CapitaMall Trust: When is AK nibbling?

Following a recent blog post in which my admiration for CapitaMall Trust's (CMT) management was once again mentioned, with the REIT's unit price having retreated from a recent high of $2.09 a unit, I decided to examine whether it makes sense for me to have some exposure to the REIT soon.

One thing that has held me back for some time is the matter of distribution yield. With an annual DPU of about 10c, give or take a small fraction, at $2.00 a unit, we have a yield of 5% and at $1.80, we have a yield of 5.55%. This is also yield made possible only with financial leverage.

Anyway, I have blogged about how rising interest rates would increase the interest cost for REITs and how it could affect their interest cover ratios and income distributions. It could also affect their valuations as investors demand cap rates which make more sense when a riskier property investment is compared with a more attractive risk free rate.

Well, these concerns could be addressed effectively as long as REITs are able to increase their rental income meaningfully. It would largely be through positive rental reversions and this would hinge upon whether tenants are willing to pay higher rents. I expect that some REITs would be able to do this better than others.

When would tenants agree to pay higher rents?

There are probably many factors involved and only a businessman would have the full answer but factors such as the nature of the business, general economic conditions and availability of suitable alternatives come to mind. Obviously, some factors are beyond the control of even the best REIT manager.

However, for Retail REITs like CMT, if they are able to add value by encouraging shoppers to choose their malls over the competition's, they will create a win-win situation for themselves and their tenants. I believe that CMT is doing a good job of this and the REIT's tenants would appreciate this.

Not much of a shopper myself, it is really after becoming a CapitaStar member and getting the CapitaMalls credit card that I appreciate this as I looked at the REIT through the lens of a business development manager which is the fun part for me.

Then, there is the part that is not as fun for me which are the numbers. I looked at the REIT's debt. CMT has a credit rating of A2 from Moody's. That is a relatively high rating and it helps to ensure that the REIT will have access to cheaper funding.

Correct as of June 2014, here are some numbers:
Gearing: 34.3%

Interest Cover: 4.7x

Ave. cost of debt: 3.6%

NAV/unit: $1.76

The REIT's debt maturity profile shows staggered maturities which is very comforting:

Also, 98.7% are fixed rate borrowings.

It is hard to imagine CMT being caught in any situation where they might have trouble refinancing their debt. Now, this is not saying that it cannot happen, of course, which is why, expecting interest rates to rise from middle of 2015, I think that having a larger exposure to companies which pay stable and meaningful dividends out of their earnings with little or no debt is safer than increasing exposure to leveraged income instruments like REITs.

Next, as REIT investors, we would be familiar with the argument why Industrial REITs must offer a higher yield because their land leases are much shorter (although some could hold some freehold properties which throws a spanner into the wheels of this train of thought). Anyway, I feel that what is more important is a REIT's ability to actually add value even if their land leases are getting shorter over time.

REITs are able to add value through Asset Enhancement Initiatives (AEIs) and developments which max out their existing properties' plot ratios, for examples. AIMS AMP Capital Industrial REIT does a good job of this although it is an Industrial REIT with most of its properties having shorter land leases. So, to have a pro-active REIT management that creates value for unit holders is very important.

Now, coming back to CMT, unless we do not visit shopping malls at all, it would be difficult not to see how CMT have done a good job with their malls. I don't visit all their malls but because I stay in the west side of Singapore, I visit Bukit Panjang Plaza, LOT 1, Westgate, IMM and J-cube quite often. I also visit Bugis Junction, Bugis Plus (former Illuma), Raffles City and, sometimes, Bedok Mall. Oh, recently, I visited Junction 8 a couple of times too. 

If we look at the AEIs that CMT did and are doing now, it is easy to see that they have added value and are going to add more value to the REIT again.

I hope to buy at a discount to NAV but with a strong track record and pedigree, under normal circumstances, it would be difficult for my wish to come true. Then, perhaps, I might be persuaded to take a nibble if I could pay only a smallish premium to NAV.

Click to enlarge.

Could we see a re-test of a many times tested support at around $1.80? Maybe.

See presentation slides: here.

Related posts:
1. SPH or SPH REIT?

2. CMT: Buy the retail bond or the REIT?

3. AIMS AMP Cap Industrial REIT: 103 Defu Lane 10.

Tea with TheMinimalist: If Personal Finance and Investing were a religion, what would be your denomination?

The Minimalist, a mysterious and wise man, has contributed another guest blog to ASSI. I hope you enjoy reading it as much as I have:

Over a podcast interview with AK71, he shared that “Investing is a religion”. I can relate to his statement on so many levels. Firstly, there are so many different denominations like value investing founded by Benjamin Graham and David Dodd or permanent portfolio by Harry Browne. Secondly, you cannot “force” someone to adopt an investing style that they are not comfortable with. For example, my best friend is a conservative investor and is satisfied with investment returns that match the inflation rate (3% to 5%). People like my best friend would be best suited for the Permanent Portfolio.

With so many religions in the world, which one is the best for me?

During my university days, I went through a “quarter-life crisis” and was very lost with what I wanted to do in life. Upon the advice of some friends, I decided to turn to religion. As I started reading different religious texts (such as The Bible; Dhammapada; Dao De Jing), attending services, I realise that these religions share common truth. I will share two points that have benefitted me the most. The first one is to engage in meaningful and purposeful work. The second is to love and serve people.

For readers who are new to personal finance and wish to take charge of their finances, where is the best place to start? In my humble opinion, the Bible of personal finance is “The Richest Man in Babylon”.

In this book, it states the 7 universal principles of personal finance. When you secure a copy of this book, read it once, read it twice and commit the principles to heart. More importantly, PRACTISE it. Success only comes by taking actions, NOT by reading. (I have never come across a book that is titled “Read and Grow Rich”) 

After reading the bible of personal finance, feel free to research the different styles of investing and adopt one that you are comfortable with. One of the best ways to shorten the learning curve is to be a mentee to someone who has successfully applied those principles. (Maybe, AK71 can start a mentorship program and start with coaching his mentees to eat oatmeal for breakfast, lunch and dinner. Cheap, healthy and nutritious!) 

Breakfast of champions'.

A word of caution.

Make sure you are learning from the RIGHT people. I am sure many of you have read of religious leaders in Singapore who have fallen into the money/power trap. Or finance trainers who promise infinite riches by paying $X,XXX to attend their courses.

The end goal of personal finance/investing should be financial freedom where our assets generate sufficient passive income to cover our expenses. The means should justify the ends. If your mentor makes his money through insider trading (illegal), excessive leverage (dangerous) or guess-work (lazy), you might want to reconsider learning from this person.

To end off this blog post, I feel that there is no religion that is “superior” or “right”. Everyone should make a well-informed decision on the faith that he or she is comfortable with. Do not convert yourself to a certain faith just because your wife/husband/best friend/teacher is of that faith (I am a deist for those who are curious about my faith). Similarly, there is no personal finance philosophy or investing style that rules supreme over all others. If you are uncomfortable eating oatmeal for breakfast, lunch and dinner, then don’t do it! (Right, AK71?)

Here are some actionable steps to get you started on taking charge of your personal finance:

(1)    Grab a copy of the book, “The Richest Man in Babylon”

(2)    Read and memorise the seven universal principles of personal finance

(3)    Plan and write down specific steps on how you would apply each of the seven principles. For example, you want to apply the first principle “Start thy purse to fattening”. To do this, you write down “On my next payday, 16^th Oct 2014, I’ll set aside S$500 from my S$5,000 paycheck to a designated savings account with OCBC.”

If you like what I have shared in my blog post, feel free to e-mail or share with your friends on FB.

Richest Man in Babylon
Buy pre-owned with free shipping worldwide at US$6.98 a copy.
Read and learn 7 important lessons in life:
1. Pay ourselves first.
2. Live below our means.
3. Put our money to work.
4. Always have insurance.
5. Our home is a consumption item.
6. Plan early for retirement.
7. Upgrade our knowledge and skills.

Read another guest blog by The Minimalist:
Financial planning? Start with why!

Related posts:
1. Getting paid more while waiting for opportunities.

2. Motivations and methods in investing.
3. If we are not rich, don't act rich.
4. A common piece of advice on saving.
5. Do you want to be richer?