Frasers L&I Trust and CapitaLand Retail China Trust added in January 2017.

As REITs will always be relevant to the income investor, I have been thinking of how best to increase my investment in REITs again in an environment of increasing interest rates and I decided I should choose REITs which have a better plan or chance to improve their income.

Hedging interest rate risk is very well and good but this only kicks the can down the road because sooner or later, higher interest rates will hit home. 




So, having the ability to increase income is still key as to whether a REIT will do well with interest rates increasing over time.

Very importantly, I also decided that it is probably a good idea to diversify more geographically and to reduce my portfolio's reliance on Singapore. 

Remember I said this in a recent blog post on Sabana REIT?
However, things will get even more challenging for REITs from here on with interest rates expected to rise further. Industrial REITs here are facing an oversupply of space and a malaise in demand.  (Source: History with Sabana REIT and current thoughts.)




So, although I like AIMS AMP Capital Industrial REIT (AA REIT), for example, last month, I decided to initiate a position at 92.5c a unit in Frasers L&I Trust (FLT) which owns logistics and industrial properties in Australia.

The IPO price was 89c a unit and, to be honest, I was waiting for the price to come down from there before buying some. 

This was because although there are many things to like about FLT, the distribution yield was on the low side for an industrial REIT. 

Unfortunately, the decline I had hoped for did not happen.




So, although FLT's distribution yield of  7+% doesn't seem very attractive when compared to AA REIT's 8+%, I decided that there are enough positive factors such as relatively low gearing and a portfolio of mostly freehold properties in Australia for me to invest in the REIT.

(30 November 2016)

Of course, regular readers would know that although AA REIT has been a fantastic investment for income for me and is likely to remain decent, apart from the challenging leasing situation in Singapore, I am also unwilling to add to my already rather significant investment in the REIT.

Other than FLT, I have another new investment in my portfolio. 

Again, this has a portfolio of real estate outside of Singapore.

Some readers might remember that I have been waiting for a chance to get into CapitaMall Trust (CMT). 

I remember I spent quite a bit of time blogging about it once upon a time: here.




However, from then till now, CMT's unit price did not decline enough to be persuasive, I feel. 

Translation: AK is "giam siap" and wants to buy at a much lower price. 

What? 

You need a translation for "giam siap"? 

I blur.

After much consideration, I accepted the offer from Mr. Market to invest in Capita Retail China Trust (CRCT) instead, paying $1.40 a unit. 

Just a few months ago in September 2016, CRCT hit a high of $1.66 a unit. 




Why the big decline in unit price? 

It was probably due to a 10.6% drop in DPU, year on year. 

A new tax in Beijing and a weaker RMB were the reasons. NAV also declined by almost 12% to $1.56 per unit.

Offering a higher yield than CMT even now and having ownership of a portfolio of shopping malls in a market with arguably more room for growth (in terms of organised retail activity) than Singapore's, I decided CRCT is probably worth investing in. 




After all, a 10.6% decline in DPU doesn't warrant an almost 15.6% decline in unit price unless we are expecting a more severe decline in DPU. 

In fact, I think that DPU should recover somewhat as CRCT's non-Beijing malls could pick up the slack over the course of the year.

Having said this, I am reminded of a longer term risk, that land lease in China is typically 50 years and that could explain why Mr. Market demands a higher distribution yield for a retail REIT in China compared to one in Singapore. 




I do not know if, like in Hong Kong, land lease could be renewed easily. This is one risk to bear in mind if we choose to invest in CRCT.

(September 2016.)

Another risk we should be aware of is financial in nature. CRCT's loans are mostly S$ loans but its income and valuations are in RMB. 

This arrangement is similar to Lippo Malls' and I blogged about it before (See blog: here). 

A decline in RMB against the S$ could see both gearing and interest expense affected in a bad way.




Although I have said that CRCT would likely see income increasing over time, this is going to be a gradual process. 

So, to be prudent, I am keeping my investment in CRCT relatively small.

CRCT's 4Q2016 results.

As CRCT distributes income half yearly, I will be receiving DPU of 2.37c (4Q2016) and 2.36c (3Q2016) for a total of 4.73c in March. 

Annualising the DPU gives me a distribution yield of 6.75%.

Again, why did I choose to invest in FLT and CRCT in an environment of rising interest rate which would impact their cost of doing business eventually? 

You blur? 

I also blur.




Xizhimen Beijing. Just next to the train station.

A tale of two HDB flats by Darles Chickens.

Chinese New Year is a time of family bonding, catching up with friends and also gossiping.

What? Gossiping is not a Chinese New Year tradition? Alamak. 

Oh, it is something we do daily? OK lor.

Since this is the Year of the Chicken (What? Not Chicken? Is Rooster? Rooster is not a Chicken meh?), I present to you "A tale of two HDB flats" by Darles Chickens.

Gossip Tale #1

A: Charlie's family sold their 5 room flat. 

B: Aiyoh, why like that? Bad times need money har?

A: They downgraded to a 3 room flat and they no longer have a home loan to worry about. Fully paid.

B: Wah! Quite smart hor?
Gossip Tale #2

X: You know Dickens from our primary school class? I met him recently.

Y: Oh, what happened to him?

X: His family upgraded from 3 room to 5 room flat already, you know?

Y: Wah! Must be doing well!

X: He says now they are stuck with a big loan and he must help to pay.

Y: Why like that?

X: Actually, when they sold their old flat, they could have paid for the new flat in full. Their old flat sold for very good price.

Y: What happened to the money?

X: His parents took a home loan for the new flat and spent the money from selling the old flat.

You think this tale can become classic like Charles Dickens' novel or not?

Alamak! Who threw a shoe at me? Who? Who?

Related post:
How did AK amass so much money?

Good entry price for QAF Limited?

Reader:
"Hi, I found out abt ur blog thru Remove Sabana Mgr fb grp. Thks for sharing CNY video from Gardenia. I din know abt QAF. What is ur ave price? Do u think this $1.41 is gd to enter?"
AK:
"What is my average price for QAF Limited? Is $1.41 a good entry price? Alamak! I am not a guru and I just anyhow do valuation. You have been warned. Er, I anyhow talk to myself in my blog later."

OK, I start talking to myself now.

What is my average price? I don't know. I have never bothered to find out. I could but I just don't bother. AK is lazy. Regular readers know I don't care about average prices.

I do know I have been a QAF shareholder for many years and I first bought some shares at 60+ cents a share donkey years ago because I wanted to eat free bread. Mental? Must be.

Is $1.41 a good price to enter? I don't know about price but I probably can say something about value.

QAF 3Q 2016.

Q2 2016 EPS was 5.1c. 
Q1 2016 EPS was 2.9c.
(Hyperlinked. Click on above links to read quarterly announcements.)

So, for first 9 months of 2016, total EPS was 11.4c. 

To put things in perspective, full year 2015 EPS was 9.4c. 

So, buying more at $1.03 a share in 1H 2016 meant paying a PER of under 11x. Yes, that was the last time I bought more QAF shares.

Now, with only 9 months worth of earnings in 2016 (i.e. 11.4c a share), assuming Q4 does not turn in a loss and we have zero earnings in Q4, 11x PER would give me a price of $1.25 a share or so. 

If Q4 were to turn in pretty decent earnings which I think it would, of course, based on 11x PER, the price should be higher. If Q4 turns in an EPS of 3c, I would get a price of $1.58, for example.

Now, for a dash of excitement, if I remember correctly, when Mr. Market was feeling a bit happier in the past, QAF Limited was valued at about 14x PER which would give us a share price of almost $1.60 a share based on EPS of 11.4c (i.e. with no contribution in Q4). 

What if we were to add EPS from Q4? 3c EPS in Q4 maybe? That would give us $2.02 a share at 14x PER.

OK, I am beginning to talk nonsense. What? Will it happen? Alamak, don't ask me things about the future. I don't know.

I will say that getting in at $1.41 a share with the thought that share price is probably going higher in the next few weeks or months has a strong speculative flavour. There is nothing wrong with a bit of speculation, I always say, if sized properly.

Now, seriously, go read the quarterly reports for yourself and see why earnings went up as much as they did. Don't just eavesdrop. 

AK is mental. Remember?
-----------------------------
Added 7.55PM (31 Jan 17):

Bad AK! Bad AK! 
Related post:
Breadtalk, Old Chang Kee and QAF Limited.

Watch CNY video clip from Gardenia: HERE.