIMS AMP Capital Industrial REIT? Well, even its most vehement detractors (mostly from its MI-REIT days) must admit that the REIT has done much better since George Wang et al came into the picture. Like I said in an earlier blog post, some short term pain is likely with the redevelopment of 20 Gul Way but the longer term benefits make it worthwhile.

Finally, to dispel the misconception that I am a diehard optimist of REITs, I will say again that it is unlikely that conditions will always remain this benign for REITs. I am, therefore, unlikely to remain heavily invested in REITs forever. There will, most probably, come a time to divest but the time is not now.

Of course, my believes remain just believes. They form partially the basis for the plan I have in place now. Although I feel that my plan will serve me well, there is no way to be sure until the storm is over. Do your own due diligence and if you feel that my plan suits your purpose, go for it.

With my finances almost on auto-pilot, I will try to spend more time on other aspects of my life from now.

Related post:
Staying positive on S-REITs.

High yields: Successes, failures and the in betweens.

In this post, I shall share some personal experience with high yielding trusts and provide some numbers in the process for the purpose of illustration.

High yielding trusts which have done very well for me are those which meet the selection criteria I have talked about so many times before for REITs.  Investing in such trusts is mainly about generating a steady passive income (cash flow) and to do this well, we have to look for low gearing, high yield and attractive discount to NAVs. These factors will ensure that the trusts' distributions are meaningful and sustainable.  Here are some which have done well for me:

First REIT:  I first bought some in 2007.  It had low gearing, high yield but did not have a great discount to NAV.  My initial purchase price was in the mid 70c.  The dpu was about 6c per annum.  As prices slumped during this last crisis, I bough more at 42c.  The dpu has risen to almost 8c per annum in the meantime.  First REIT didn't have to issue any rights or do any share placements as its gearing was relatively low and still is.  The unit price of the REIT now is 82c thereabouts.

LMIR:  I first bought some in 2007, not during the IPO at 80c, but after the price dropped to 70c days after.  It had low gearing, an attractive yield and trading at a discount to NAV.  During the last crisis, I bought more and the lowest price I bought more at was 18c.  The dpu is now almost 5c per annum.  It didn't have to issue any rights or do any share placements as its gearing was very low and still is.  The current unit price is about 48c or so.

Suntec REIT:  I always wanted some Suntec REIT units but looked on in amazement as the price hit $2.00 at one stage.  I bought some at $1.03 during the downtrend.  It went on in the coming months to make a new low at 50c or so, if I remember correctly.  As the price recovered, I bought more at an average price of $1.00 or so.  NAV per unit was almost $2.00. So, the discount to NAV was very attractive. The dpu is about 10c and provides a handsome 10% yield for me.  Gearing level is not very low though. 

Hyflux Water Trust:  A business trust, not a REIT.  This is an investment which many of my friends remember because I was talking about it a lot early last year.  They listened politely mostly.  I was always interested in this trust as it has regular cash flow through its exposure to the water sector in China.  In January 2009, I looked at it again in greater detail as the price was so low.  I found the yield to be almost 20% then.  Gearing was non-existent and it was trading at a very nice discount to NAV.  The unit price was 30c or so at that time.  I went on a buying spree.

I did not keep all of these investments bought at low prices. I sold most of them for very nice capital gains, cycling the funds into laggard counters like Healthway Medical to make more money.  I kept, on average, 10% of my original positions in each of these investments to collect passive income in perpetuity.  It would have been nice if I had been able to keep my investments in these trusts in full and yet have more money to invest in laggard counters but, unfortunately, my resources are limited.

As you could probably tell, I was not always rigorous in making sure that all three criteria I talked about were met in choosing a trust.  In part, such trusts did not present themselves all the time and I had to make do with the best choices available.  This last crisis, however, was an opportunity of a lifetime.

It was also because I was not rigorous that in my early years with trusts, I made many mistakes in my choices. What we must always remember is not to focus solely on yields.  Also, do not invest in anything without doing our own FA. Here were some of my mistakes:

MPSF: It just got suspended today. This must have been my worst mistake. I listened to a very young "analyst" who said it gave upwards of 10% in yield and that the yield was sustainable. I invested a five figure sum without doing any analysis of my own. I later found out that MPSF invests in other REITs in Australia and as some of these REITs are private in nature, they could gear up to 80%! MSPF froze all distributions with the credit crisis but what is worse is the complicated situation it is in with so many cans of worms. There is no passive income for unitholders and, as far as I can see, there is no clarity as to its future. Must remember not to be swayed by sweet talking analysts. Always do our own homework.

FSL Trust: A friend introduced me to shipping trusts saying that I should diversify my passive income stream. He also introduced me to Rickmers and PST but I only have a position in FSL Trust. I still get passive income from the cash flow generated by its business and I receive  >8% yield per year based on my average price. High gearing in excess of 100% and the fact that its assets depreciate whether or not the economy does well make this a mistake for me.

CitySpring: This is a business trust. I was emboldened by the fact that this has the backing of Temasek Holdings. It had very high gearing but the management (headed by Sunny Verghese) said that they did not have to issue rights and people who thought they had to didn't understand their business. A few months later, they issued rights. The yield plunged and unitholders became poorer as they subscribed to the rights. It yields an average of 6.5% per annum for me.

There are a few others but the essence of the negative experience is more or less the same. For examples, with FCOT (previously Allco REIT) and MI-REIT (now AMPS AMP Capital Industrial REIT), I overlooked their high gearing levels at the time of purchase.  This is also a reason why I tell people to be cautious with Cambridge Industrial Trust (CIT) which I am vested in as well as its gearing is still in excess of 40%.

As creating a significant stream of passive income is still a very important objective for me, trusts with high yields must still play a part in the grand scheme of things. Rather than remember the pain and avoid these trusts altogether, I choose to remember the pain and find a way to achieve mastery over them. I hope that by freely sharing what I have realised to be the right way to approach REITs (and other forms of trusts) here in my blog, other investors who might not be in the know would not have to suffer like I did.

AIMS-AMP Capital Industrial Reit (MI-REIT)

As expected, a re-rating upwards:

From Business Times, 30 Dec:
Moody's upgrades AIMS-AMP Capital Industrial Reit
Re-rating follows recapitalisation exercise

MOODY'S Investors Service has upgraded AIMS-AMP Capital Industrial Reit's corporate family rating to Ba2 from Caa1 following its recent recapitalisation exercise.

The industrial trust - which was formerly known as MacarthurCook Industrial Reit - underwent a change of name after a recent debt-and-equity-raising plan. The Reit placed out shares to new investor AMP Capital Holdings and existing sponsor AIMS Financial Group as well as other cornerstone investors. This was then followed by a rights issue and a new term loan.

Concluding a rating review that was started on Nov 9, Moody's said that the rating outlook for the Reit is stable.

In addition, its liquidity profile has improved substantially, without material refinancing needs in the near term, Moody's noted. The Reit's debt/capi-talisation leverage has fallen to 30 per cent, from 47 per cent as of Sept 2009. The Reit's major borrowing, a new $175 million term loan, is only due in December 2012.

Strategy: I bought a large chunk of MI-REIT at 20.5c after the recap exercise. At that price, it gives a yield of about 10%. It's trading at about 30% below NAV. It has the lowest gearing amongst Singapore industrial REITs. For anyone looking for high yield at a bargain, this is a BUY even at 21.5c. Once again, look to TA for guidance on entry and exit prices.
High yield portfolio

High yield portfolio

In case anyone is interested in building up a portfolio of high yielding Singapore counters, here are a few counters worth considering:

Saizen REIT - For a potential yield of 13% from middle of 2010. Lower gearing in time. A strong Yen is a plus as distributable income is converted to S$ for distribution to unitholders. At 15c, it is deeply undervalued. Please refer to the earlier entry on Saizen REIT for a more detailed write-up. Passive income with high yields: Saizen REIT

MI-REIT - Soon to be renamed AIMS AMP Capital Industrial REIT. With its recent recapitalisation exercise, gearing is at 29% and the yield is a respectable 10% with price at 20.5c. NAV is 31c. I like Singapore industrial properties a bit more than office buildings as the demand is more inelastic. AIMS-AMP Capital Industrial Reit (MI-REIT)


LMIR - A joint venture between Indonesian powerhouse, Lippo, and Mapletree (a subsidiary of Singapore's Temasek Holdings). Indonesia never did go into a recession. It kept growing through the financial crisis. This REIT owns shopping malls in the country. With domestic consumption forming 60% of GDP plus a growing middle class, this REIT will do better in time. Indonesia needs more malls. Yield is at 9.5% with price at 51.5c. Gearing is a low 12%. Price has closed above resistance. 50c might just be resistance turned support. LMIR

First REIT - Owned by Lippo, it primarily owns healthcare facilities in Indonesia and Singapore. Yield at 9.5% with price at 80c. Gearing is a low 16%. This counter has been doing a levitation act. Seemingly infallible.

Suntec REIT - A respectable yield of 8.6% with price at $1.35. Gearing is at 34%. However, its price is close to resistance. Might want to wait for a pullback before entering. $1.25 or thereabouts would be a nice entry price.

SPH - My favourite high yield blue chip. At the price of $3.60, I'm estimating a fairly conservative 5.5% yield in 2010. Strong balance sheet. Price seems to be going through a basing process now.

I own units or shares in all the above. These are for long term passive income generation. So, I won't be too bothered by short term price fluctuations. There will come a time when I should liquidate these. This is when there is a change in the longer term trend.
A new year and a new decade. Strategy for 2010. 

Update (added on 13 Oct 2010).