Digital Core REIT lost 2nd largest customer! Things to note!

This is the transcript of a YouTube video I produced recently.
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About three months ago, I wrote a piece on Digital Core Real Estate Investment Trust.

I said that I was not attracted by its seemingly high distribution yield because one of its largest customers could go bankrupt.

Today, I read that the Trust's second largest customer which accounted for almost 23% of its rental revenue has filed for bankruptcy protection on 4 June 2023.

During "Evening with AK and friends 2023", I warned that in an environment of heightened inflation and rapidly rising interest rates, many businesses which thrived on cheap money would find it hard to cope.

Unfortunately, many startups and tech companies fall into this category.

When money was cheap or even free, there were many investors who were willing to tolerate negative earnings while watching these businesses grew their market share.

With money having a real cost and a comparatively much higher cost at that, investors want to see positive earnings now.

Hence, the pressure for SEA Limited, Shopee's parent, to cut costs aggressively so as to turn profitable.



With interest rates having risen so much and so quickly, the chaos at the regional banks in the USA already led to 3 relatively large banks failing.

Apparently, deposits are still flowing out of regional banks into larger banks like JP Morgan.

Billions of dollars continue to flow into money market funds.

In a research paper with the following title.

"Monetary Tightening and U.S. Bank Fragility in 2023. Mark-to-Market Losses and Uninsured Depositor Runs?"

It was revealed that if a mere 50% of those uninsured depositors decided to withdraw their funds, 186 regional banks in the USA could be at risk of failure.

So, Warren Buffett and Charlie Munger could be right.

This isn't over yet.



While waiting to see if more regional banks could go under in the USA, businesses which are highly leveraged could fail one by one.

This could pick up pace as the USA sails into a highly anticipated recession.

Investors are less willing to pump in more money into "growth" businesses only to watch their money being burnt now.

If you want an example, we have one right here in Singapore.

Its name is "GRAB".

Why not borrow money from the banks instead?

Well, the chatter is that banks are becoming more cautious when they lend money now too.

So, even if businesses could get a loan, the cost is much higher.

Now, as investors for income, we are mostly concerned about any development's impact on our passive income.

So, what does this latest development at Digital Core Real Estate Investment Trust mean for those of us who invested in it?



When a customer goes bankrupt, it is worse than a customer downsizing or right sizing their rental requirements.

The rental income disappears overnight.

In this case, Digital Core Real Estate Investment Trust will lose 23% of its rental income.

In terms of dollars and cents, the manager has estimated a reduction of around 2 cents in distribution per unit.

At a unit price of 40 cents, this means distribution yield would plunge from around 10% to less than 5%.

That is a massive 50% reduction.

OK, don't panic.

The good news is that the many facilities which this customer currently rents are partially occupied by other companies.

So, if the Trust's manager is able to retain these other companies, the resulting loss of income could be lessened.



Still, we don't want a good lesson to go to waste.

We want to remember the following.

With interest rates likely to stay higher for longer, remember not to stay too optimistic about any business that has too much debt.

I do believe that interest rates will come down again one day.

However, we want our businesses to be able to keep their heads well above water until that day comes.

If AK can talk to himself, so can you!

Reference:
Recession could hit Singapore!

Singapore bank's target price slashed by 8%! Why?

I have just produced a YouTube video based on this blog a few moments ago. So, if you prefer listening to reading, that option is available now.

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Recently, I read a report in The EDGE.

I read that the analysts at RHB Research slashed their target price for a Singapore bank by almost 8%.

Which Singapore bank?

Like to make a guess with this hint?

Target price slashed from $34.90 a share to $32.30 a share.

If you guessed UOB, you are right.

Some readers might remember that in a video I produced on DBS, I said that we should not be too concerned by target prices set by analysts.

Crystal ball gazing might be an interesting distraction but that is what it is.

A distraction.

What is more interesting to me is the reason behind the lowering of the target price.



The analyst said that the target price has been lowered due to "heightened economic uncertainty."

To me, that sounds like they expect the economic conditions in the markets UOB is in to weaken.

They went on to say that UOB sees two key headwinds.

Revenue and asset quality risks.

Revenue is likely to take a hit because net interest margin is probably going down further.

This is not something new to anyone who has been following the news, of course.

In several blogs and videos which I produced, I said that Net Interest Margins for all three banks, DBS, OCBC and UOB likely peaked in Q1 2023.

Funding cost has finally caught up which will squeeze the said margin.

For UOB, net interest margin apparently has already reduced 8 basis point, quarter on quarter.



Loan growth is also moderating.

In fact, in Q1 2023, loans contracted 1.2% quarter on quarter.

UOB also has exposure to Commercial Real Estate and financing for these assets is 30% of total loans.

UOB has said that it has not seen any stress.

They also enforce a loan to value of 50% on their Commercial Real Estate loans.

In earlier videos on UOB, I said that the bank is likely to be the fastest growing Singapore bank this year, thanks to their acquisition of Citibank's consumer banking business in four South East Asian countries.



Acquisitions in Malaysia and Thailand completed in November 2022 while the acquisition in Vietnam completed in March.

We will see full year contributions from these markets this year.

Acquisition in Indonesia is likely to be completed by end of this year and will contribute to earnings in 2024.

Also, non-interest income should pick up some slack at UOB.

In fact, UOB saw a 457% year on year growth in non-interest income in Q1 2023 compared to a 35% growth at DBS.

So, what do I think of the target price for the common stock of UOB being slashed by 8%?

To be totally honest.

It is really just someone else's number to me.



Some readers might remember that I said that Singapore banks saw their stocks trading at 2 times book value when Market was very exuberant.

If that should happen again, what is my target price for UOB?

$50 a share!

Now, that makes me giddy!

As an investor for income, I am more interested in the dividend which UOB is able to pay me.

$1.35 a share seems undemanding.

If we are a little more optimistic, $1.60 a share isn't impossible either.

Based on technical analysis, a major support is probably at around $26 a share.

Buying more at that price could mean a dividend yield of between 5.2% to 6.1%.



With dividend yields of 5% to 6% at a payout ratio of around 50%, Singapore banks provide investors with peace of mind.

Why would I invest in a healthcare REIT that has a distribution yield of less than 4%, especially when I remind myself that it has to distribute all or almost all of its operating income to achieve that?

I don't know if we would see the stock at $26 a share but if it should happen, all else being equal, I hope I would have the resources to buy more.

Is this where I say if AK can talk to himself, so can you?

Maybe.

But when I think of $50 a share as a possibility, I feel giddy.

So, I really want to say this.

If AK can feel giddy, so can you!

Related post:

DBS fair value $35 per share?