Second Chance Properties Ltd: REIT timing.

When I blogged about Second Chance Properties Ltd in December 2012, I said:

"As an investment for growth, we have to be prepared for some headwind as real estate prices have very likely peaked. With more supply coming on stream, rental rates and property values could face downward pressure in the coming years."

Well, the company has done something very clever! They are selling "all 45 properties in its portfolio to REIT manager Celestine Management Pte Ltd for $175.4 million with the intention of listing the property fund as a REIT."

And this is what they said in a press release:

"Going forward, the board thinks that it is prudent to significantly reduce the group’s exposure to its investments in properties. Additionally, the opportunity to sell the properties en masse is a rare one and provides the group with an easier and more expedient means of disposing the properties as compared to selling each property individually." Source: The EDGE.

To me, it is quite obvious that they are exiting at a high. Do you think that the proposed REIT will be good value for money for investors like you and me at its IPO? I wonder.

Related post:
Second Chance Properties Ltd.

Second Chance Properties Ltd.

In reply to a comment from Desmond: here.

Some have said that Second Chance Properties Ltd is a company that is REIT like. This perception could be due to the fact that much of its success stems from its timely investments in real estate at depressed prices.

They announced an annual dividend of 3.3c and a special dividend of 0.5c this year. NAV/share is 35.72c. So, buying some shares closer to the NAV/share would give an attractive dividend yield, discounting the special dividend. At the last closing price of 40c/share, a 3.3c dividend would be a nice 8.25% dividend yield if the payout should be repeated next year. Seems like a decent proposition.

However, I would draw attention to its earnings per share (EPS) which has declined year on year. For 12 months ended June 2011, EPS was 7.2c. For the 14 months ended August 2012, EPS was 5.62c. 2 more months of earnings and EPS was actually 22% lower? Has its earnings declined? Although not comparable, for want of any available alternative, its net profit actually improved 1.37% for the period reported.

So, it could only mean that the number of shares in issue has increased significantly. As the founding family of the company has 81% of its shares and routinely accept dividends in scrip plus the fact that there are many outstanding warrants (expiring in 2013 and 2017), further dilution of EPS is to be expected, all else remaining equal.

Valuation of a company's shares could be based on many things. However, let us look at P/E ratio which is used more during good times compared to NAV/share. At its highest in June 2011, it was 39c/share and with an EPS of 7.2c then, its P/E ratio was 5.42x. Share price went to a high of 45c as punters chased its shares after the dividend announcement. With EPS at 5.62c, its P/E ratio was 8x then.

Now, closing at 40c/share in the last session, using the EPS of 5.62c, its P/E ratio is 7.12x. With a P/E ratio of 8x or lower, shares of Second Chance Properties Ltd. do not seem expensive. Why does Mr. Market not ascribe a higher value to the company then? Ah, good question.

They always say that the market is forward looking. If I were to hazard a guess, I would say that Mr. Market is concerned about the potential dilution to the EPS of the company which could, of course, lower dividend payout per share in future. With an increasing number of shares in issue, it is also hard to expect greater upside in share price as valuation per share finds little improvement.

Would I buy shares of Second Chance Properties Ltd.? I would, as usual, question my motivation for thinking about investing in a stock. Am I after income or growth? As an investment for income, with the company's track record, it is likely that they would continue to pay dividends. However, unlike S-REITs, there is less certainty. Also, with declining EPS, it is possible that dividend per share could reduce in future.

As an investment for growth, we have to be prepared for some headwind as real estate prices have very likely peaked. With more supply coming on stream, rental rates and property values could face downward pressure in the coming years. This coupled with economic malaise that is expected in the near future could also see retail businesses affected negatively.

All in all, I would say that Second Chance Properties Ltd. is in a position of strength and should be able to weather the economic malaise ahead.

If we are able to accept the potential dilution of EPS and its possible effect on dividend payout per share, and if we are not overly concerned about the probable lack of meaningful appreciation in future share price, this seems like a good company to invest in.

See financial report: here.

Related posts:
1. Don't be a yield pig. Be a hardy pig.
2. Be cautious as we accept higher risks.
3. Good debt is always good?
4. Mr Market is always right.
5. Never lose money in real estate and REITs?