EC World REIT.

Reader says...
What do you think of EC World REIT?

AK says...
EC World REIT, I looked at it and was in the process of blogging about it but, somehow, it joined the ranks of half finished blogs. I have about 400 of these. Terrible, I know.

Looking at that half finished blog, I remember I was concerned about the relatively short land leases, similar to most Singapore industrial land leases and the relatively low distribution yield.





The yield was 7% or so and this was because it was bolstered by the sponsor as well. Without the sponsor's support, the yield would have been much lower. Less than 6%.

Still, the sponsor accounted for two thirds of the REIT's income. Real concentration risk.

There was also something about having debt denominated in S$ which I didn't like. I would have liked for all the debt to be in RMB which would give them a natural currency hedge.





Also, I didn't like that a port was such a substantial part of the the REIT's portfolio. Quite the opposite of e-commerce.

It just didn't seem rewarding enough for the risks we must bear.

I would demand a much higher yield for something like this.






Just being promising is not good enough. Whether I am being compensated sufficiently is more important and this brings to mind my PCRT story.

This is just me talking to myself, of course. 😉

Related post:
PCRT: Full divestment.

PREH is likely to continue trading at a big discount.

My experience with Perennial Real Estate Holdings (PREH) started from its days as Perennial China Retail Trust (PCRT).

PREH has a portfolio consisting mostly properties in China in terms of asset value (75%) and the balance being properties in Singapore.

Some numbers:

NAV/share= $1.68
Gearing= 0.45x
EPS=6.88c






At 90c a share, we are looking at a PE ratio of about 13x.

I believe that PREH is a long term value creator. 

The investment thesis is somewhat similar to that for CapitaMalls Asia which I had an investment in before. Similarly, PREH's Chinese investments will take time to deliver the goods. 





PREH is definitely not for the impatient investor. 

Although not comparable in many ways, for something similar in terms of gearing and EPS, the purist income investor might be more interested in Croesus Retail Trust (which holds Japanese commercial properties) and regular readers know that I have a significant investment in Croesus Retail Trust.

...

At the moment, I have a smallish exposure to PREH and I am likely to add to my position if its stock price should decline further.

I like PREH's longer term growth story and I am quite willing to wait for it to do better.

I bought into my investments in both OUE and Wing Tai Holdings at a 50% discount to NAV or more. 

So, I will probably add to my investment in PREH using the same yardstick.






Related posts:
1. Perennial Real Estate Holdings.
2. Perennial China Retail Trust.
3. Croesus Retail Trust.
4. CapitaMalls Asia.

Perennial Real Estate Holdings (PREH): A nibble?

Regular readers would remember how I once bought units in Perennial China Retail Trust (PCRT), how I sold a part of my investment when its unit price moved up and how I sold my entire investment a couple of years later in 2014.

What motivated me to invest in PCRT in 2012 was the much lower unit price it was trading at the time compared to its price at IPO and while it made progress in its business, its income distributions were largely unchanged. However, when it was clear to me that the income distributions were not going to be sustainable, I made my exit.

Of course, we know that PCRT was eventually delisted and its assets are now part of a larger entity, Perennial Real Estate Holdings (PREH). Backing PREH are big names in the corporate world, Mr. Kuok Khoon Hong, Mr. Ron Sim and Mr. Pua Seck Guan. Together, they hold a combined interest of about 70% in PREH. Some of us might have noticed some persistent insider buying in PREH and that was the reason why a friend recently told me that I should go take a look.

Well, I vaguely remember that PREH owns some Singapore assets as well. So, it is a more complicated creature compared to PCRT. It could be a daunting task to analyse and also because so many of its assets in China are still being developed. Anyway, I decided to start by looking at its financial results dated 13 Feb 2015 and see if I could cut short the process by looking at the numbers which could matter more. See financial results: here.

From 28 Oct 2014 to 31 Dec 2014, revenue was reported as $14.966 million. Just to make it easier for me, I will think of this as 2 months' worth of revenue. Assuming nothing changes, revenue would be $89.796 million for the full year. Now, I try to derive the earnings.

Administrative expenses ballooned due to the offer to buy over PCRT. Removing that non-recurring portion, we could see expenses at $40 million for the full year. Finance costs could be about $60 million for the full year.

Associates' contributions (disregarding fair value gains) would amount to about $8 million for the whole year, all else remaining equal. Similarly, I have ignored fair value gains on PREH's fully owned investment properties to the tune of some $46 million.

Now, if we put all these together, we will get:

Revenue $89.796 million
+ Associates' contributions $8 million
- Expenses $100 million
= A small full year loss of about $2 million

Whether PREH is able to become profitable would depend on their ability to increase asking rents for their investment properties in Singapore and China. It would also depend on whether they are able to sell some percentage of their investment properties to realise capital gains which was suggested by Mr. Pua Seck Guan when he was still running PCRT then in order to fund income distributions to unit holders. That would really have been a partial return of capital but it would also have been a useful exercise to see if the valuation of PCRT's assets was actually realistic.

Since the release of its financial results dated 13 Feb 2015, PREH also acquired stakes in House of Tan Yeok Nee and smallish stakes in Chinatown Point and 112 Katong. It also recently announced the purchase of AXA Tower in Singapore. We could see revenue receiving a boost as these are investment properties that would be generating rental revenue.

Of course, we won't be wrong to suspect that there will also be more debt on its balance sheet and that finance expense should increase. How much of an impact would these have? At the moment, I simply don't know.

What is known is that PREH inherited PCRT's Chinese portfolio and the challenges have not changed. There are still many development projects which are yet to be completed and these have to be paid for.

The funds required for the various projects are estimated to be about S$1.5 billion. That is a lot of money. If we look at the liabilities section of the balance sheet, PREH is already heavily geared. Having said this, they are well located projects situated on transportation nodes.

There are many assumptions for PREH to do better. Mr. Pua Seck Guan has a very good track record in his career and now he has the backing of Mr. Kuok and Mr. Sim. Having strong backers definitely helps especially when circumstances for real estate either in Singapore or China are somewhat challenging now. Could PREH have bitten off more than they could chew?

There are some calls to buy into PREH now because it is trading at a big discount to RNAV. Well, PCRT was also trading at a big discount to RNAV. A big difference is that PREH now owns, in part, some investment properties in Singapore which are generating recurring income but these are also bought with borrowed funds.

There is an estimate that the RNAV per share is $1.83. So, at $1.05, the stock is trading at a 43% discount to RNAV. RNAV is what an analyst thinks the stock should be worth in future based on revaluation exercises. Is it realistic? I read a 19 page report dated 4 February 2015 by PhilipCapital and I feel that they have been pretty realistic with valuing PREH's assets in Singapore.

As for the assets in China, PhilipCapital made assumptions as to percentages of certain development properties which would be sold by PREH and they seem to have opted for more conservative estimates with regards to asset values too. Read PhilipCapital's analysis: here.

Now, assuming that the RNAV of $1.83 per share is realistic, we would then have to ask ourselves if a 43% discount to RNAV is good enough for us to buy into PREH. If we are buying this in the hope that Mr. Market would pay a price closer to its RNAV in future, are we prepared to wait? For how long must we wait? I don't know. Will there be dividends in future as we wait? There could be, especially, if they sell bits (or chunks) of their investment properties although they could also very well opt to pare down borrowings. There is no certainty of a dividend.

I have bought into OUE Limited at slightly more than 50% discount to valuation. I have bought into Wing Tai Holdings at about 56% discount to valuation. Will I now buy some PREH at a 43% discount to valuation? I have a feeling that if not for the persistent insider buying, PREH's stock price would have declined to a much lower level by now. Will insider buying let up? Again, I don't know.

PREH is definitely not an investment for income and I don't think that they are likely to pay a dividend anytime soon. PREH is still very much in its growth phase, just like how PCRT was in its growth phase. PREH might have stronger backing compared to PCRT but there are still many unknowns.

Of course, we could choose to put our faith in Mr. Pua Seck Guan's judgement like Mr. Kuok and Mr. Sim have done and invest in PREH. Why get headaches from trying to analyse the business? Truly, I got a mild headache after my amateurish attempt which lasted several hours.

In conclusion, I probably don't have the kind of vision that these esteemed gentlemen have and I know for a fact that I do not have the deep pockets that they have. If I should invest in PREH, I would make sure it is a smallish position similar in size to my investments in OUE Limited and Wing Tai Holdings.

A nibble? Maybe.

Related post:
PCRT: Full divestment.

2014 full year income from non-REITs.

This is the first time I am blogging about my full year income from investments in non-REITs. As my passive income generated from investments in S-REITs has for many years overshadowed income received from non-REITs, it wasn't very meaningful to blog about the latter.



Now that passive income received from S-REITs took a plunge, it has become more essential to talk to myself about what I have done in the non-REIT space which has shored up dividends received this year, making income contributions by non-REITs a more significant part of my total annual income from the stock market.


Before I continue, readers might want to bear in mind that a few of my investments in the non-REIT space have been with me for many years. They are not all new investments, therefore.

Anyway, non-REITs which have contributed to my passive income in 2014 are:

1. Croesus Retail Trust
2. Hock Lian Seng
3. Perennial China Retail Trust *
4. CapitaMalls Asia *
5. NeraTel
6. Wilmar
7. Yongnam
8. APTT
9. ST Engineering
10. SPH
11. QAF
12. Old Chang Kee
13. K-Green Trust *
14. SATS
15. Ascendas Hospitality Trust
16. Singapura Finance

* Sold and will not contribute any income in 2015.

New or old, I have blogged about all the above stocks before. So, if you should be interested in understanding why and when I invested in these stocks, just do a search for them in my blog and you will find the relevant blog posts.

Of these 16 stocks, I increased my long positions or initiated long positions in the last 12 to 15 months in Croesus Retail Trust, Hock Lian Seng, NeraTel, ST Engineering, SPH, SATS, Ascendas Hospitality Trust and Singapura Finance. 

Apart from Singapura Finance, it is quite obvious that I increased or initiated exposure to these stocks because of their relatively attractive dividend yields. I am still an income investor at heart.

I wouldn't say that all the stocks are of the "good to hold forever" variety but it should be obvious to regular readers that I am not averse to selling a stock if I am no longer impressed by its prospects. 

There are many examples which I have blogged about in the past and examples from this year are Perennial China Retail Trust and K-Green Trust in the list shared earlier.

Anyway, the total amount of dividends from non-REITs in 2014 is beefed up mostly by my rather big investment in Croesus Retail Trust which happened when its unit price took a severe beating shortly after its IPO. 

The relatively large increases to my investments in SPH and NeraTel also helped.

Income from non-REITs in 2014:
S$ 61,752.66

This figure could increase in 2015 despite losing the contributions from Perennial China Retail Trust, CapitaMalls Asia and K-Green Trust. This is because Ascendas Hospitality Trust will make a full year income contribution in 2015.

Of course, it is hard to say at this point in time if I could divest partially or fully some of the investments mentioned here in 2015. 

Indeed, I could also put more money to work in the stock market. So, nothing is set in stone. However, I do know that if valuations should go closer to crisis levels, I will be buying more.

I understand that the stock market could get a bit bumpy but my investments for income should provide me with much comfort and also help to fill my war chest in the meantime.

Related posts:
1. 2014 full year income from S-REITs.
2. AK went shopping in the (stock) market.
3. Be comfortable with being invested.
4. Mystical art of wealth accumulation.
5. Portfolio review: Unexpectedly eventful.
"... my decision to increase my level of investment in SPH and NeraTel last year so that my overall portfolio is less reliant on S-REITs for passive income was pre-emptive. Enlarging investments in Hock Lian Seng and Croesus Retail Trust earlier this year has also helped to reduce reliance on S-REITs for passive income."

Invest X Congress: Q&A.

A feedback which I received from readers is that they wished I had given them some Q&A time after my presentation. I ran out of time and I think I took some of Rusmin's time too. My bad.


Courtesy of Audrey S. who had one of the front row seats.

Well, good thing I have a blog, right? I received quite a few emails, comments and PMs from old and new readers (mostly old as I think the new ones are still too shy) after the event and you might want to think of this blog post as the Q&A session that we didn't have time for at the event:

Q1. On the importance of an emergency fund.

A1. I said that it is important to have an emergency fund that will cover at least a year or two of living expenses and that if people who were at the event didn't have an emergency fund, they should go home and build an emergency fund first and not be investing now. If the economy should go into a recession, chances are the stock market would see prices tumbling too.

Now, imagine if we should be jobless but did not have an emergency fund. We might be forced to liquidate our investments at low prices. Not a pretty picture, is it? This is especially so when that should be the time to pick up good bargains offered by Mr. Market. It would be quite depressing.

Have an emergency fund and also a war chest. Two different funds. Not to be confused with each other.

Q2. On tipping AK.

A2. In the early days, I used to have a tip button in my blog. I installed it after seeing some bloggers having one in their blogs. I removed it after receiving that $100 tip I spoke about at the event. I don't want to feel obligated to anyone to provide advice because I receive tips from them.

I am not allowed to give advice, anyway. So, that was when I started saying I am only talking to myself in my blog. People who eavesdrop do so at their own risk. ;p

Q3. On income producing assets.

A3. Stocks, bonds and real estate. Actually, there are some very interesting assets which people invest in for income. I read that people actually invest in parking lots as well as taxis in Hong Kong to generate passive income, for examples. We can also find business trusts in Singapore which invest in assets such as infrastructure, ships, ports and cable television network.

No matter what assets we decide to invest in, if it should be for income, we want to be clear that the income is generated by the assets and we want to be sure that income distributions are sustainable. The time period could vary. The reason why I sold my investment in PCRT was because I decided that the income distributions were unsustainable.

Q4. On pyramids and percentages.

A4. I spent quite a bit of time talking about the graphic that looked like a pyramid because I felt that it is something important that income investors like myself should have in mind. Being able to compartmentalise investments is helpful in guiding our behaviour towards each investment, actual or potential. The question which I have been asked has to do with percentages since I mentioned that I would not have more than 2 or 3% of my money at the top of the pyramid which represents "aggressive" or "speculative" positions. So, what about the other layers in the pyramid? What are the percentages? I would say that it depends on the individual and his motivations.

Like I said during my presentation, if he is more of a speculator, then, the graphic for him could be an inverted pyramid. For someone who is more into growth stocks but who still believe in having plenty of cash to take advantage of opportunities, then, his graphic could look like an hourglass. Remember the population pyramids we learned in Geography classes in secondary school? You get the idea.

Q5. On Marco Polo Marine.

A5. I had an investment thesis. A sound one too, I believe. If all things had remained the same, the thesis would still be valid today. Of course, things changed over time and with only a schizophrenic bowling ball, I was not able to see the changes before they happened.

For anything positive that has a greater degree of predictability or certainty, I would allow a greater exposure to it in my portfolio. If there is a stronger element of uncertainty, then, I would trim my exposure. It is one way I manage risk. So, this was why I moved my investment in Marco Polo Marine from the "growth and income" section of my pyramid upwards to the narrower "growth" section. We could even suggest that it has a speculative element with its purchase of a jack up rig scheduled for delivery in December 2015. So, logically, it had to become a smaller investment for me.

Q6. On Starbucks, Bangkok and bras.

A6. I was told by a female reader who flashed the "V" sign at me that she was not flashing a victory sign at all. I misunderstood her. She was trying to tell me that I made an inappropriate comment about saving money. Which comment was that?

I made a joke about using money saved from not buying Starbucks coffee to fly to Bangkok to buy cheap and good bras. To all the ladies who were wounded by this joke which was apparently in very bad taste, my most sincere apology.

You can tell that I am truly remorseful because I have not sent out an email to the media stating that I had sacrificed myself to raise awareness of how we could save money and how ladies could use the money saved to buy cheap bras in Bangkok to save more money. Sounds Royt? ;p

Q7. On CMT.

A7. CMT is very well run. There is no question about it. At $1.97 per unit, we are looking at an annualised yield of 5.2%. It is also trading at a premium of 15% to its NAV of $1.71. "I would sooner buy a great business at a fair price than a fair business at a great price." Warren Buffett. To me, buying REITs is almost like buying real estate. I won't want to pay more than the NAV. At NAV, perhaps, it would be good to get some, everything else remaining the same.

Finally, if you went for the event and if you want to find out about the stuff that I could have shared if I had more time, contact me to ask for my presentation slides. I will tell you how to get the slides. Then, use the slides as a guide and search for the relevant blog posts in my blog. It will probably be similar to reading an e-book but with a bit more work required on your part. ;p

More Q&A found in the comments section of this related post: Invest X Congress: Closing thoughts.

Portfolio review: Unexpectedly eventful.

At the end of last year, I shared the results of my efforts in the stock market and also my strategy to grow wealth and augment income in the new year. Quite a few things have happened since then. So, I decided to do a review of how things have moved.

In the S-REITs department, the biggest change this year to my portfolio has to be the major divestment in Sabana REIT. My current long position in the REIT is just a bit more than 10% of my investment at its largest. Whatever I have left is free of cost and will continue to generate passive income although on a much smaller scale.

Also in the S-REITs department, I took part in AIMS AMP Capital Industrial REIT's rights issue and tried to get more excess rights but without much success. Recently, I sold a small percentage of my investment, believing that it was the right thing to do as its unit price ran up, post rights. This REIT is still my largest investment in S-REITs. Having said this, passive income received from this REIT will shrink some 15% this year, given the dilution from the recent rights issue.

In the Business Trusts department, I decided to divest completely my investment in Perennial China Retail Trust after receiving another round of income distribution which I concluded was unsustainable. This was before the takeover offer by St. James.

Also in the Business Trusts department, in late January, I more than doubled my investment in Croesus Retail Trust, believing that, trading at a discount to valuation and offering an attractive income distribution, it is a more dependable passive income generator than Perennial China Retail Trust. Although its relatively high level of gearing is a concern for some, there is unlikely to be any nasty surprises in the area of financing over the next few years.

In other stocks, I added to my long positions in Yongnam and Hock Lian Seng. Yongnam hit a rough patch, as expected. However, things are likely to improve later this year and probably the next. It is a leader in what it does and it has a very good track record. Last year's performance was exceptionally bad and probably would not be repeated. I like how Yongnam started to pay meaningful dividends in recent years and this is likely to continue, conditions permitting.

Hock Lian Seng, like Yongnam, is in the construction sector and also like Yongnam, I expect it to be a beneficiary of increased spending on infrastructure projects in the country. Already, Hock Lian Seng won two major projects which have bumped up its order book and will provide earnings visibility for some time to come. There will probably be more order wins in future. Of course, Hock Lian Seng also pays meaningful dividends which I like.

One stock which I have been waiting for an opportunity to accumulate was CapitaMalls Asia. Well, it is a pity that it will be taken private by its parent, CapitaLand, which offered $2.22 a share. I feel that it is a fair enough price which, perhaps, suggests that the price at IPO was unfair but I will let readers draw their own conclusions in this contentious issue. My acceptance form has been sent out.

A stock which I have turned more cautious on is Marco Polo Marine. Recent developments mean that the business is now somewhat different from what I envisioned it to be in my initial investment thesis. Not giving enough consideration to how the tugs and barges could be a drag on overall performance before, I decided to trim my exposure to the stock. Things could improve in future but, for now, the level of clarity has lowered.

The first few months of the year have turned out to be a bit more eventful than expected on the investment front. My war chest is now fuller through some divestments as well as dividends received. I do not have any immediate plans for the funds and I will probably just hold on to them for now. After all, I had felt that I was too much invested in the stock market and had desired a bigger cash position.

Of course, if I were to keep the status quo, I will, for sure, receive a much lower level of income from my investments in S-REITs this year. How much lower? I guess we will know by end of the year.

Having said this, my decision to increase my level of investment in SPH and NeraTel last year so that my overall portfolio is less reliant on S-REITs for passive income was pre-emptive. Enlarging investments in Hock Lian Seng and Croesus Retail Trust earlier this year has also helped to reduce reliance on S-REITs for passive income.

What next? I certainly do not know if the economy will do well or if it would suffer a decline in the next few years. However, I do know that I am staying invested as long as my investments have reasonably sturdy fundamentals and, preferably, are able to generate reasonably good income for me. They don't have to be stellar performers and I don't have a problem with getting rich slowly.

I will simply wait for Mr. Market to feel depressed enough to sell more to me at prices I cannot refuse while I collect regular dividends in the meantime.

Related posts:
1. A strategy to grow wealth and augment income.
2. Sabana REIT: 1Q 2014 DPU 1.88c.
3. AIMS AMP Capital Industrial REIT: $1.425.
4. Perennial China Retail Trust: Fully divested.
5. Croesus Retail Trust: DPU above forecast.
6. Yongnam: DPS of 0.6c.
7. Hock Lian Seng: $221.8 million contract.
8. CapitaMalls Asia: Farewell.
9. Marco Polo Marine: Price weakness.
10. SPH: Within expectations.
11. NeraTel: A very good investment.

PCRT: St. James' RTO.

I feel that this is a good email correspondence to share because it shows how I look at my investments as to whether they are good to hold or divest.

Hi AK,

 

When last and first we exchanged descriptions of owners on the subject of first time car buyers, your thought of "obscene" seems appropriate now, including "greedy" and "grasping" (my opinion) on the issue of St. James' reverse takeover of PCRT.  Having been allocated a fair number of lots of PCRT at IPO and watching the price go down through the years has been painful for a retiree.  The dividends received so far has at least eased the loss.  With this latest development and a call to downgrade/sell the stock, I'm wondering if I will be stuck with a dud share for many years.

... Would you be so good as to comment on PCRT/St James and give some words of wisdom and perhaps comfort to shareholders like me?

Thanks so much.

 

AH

 

 

My reply:

 

Hi AH,

I have divested my remaining stake in PCRT and blogged about it. You might want to read the blog post, including the comments that follow. Search for "PCRT: Full divestment."

Try to recall what was your motivation for investing in PCRT and ask yourself if it still does the job you expected it to do. If it does not, what should you do? What if it does? I think you will have your answer then. :)

Best wishes,
AK

 

Related posts:

1. PCRT: Full divestment. 

2. Motivations and methods in investing.

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.

Croesus Retail Trust and Perennial China Retail Trust.

I had a discussion with a friend over dinner last night regarding Croesus Retail Trust (CRT) and why I feel relatively good about it as an investment for income. 

In the conversation, one of the things I did was to compare it against Perennial China Retail Trust (PCRT).

When PCRT had its IPO, I said that only "Red Star Macalline Global Home Furniture Lifestyle Mall, Shenyang, which was completed on 30 Sep 2010 is income contributing at listing date. The rest of the initial portfolio is expected to be completed from 3Q 2010 to 2Q 2014. If we are investing for income, this is not very reassuring."

And I also said that a "distribution yield of 4.88% to 5.51% in the years 2011 to 2012 also does not provide enough compensation for the risks which investors are being asked to bear, in my opinion."
See: Perennial China Retail Trust.

Mr. Market sent PCRT's unit price down 12.86% on its first day of trading from its IPO price of 70c to just 61c. See: PCRT: Weak debut.

Unit price went on a continual decline and was under 40c at one stage. Pua Seck Guan increased his stake while Kuok Khoon Hong and Martua Sitorus became substantial shareholders. I initiated a long position some time later at 47.5c a piece.

"I initiated a long position in PCRT at 47.5c because the distribution yield of 8+% at that price offered a more acceptable level of compensation for the risk I would be asked to assume."
See: PCRT: 1H 2013 DPU 1.9c.

Mr. Market is rather efficient in pricing PCRT's stock. The latest reported NAV/unit is 77c which means PCRT's stock is now trading at a 31.2% discount to NAV! 

Why? Mr. Market has priced in a risk premium.

Although annualising the half yearly DPU of 1.9c will give us a distribution yield of 7.16%, most of the distributable income is from earn out deeds and I highlighted that "current DPU is being sustained by earned out deeds which will be exhausted by end 2014". 

So, what happens then? Income distributions to investors will most probably take a hit. 

See: PCRT: Progress in Q3.

Now, for readers who have been following my recent blog posts on Croesus Retail Trust, they will be able to see the difference I am trying to point out between CRT and PCRT easily. 

CRT's portfolio consists properties which are mature and generating income, all of them. The level of risk which investors are being asked to assume here is very low compared to PCRT's.

Having said this, investing in CRT is not without its risks and I blogged about it briefly before. See: Croesus Retail Trust: Motivations and risks.

I am invested in both PCRT and CRT. So, to some, it might appear silly that I am talking down PCRT but, in my opinion, I am not talking down PCRT or talking up CRT, for that matter. I just say it as it is.

PCRT could do better over time but unit holders must be prepared for a much lower DPU next year as earn out deeds are depleted by end of this year and if the properties completed are not able to pick up the slack fully by then.

CRT offers a much higher level of certainty for the next 2 to 5 years for anyone investing for income and although it is a business trust like PCRT, it is not the same as PCRT. This is why my investment in CRT is about 8x bigger than my investment in PCRT now.

Both PCRT and CRT are business trusts. Same but different. We should not over-generalise.

Related posts:
1. Croesus Retail Trust: What is my plan?
2. Croesus Retail Trust: Overnight BUY order filled.
3. Croesus Retail Trust: Initiated long position at 87c.

Perennial China Retail Trust: Progress in Q3.

In my blog post of 10 August, I mentioned that current DPU is being sustained by earned out deeds which will be exhausted by end 2014. So, we really need to see stronger occupancy and evidence of improved cash flow from operations in the coming quarters.

The latest report shows that the Trust's operations have improved with occupancy in Shengyang Longemont Shopping Mall increasing to 85% and with occupancy in Shenyang Red Star Macalline Furniture Mall at 93%. Shenyang Longemont offices saw occupancy improving from 33% to 41%, quarter on quarter.

Perennial Jihua Mall which opened in August has hit an occupancy of 95% while Perennial Qingyang Mall which is slated for opening in 1Q 2014 saw leasing commitment improving from 67% to 75%.

All in all, it seems that the management have been working hard to secure tenants. However, there is still much to be done. So, I believe that it is still relatively risky investing in PCRT compared to a plain vanilla retail or commercial S-REIT.

Therefore, I would ask to be adequately compensated for the risk that I would be taking on if I were to invest in the Trust.

For now and the next few quarters, the Trust would probably continue to draw on those earned out deeds in order to sustain the income distributions at current level to unit holders.

Will the Trust be able to maintain its current DPU without the earned out deeds from 1Q 2015? It would depend on the progress that they make in the next 15 months. If the Trust keeps up the momentum we see in Q3 and with the opening of a new mall with a relatively high level of leasing commitment in early 2014, it could happen.

Bearing in mind that another mall, Perennial Dongzhan Mall, could open its doors in 1Q 2015, things could further improve if there is, again, a relatively high level of leasing commitment. However, we do not want to count our chicks before they are hatched as the management have just started to market this new mall to prospective tenants.

Assuming that no further improvements are forthcoming which, I believe, is rather unlikely, then, I have estimated in an earlier blog post that DPU could reduce by at least 50% from 1Q 2015.

With an entry price that gives me approximately an 8% yield, a 50% reduction would bring the yield down to 4%. Although this is unlikely to be the case, if it should happen, it is still acceptable to me.

What about anyone who is thinking of buying in at 54c a unit today? Well, that would mean a yield of 7% and a worst case scenario yield, by my reckoning, of 3.5% in 2015.

If distribution yield should decline by 50%, however, it would be optimistic to think that the unit price of the Trust would not decline. This is especially true in an environment of rising risk free rate.

So, before we invest in the Trust, should we not ask ourselves if we are able to stomach what could be the worst case scenario?

Related post:
Perennial China Retail Trust: 1H 2013.

9M 2013 income from S-REITs and more.

Three more months to the end of the year. Lots of things have happened in the first 9 months of the year. I want to zoom in on the investment front and record some of my thoughts.

The strategy to be invested in S-REITs for income is still working. Of course, with the spectre of the Fed cutting back on QE and a possible increase in interest rates in the next 2 or 3 years, Mr. Market has turned cautious on leveraged investments like S-REITs. This is only natural. Unit prices of S-REITs have become more realistic as a result.

When Mr. Market is pessimistic, that is when we are likely to get good deals. As to what is a good deal, I am sure this is rather subjective. Every person would have a different idea of what is an acceptable margin of safety. Every person would have a different perception of a REIT's prospects.

Having built up a relatively large portfolio of S-REITs, I devoted more resources to investing in what I believe are undervalued stocks, something which I continue to do in 2013.

So, essentially, what I have done is to keep what has worked well for me thus far while expanding my investments in certain companies, recognising possibly more difficult times ahead for S-REITs. 

This is an approach that requires more work than simply getting passive income from S-REITs but the time when it was a no-brainer to buy and hold S-REITs probably ended sometime in the second half of 2012.

For 9M 2013, how much did I receive in passive income from S-REITs? 

$92,872.65

Full year 2013 income from S-REITs is most likely going to be lower compared to 2012 because I sold a significant portion of my investment in LMIR earlier this year and also because Saizen REIT distributes income half yearly (i.e. there is no income distribution in December from Saizen REIT).

Also, we might want to bear in mind that, although hedged, the weaker Indonesian Rupiah and Japanese Yen could result in lower income distributions in S$ terms for unit holders of these REITs in the year 2014.

With twice as much industrial space being scheduled for completion in 2014 and 2015 than any single year in the past decade, the possibility of stagnating or even a reduction in income for industrial S-REITs in future cannot be discounted. This is why looking at WALE (Weighted Average Lease Expiry) of industrial S-REITs is more important now.

Although I would have liked nothing better than to sit back and collect passive income regularly from S-REITs, doing very little else, I decided to move out of my comfort zone. For sure, there were bumps along the way but my efforts have generally been rewarding thus far. 

What did I do?

I increased my investments in stocks which are likely to be dependable passive income generators such as SPH and NeraTel. 

I also hold long positions in stocks which I believe would benefit from the Chinese consumption story such as CapitaMalls Asia, PCRT and Wilmar. 

Any dividend from investing in these stocks and any gain from trading would go towards cushioning the possible decline in income from S-REITs in future.

Up to 15 September 2013, the total gain from trading this year amounts to: 

$188,625.13

It was fortuitous the way the China Minzhong saga turned out. It preserved my trading gains and grew it rather significantly at the same time. Apart from my long position in Wilmar, all other investments are in the black. 

So, what is my plan for the future? 

Nothing profound really. 

If prices were to decline much more, I hope I would be brave enough to buy more. If prices were to rise much more, I hope I would remember to sell some.

The grand scheme is to augment and not to replace my passive income portfolio. 

For sure, it doesn't mean that I think S-REITs are going the way of the Dodo. Indeed, they are still good investments for income at the right prices. For me, passive income from S-REITs will still be an important pillar in achieving financial freedom. This is unlikely to change in the foreseeable future.

Remember, this blog is not meant to instruct but if anyone finds it inspiring, I will be happy enough.

Related posts:
1. 2012 full year income from S-REITs.
2. Never lose money in real estate and S-REITs?
3. Do not love unless it is worth the loving.
4. Motivations and methods in investing.
5. Be cautious climbing the S-REIT tree.
6. Be comfortable with being invested.

When to BUY, HOLD or SELL? (Part 2)

Now, a question that people sometimes ask me with regards to selling is if they should cut loss? 

Well, from a valuation perspective, if we got into a stock which we thought is worth $10 a share at, say, $8 a share, and if the price should fall to $6 a share, should we sell?

OK, let us push this a little and let us say we thought the stock is worth $10 a share but for some reason, we bought it at $12. At $6 a share, should we sell? 

I think you know the answer.

Well, if we need the money urgently because there is an emergency at home, then, we don't really have a choice, do we? 

This is also why we must always use money we can afford to lose for investing. 

If we don't need the money, everything remaining equal, should we not be thinking of buying more if prices fall? 

This is why we must always have a war chest ready!

What we have to remember is that we want to buy at a price we would not sell at and sell at a price we would not buy at. This is a general mantra we should chant to ourselves and embrace its spirit.

Although we might think that $10 for a certain stock is cheap, it does not mean that it would not become $8 or $5 or even $2. 

Of course, if we are sure that our facts are correct and our reasoning is right, we should be buying more as prices fall.

Isn't it risky to buy more as prices fall? Of course, there is risk involved. Cheap could get cheaper. This is why I feel that some knowledge of technical analysis (TA) is useful. 





Purists in fundamental analysis (FA) will pooh pooh at this idea, of course, but unless we have very deep pockets, I think a bit of TA is useful. Anyway, I will talk a bit more about TA later.

Now, since we are on the topic of risk, some would argue that the level of risk associated with an investment should be considered when we talk about valuations. 

So, in the case of a business trust, for example, if it is perceived to be more high risk in nature, we would need a higher distribution yield before we invest in it, wouldn't we? 

I blogged about how this was the case for me when I invested in Perennial China Retail Trust: here.

The same goes with bonds although in the case with bonds, the holders are more lenders than investors and I blogged about bonds before: here and here.

Now, with interest rates rising and we are seeing higher coupons from 10 year bonds, the risks associated with REITs have risen. 

This is why their unit prices have fallen because Mr. Market is now demanding higher distribution yields for investing in a riskier instrument compared to 10 year government bonds. I am not saying anything new, of course.

As anyone can see, there is no one size fits all valuation technique.





So, some have thrown up their hands in despair and decided that they would only use charts to help them decide when to buy and sell. TA gives us a peek into Mr. Market's psychology. 

We then buy and sell based on technical signals which tell us the sentiments in the market. 

Of course, TA is about probability and never certainty. 

TA is about managing probabilities!

There is no exactitude, no matter which approach we choose to use. There are only approximates. 

As long as we are approximately right, we are better off than being exactly wrong. This is good enough. 

This is what Warren Buffett would say. If you have yet to watch the video on why he is the world's greatest money maker, watch the video: here.

Make money using the tools available to every person.

Valuation is a subjective exercise and often, whether to BUY, HOLD or SELL, we have to rely on experience too. 

If there was a magic formula that worked all the time, Warren Buffett and any investment guru for that matter would never have made bad investment decisions in their careers. 

So, it is important to remember this and not become narrow minded when we think of valuations.

Related posts:
1. When to BUY, HOLD or SELL? (Part 1)
2. Recommended books for FA and TA.