Sabana REIT: Buy but remember the Sukuk.

In November 2013, I said that I reduced my investment in Sabana REIT and moved the funds into Croesus Retail Trust, believing that a reduction in my exposure to industrial properties in Singapore was sensible. At the time, Sabana REIT was trading at about $1.09 a unit.

Then, in January 2014, I wrote a piece saying that Sabana REIT's quarterly results were within my expectations and that trading at $1.07 a unit, we could see its unit price fall to $1.03 once the REIT went XD if Mr. Market were to demand a 2% premium over the market leader, A-REIT.

I also said that although I was not buying at $1.07, neither was I selling. The reason was because Sabana REIT's relatively low occupancy of 91.2% could improve over time. So, we could see DPU and distribution yield improving, everything else remaining equal.

How much of an improvement would we see? Well, assuming that Sabana REIT improved occupancy of its properties to 96% and that DPU improved proportionally, we could see an annualised DPU of 9.2c. This would give us a yield of some 8.6% at its NAV of $1.07 a unit.

At a price of $1.03 per unit, we are just a whisker away from a 9% yield. It would be 8.93%. This is rather attractive and at $1.02 a unit, we see a prospective distribution yield of 9.02%. $1.02 a unit also coincides with a technical support provided by Fibo retracement lines.

So, it is not surprising to see investors buying again at current prices even though, technically, I see a stronger support at 97.5c or 98c a unit. Do I really think unit price could go that low? This is just what I see in the chart as a possibility. I don't know if it would happen.

However, remember the $80 million Convertible Sukuk due on 24 September 2017? In 2012, when I blogged about this, I said that if all should be converted to new units in the REIT, they would add some 10.5% to all units in issue. This would dilute existing stakeholders' interests but the debt would disappear.

"During the financial year ended 31 December 2013, certain Converting Sukukholders had converted an aggregate principal amount of $7.5 million. As a result, the Group elected to issue 6,285,090 units at the then conversion price of $1.1933 to these Converting Sukukholders."
Source: Full year 2013 report.

The bond holders pay a higher than market price and the REIT's gearing level declines at the same time. Seems like a good deal for the REIT. Actually, it makes sense to the bondholders too as they are paid a coupon of only 4.5%. Even converting to units at $1.1933 would mean enjoying a distribution yield of some 7.3%. Of course, this is leveraged yield. So, not really comparable.

Anyway, we should not worry about what these bond holders should do. Instead, we should think about how would their actions impact us as investors in the REIT.

If all the bond holders should convert to units by 2017, be prepared for a further 8.8% dilution but the REIT's gearing would then decline to a lower 33% thereabouts. Is this a good thing?

Well, it would mean that any increase in DPU from improving occupancy level could be diluted and we might not see much of a difference from current levels. If there should be zero improvement in occupancy level, which I think unlikely, then, we could see DPU reducing to 8.08c which means a yield of 7.84% at a unit price of $1.03 which makes a unit price of 98c a unit seems less far fetched.

Of course, if the convertible bond holders decide not to convert to units anymore and wait for maturity in September 2017, then, expect the status quo, everything else remaining equal.

What the bond holders would do is anyone's guess but what are investors in the REIT to do? Well, add to long positions at $1.02 to $1.03 a unit if we like but bear in mind the convertible bond and the possible effects. Are we comfortable with it?

In my opinion, prices of $1.02 and $1.03 a unit are not bad but don't be surprised if unit price should decline to 98c. So, always have a war chest ready.

Related posts:
1. Sabana REIT: Convertible Sukuk.
2. Added Croesus Retail Trust and reduced Sabana REIT.
3. Sabana REIT: After the 4Q 2013 results, am I buying or selling?

AIMS AMP Capital Industrial REIT: The rights' value.

With AIMS AMP Capital Industrial REIT's 7 for 40 rights issue on the horizon, suddenly, I feel nostalgic. This is a REIT which I have been invested for many years.

Looking back, my very first blog post on the REIT was on 31 Dec 2009. I had only been blogging for a few days back then.

At the time, the REIT was trading at 20.5c a unit ($1.025 post consolidation). It offered a distribution yield of about 10% and I said, "I bought a large chunk of MI-REIT at 20.5c after the recapitalisation exercise. At that price, it gives a yield of about 10%. It's trading at about 30% below NAV. It has the lowest gearing amongst Singapore industrial REITs. For anyone looking for high yield at a bargain, this is a BUY even at 21.5c."

I kept on accumulating units in the REIT and when it had a 7 for 20 rights issue in August 2010, I took part enthusiastically. After all, my calculation then showed that, on an annualised basis, the rights units were going to enjoy a yield of 13.42%. The rights were offered to unit holders at 15.5c a unit (77.5c post consolidation).

Of course, we should know the value of our investments. Otherwise, we won't know if it is worth buying more or not. On 11 December 2010, I did a valuation exercise for the REIT and decided that the fair value was 25c a unit ($1.25 post consolidation). Totally subjective, I am sure.

That meant that, by my reckoning, even at 24.5c a unit, it would still have been a fairly good buy. So, when Mr. Market went into a depression later on and offered to sell units of the REIT at lower prices, it was only natural that I bought more.

The value of the REIT had remained the same. So, a lower price meant that it had become cheaper.

Specifically, I bought more units from August to December 2011 when such a depression took place. By then, the REIT had transformed into a stronger entity and there was no reason for it to trade at lower prices but it did.

On 14 December 2011, the last time I added to my long position in the REIT, I paid 93.5c a unit which was just a little shy of very depressed prices last seen in 2009. That worked out to be just 18.7c a unit, pre consolidation!

It didn't take much to know that buying the REIT in December 2011 was a better deal than buying it during the lows of 2009. Why? Pay almost the same price for a financially stronger REIT today than for a weaker one 2 years ago? Felt like a sensible thing to do.

The future of the REIT was also very promising as they embarked on a redevelopment program and I was able to conclude that by early 2014, two years on, the expectation was for a positive DPU impact, everything else remaining equal. To anyone investing for income, the REIT was, quite simply, a buy and I said to accumulate on weakness.

Regular readers might remember that I said I am not averse to trading around my long positions. I sold some of my investment in AIMS AMP Capital Industrial REIT in the following year when its unit price rose but I retained most of my investment in the REIT as part of my core investments for passive income. With past distribution yields on cost ranging from 10.18% to 13.42%, I think that my investment in the REIT has not done too badly.

The current rights units to be issued at $1.08 a unit will probably be the most expensive units of AIMS AMP Capital Industrial REIT's I have ever bought. At $1.08, I am expecting a prospective distribution yield of 8.66%. A very rough back of the envelope calculation shows that this could increase to 9.26% (taking into consideration income from Optus Centre, the redevelopment of a property in Defu as well as savings in financial expenses).

The prospective distribution yields of 8.66% to 9.26% for the rights units are rather much lower than the distribution yield of 13.42% for rights units offered in its 2010 rights issue. So, this rights issue seems relatively less attractive.

However, if we believe in the management and if we believe that a prospective distribution yield of 8.66% to 9.26% is sufficiently attractive, we should take up our entitlement and apply for more excess rights. Otherwise, we could think of selling our rights entitlement.

For anyone who is thinking of buying the nil-paid rights, although the theoretical ex-rights price (TERP) was calculated to be $1.365 which meant that the fair value for nil-paid rights should be 28.5c a unit, to get the same pre rights distribution yield of some 7.77%, the highest price we should pay for nil-paid rights should be around 12c per unit. Of course, the lower the better but not higher than 12c per unit.

Nil-paid rights start trading 2 days from now.

Know the value and we will know how much we should be paying. Good luck to us all.

Related posts:
1. AIMS AMP Capital Industrial REIT (MI-REIT).
2. AIMS AMP Capital Industrial REIT: Rights issue.
3. AIMS AMP Capital Industrial REIT: Revised DPU and fair value.
4. AIMS AMP Capital Industrial REIT: 7 for 40 rights issue.
5. AIMS AMP Capital Industrial REIT: Optus Centre.

Congratulations to DBS Westgate!

After breakfast, I went for an early morning stroll in the mall. I like early visits to the malls when they are pretty quiet and I usually leave by 11am before it gets a bit more crowded and noisy.

Saw many bouquets outside DBS Bank. So, I went and kaypoh a bit.

Wah! All the big names in finance!

Er, how come no bouquet from Muddy Waters har? Why har?

Hmmm...

Hmmmmmm...

Anyway, this was my breakfast:

Atas nasi lemak and atas barley water. $6.50.

Related posts:
1. Gourmet sandwich by AK71 Deli!
2. Atas and healthy lunch!
3. A meal with numerous benefits.
4. $2.00 breakfast and $1.00 dinner.
5. AK71 bought healthy lunch.

Croesus Retail Trust: Cap rates and growth.

When we invest in a company, it is important to be forward looking. After all, we are investing for the future and not the past. So, although numbers could tell us about the past and the status quo, to forecast performance is a little more difficult.

However, if there is some consistency, then, there could be some measure of predictability. This is probably one reason why many like investing in real estate because their values and rental rates are sticky in the short or even medium term.

Related to this, we often hear people talking about cap rates and some readers have asked me before what exactly are these. Well, cap rate is short for capitalisation rate.

Basically, it is a property's net income as a percentage of its purchase price. So, it is a measure of investment yield. This yield is part of the total return on our investment.

Net income? Yes, you might have seen the acronym NPI before and this stands for Net Property Income. It is basically gross income less expenses. Looking at NPI is more meaningful than looking at gross income, for obvious reasons.

Naturally, we would want to have as high a cap rate as possible if we were to buy a property as investors. This would mean getting as high a net income as possible and/or as low a purchase price as possible.

In a recent interview with Croesus Retail Trust's CEO, he said that it is getting harder to buy real estate in Japan at a bargain as prices have been rising. He also said that the Trust has to move at a faster clip in acquiring another asset.

Clearly, rising property prices will reduce cap rates, all else remaining equal. However, as economic conditions improve and with initial evidence of rising rental rates in the midst of falling vacancy, property prices are more likely to rise than to fall. Expectations are that net income will improve.

So, do I think that Croesus Retail Trust will be delivering a higher distribution yield over the next 12 months? With positive rental reversions at Mallage Shobu expected, everything else remaining equal, yes.

I also suspect that Croesus Retail Trust will be announcing an acquisition soon because:

1. They extended until 31 March 2014 their first right to negotiate for the purchase of the following properties: Mallage Saga, Forecast Kyoto Kawaramachi, NIS Wave I and Luz Omori.

2. They issued a S$100 million MTN last month.

The question is which property would the Trust buy?

Although Croesus Retail Trust is smallish in size given that its initial portfolio of 4 properties has a valuation of JPY 52.5 billion or about S$669 million in total, what can they buy with only S$100 million from the MTN?

Of the four properties in its current portfolio, there are two properties which are closer to S$100 million in valuation:

1. AEON Town Suzuka: S$ 112 million
2. Luz Shinsaibashi: S$ 119 million

Very likely, the Trust's next purchase will be similar in value to these two based on the size of the MTN issued. Of the four properties for which their rights of first refusal (ROFR) have been extended, I wonder which one would it be. Whichever property the Trust decides to buy, however, a completed and mature mall will probably be a DPU accretive acquisition.

Having said this, if each of the four malls on the acquisition list has a valuation of more than S$100 million, then, we might see a private placement taking place. If this should happen, we might or might not see any DPU accretion.

If the Trust should want to purchase two or more malls at once, then, I believe we could see a rights issue. Of course, that would allow all existing unit holders to participate and if the assets to be purchased have attractive cap rates, it should be a good thing.

I hope the management of Croesus Retail Trust does not disappoint. Setting a positive tone in the early years of the Trust's operation will boost investors' confidence and the Trust's standing.

Related post:
Croesus Retail Trust: Substantial shareholders are buying.

Partnering Mr. What and Miss. How.

I was inspired to write something to provide some light reading for the weekend after reading some stuff on Facebook this morning.

It is not just what you say but how you say it.

It is not just what you ask but how you ask it.

The "what" determines the content.

The "how" determines the response.

When we have something to say or to ask, think of the manner in which it could be delivered. Think of the "how".

Of course, the "how" is probably tied to our motivations.

Do we wish for a positive outcome or do we wish for a negative outcome?

If there is a mismatch between our motivations and the outcomes, then, there is something wrong with the "how".

So, how do we deal with this? What?

What we want to do is to be more mindful of the "how".

We should always pay more attention to the ladies.

Of course, I am just talking (and later reading) to myself as usual.

Related post:
To let go or to hold on to a position?

Silver Bullion Coins (Part 2).

I shared photos of some silver bullion coins more than a year ago in November 2012. Seriously, time flies. It doesn't feel like it has been so long.

Anyway, those were Canadian Maple Leaves.

Now, I am sharing photos of some other silver bullion coins that I have:

Part of my stash:

For my thoughts on why it is important to own some gold and silver bullion, click on the related post below and follow the links. I hope you will find it worth your while.

Related post:
Silver Bullion Coins.

Croesus Retail Trust: Substantial shareholders are buying.

On 28 January, I blogged about why some retail investors were badly burnt investing in Croesus Retail Trust. This was shortly after I blogged about why the Trust at the price of 87c a unit then was a very good investment for income.

In the blog post of 28 Jan, I said that persistent selling by almost all the substantial shareholders as the Trust's unit price rocketed through the roof to touch a high of $1.18 a unit and then retreated was the main reason why many retail investors were burnt.

The dumbest reason in the world to buy a stock is because it's going up. - Warren Buffett

The only substantial shareholder that consistently increased their stake was Target Asset Management as the Trust's unit price retreated from the high. They increased their stake at 98c, 95c and 96c in May, June and July 2013, respectively.

On 4 February 2014, Target Asset Management increased their stake again by another million units at an average price of 87.35c per unit. Now, they have an 8% stake in the Trust.

For anyone who does not know:

Target Asset Management was established in Singapore in April 1996. It specializes in equity investment in Asian markets. It practices value investing philosophy.

 

The Company was founded by Mr. Teng Ngiek Lian, a former Managing Director of Morgan Grenfell Investment Management Asia and Managing Director of UBS Asset Management, Singapore. Mr. Teng has more than 45 years of industrial and investment experience in Asia.

Source: Target Asset Management.

 

 

Of greater interest to me is the more recent 2.54 million units bought by AR Capital Pte. Ltd.

AR Capital Pte. Ltd. sold down their stake in the Trust from October to November 2013, some at an average price of 86c a unit and I wondered why. They still held a 6.73% stake in the Trust after all that selling.

Recently, on 14 February, AR Capital Pte. Ltd. became a buyer and bought 2.54 million units at 92c a unit. Yes, 92c a unit. I am baffled.

Why did they sell low and buy high? Many possible reasons come to mind but your guess is as good as mine.

After this recent purchase, AR Capital Pte. Ltd. now holds a 7.32% stake in the Trust.

I took a look at AR Capital Pte. Ltd.'s website. It looks more professional than Target Asset Management's. Very nice. See for yourself: here.

AR Capital was founded by Leong Wah Kheong, who has 28 years of equity investment experience. Prior to starting up AR Capital, he spent 20 years with global asset management firm Schroders, where he was the Chief Investment Officer for Asia Pacific ex-Japan equities from 1996 until his departure in 2005.

Could we be seeing the start of the return of stronger buying interest in Croesus Retail Trust? Honestly, I don't know.

However, I do know that there will always be windows of opportunity for investors to buy good income producing assets at prices that offer good value for money.

These investments could possibly turn out to be for keeps.

Related post:
Croesus Retail Trust: Why some were burnt and burnt badly.

LMIR: Gearing ratio and margin of safety.

A reader asked me why did LMIR's gearing ratio go up so much. It was 34.3% in the last quarter ending 31 Dec 2013 while it was only 28.2% in the quarter ending 30 Sep 2013. That is a 21.63% increase!

There is a simple explanation.





LMIR issued new debt in October 2013 and this was reflected in last quarter's report. The money raised was used to retire a loan facility in January 2014 which was, of course, not reflected in last quarter's report. This was why the gearing ratio jumped.

You might remember that I said that a good thing happened:

"When I blogged about LMIR in August last year, I said that the REIT's term loan maturing this year in June worried me but this concern was addressed when they used the proceeds from the issuance of a 3 year bond to repay the term loan a few months early. This also lowered the REIT's average cost of debt from 6% to 5.3%. A big improvement."

So, we should see gearing ratio come down again the next time LMIR announces results, everything else remaining equal. 





However, if the Rupiah were to continue weakening, gearing ratio will continue to increase. The REIT's assets are denominated in Rupiah but their debt is denominated in S$.

To illustrate this point, look at the presentation slides for 3Q 2013.

Debt at the end of 31 December 2012 and 30 September 2013 was the same at S$472.5 million. However, the gearing ratio went up from 24.5% to 28.2%. This was because property values fell in S$ terms.

Comparing 3Q and 4Q 2013 presentations, we see that property values in S$ terms fell again by 6.4%. 

So, with this in mind, it should not surprise us if the gearing ratio stays above 30% in the next results presentation even after taking into consideration the retired loan facility mentioned earlier.

Although I have said that the Rupiah will recover and that it always does, it is anyone's guess as to when it would recover. 





Whether LMIR will continue to be a good investment will depend on its future performance which is very much dependent on the Rupiah's future performance too.

Having said this, even if the Rupiah stays at the current level, we are likely to see DPU in S$ terms recovering in the next quarter as financial expenses normalise and I have estimated that a DPU of 0.66c is realistic. Is this attractive enough though?

Well, if we were attracted to LMIR because of the estimated 8.6% distribution yield in the recent past, then, we would probably want the same 8.6% yield to be attracted now. 

With a prospective DPU of 0.66c a quarter, to get a yield of 8.6%, unit price has to fall to 30.5c a unit. That is quite a bit to fall from the current 40.5c.

If we were to include the 10% savings from a reduction in the average cost of debt, we could see a DPU of 0.7c in the next quarter. To get a yield of 8.6%, unit price has to be about 32.5c.

So, as anyone can see, unless we are expecting a dramatic decline in unit price, I think an 8.6% distribution yield from an investment in LMIR is probably wishful thinking now, no matter how we slice it. This is the new reality.






If an investor says that he is quite happy with a 7% yield, then, he could get it by investing in LMIR at 40c a unit. 

However, if a 7% yield is all he wants, he could get it from some other S-REITs in Singapore without having to worry about foreign exchange issues. 

If he were to invest in LMIR, he would do well to demand a bigger margin of safety.

For anyone interested in investing in LMIR now, I would say that there really isn't enough margin of safety (i.e. need much higher distribution yield) although for anyone who has been vested for a long time at prices much lower than now, there is probably lesser harm in holding on since he would have benefited from many rounds of income distributions and would also be sitting on some paper gains.

Related post:
1. LMIR: 4Q and FY2013 results.
2. LMIR: There and back again.

LMIR: There and back again.

I have not done any contra trades in a long time. Well, I did one today and lost some money in the process. Good heavens! What has happened to me?

Well, you might remember that I made a decision last week to buy some units in LMIR at 40.5c a unit. It was motivated by the fact that price had fallen significantly from when I sold a big portion of my investment in the REIT exactly a year ago and how distribution yield was an estimated 8.6% at 40.5c a unit. Arguably, it wasn't expensive.

Unfortunately, things went awry and based on the latest results, the annualised distribution yield is only 5.53%.

I always try to look ahead to see if a business could do better and I surmised that LMIR could see a higher DPU in the following quarter which could push annualised distribution yield up to 6.51% (based on unit price of 40.5c) at least.

However, even 6.51% would miss the 8.6% distribution yield which I estimated and which was an important motivation for me to add to my investment in the REIT.

Since the expectation that came with adding to my long position in the REIT was not met, I should logically think of selling. So, after chewing on this over the weekend, I decided to sell what I bought last week, booking a contra loss of a few hundred dollars in the process. Another fee paid to Mr. Market.

LMIR has done passably well as an investment for income in the last few years and it has been good to me. It is still one of my top 5 investments in S-REITs and my remaining long position is still very much in the black. However, whether LMIR will remain a relatively good investment for income will depend on its future performance.

There could possibly be a better time to increase my investment in the REIT.

Related post:
LMIR: 4Q and FY2013 results.

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.

Tea with Solace: Frasers Centrepoint Limited (FCL)

A Peek into Frasers Centrepoint Limited (FCL)

Frasers Cpt (FCL) has been spun off by F&N, the real estate division carved off from its operation business. It was listed on the SGX Mainboard on 9 Jan 14. The stock opened at $1.61, reaching a high of about $1.70 a couple of days later before retreating to the current price of $1.41 to $1.42.

FCL operates as an international real estate company. It owns many properties that we are very familiar with. It has major stakes in two REITs – FCT and FCOT.

Souce: FCL 1Q14 Results Presentation. Click to enlarge.

Financial Highlights

Revenue increased by about 87% and PBIT increased by about 63% Year on Year. The strong set of 1Q14 results showed year on year gains in all segments. Strong overseas development sales were the key driver.

Development PBIT rose by about 121% year on year. It was led by Australia with the completion of One Central Park (CP) and Park Lane Block 5A in Sydney. As for China, around 750 units were sold in 1Q14, but the overall residential market remains cautious in China. In Singapore, Overall prices declined 0.9% q-o-q in 4Q13. Around 15,000 new homes were sold in 2013, 32% lower compared than 2012

Given the increasingly cautious sentiment in the local property market which has been affected by cooling measures, Frasers Centrepoint’s strategy of venturing overseas can put it in a good position for further growth,

There was also an increase in commercial rents and room rates with higher contribution from One@Changi City . Construction of Waterway Point is progressing well, slated to be completed in 2015.

Currently the Net Asset Value per share is $2.15. At current price of about $1.41, it is about 35% discount to its NAV. I am vested at this price

I resisted entering when it was trading at $1.50 or $1.60. Recently, I make a comparison of similar real estate companies listed in Singapore. On average, they are trading at about 0.75x book value. At current price of $1.41, with about 35% discount to NAV, I feel comfortable vested in FCL properties. Valuation is attractive in my opinion.

FCL has a net debt to equity of about 50%, which I am uncomfortable with. Recent media reports suggest that FCL will launch a hospitality trust, which could raise S$600m. Once they spin out the hospitality REIT, they should be able to move some debt off their books. This asset recycling move is beneficial to FCL similar to what OUE and SPH have done in recent times.

This move can fund new acquisitions and allow them to be asset light. This strategy also allows them to earn more REIT management fees and improve its commercial portfolio.

Potential Risks

FCL has a small free float of only about 12%. This does not sit well with large investors. Hopefully, this will change over time. Increasing FCL free float will improve investor participation and narrow the valuation discount. This remains a uncertainty and likely to depend on market forces.

Another potential risks lies in the majority shareholder. In this case, it is Thai boss, Chaoren, holding a direct stake at 76%. It is of utmost important that the Thai towkay's interests are aligned with minority shareholders.

What are the things the management can do to the detriment of minority shareholders? They can set unreasonably high directors remunerations or, worse still, IPT (Interested Person Transaction) which will solely benefit the majority shareholder instead of all shareholders. I believe IPT risk possibility is low but still it is a risk.

As Warren Buffett said, integrity of management is very important. This is an area which I have to pay attention to.

Conclusion

I believe at current valuation, FCL is attractive, trading at about 35% discount to its book value of $2.15. The portfolio is spread across residential, commercial and hospitality properties in markets such as Singapore, China and Australia which reduces the risk of downturn in any particular country dragging down the whole company. It has a good history of increasing its profits and assets. FCL also has a potential catalyst in the form of REIT listings in the near future,

Key risks like free float and management integrity still remains. The financials of FCL look extremely attractive and there is huge potential upside to go but it also holds hidden risk that goes beyond financial statements.

While many people are proclaiming doom for the real estate, my strategy is to invest at attractive valuation and sit tight to wait for events to unfold. I like to stay invested in good counters for longer period of time. All counters are good investments at the correct valuation.

I came across a recent quote from the papers which best explains my strategy in holding this stock.

"We believe that if you don’t believe in holding a share for 10 years, then don’t even think about holding it for three days… Speculators can still get their thrills through other means. But let’s not make the mistake of confusing investing with gambling"

- Mr David Kuo, Chief executive of Motley Fool Singapore.

Some other guest blogs by Solace in ASSI:
1. King Wan Corp. Ltd.
2. Common Sense Investing.
3. Getting ready for investment.

AIMS AMP Capital Industrial REIT: 7 for 40 rights issue.

Regular readers know that I much prefer rights issues compared to share placements as long as the funds raised go towards increasing income for unit holders. Rights issues allow all unit holders to participate in the enlarged capital base of the entity and to share in the benefits, ideally.

The last time AIMS AMP Capital Industrial REIT had a rights issue was in 2010. At that time, it was a 7 for 20 rights issue at a price of 15.5c per unit (post consolidation would translate to 77.5c a unit today). It was a pretty straightforward proposal back then because the funds raised was for the purchase of a property.

We could compare the NPI yield of the property to be purchased and the existing NPI yield of the REIT's portfolio and decide if it was a good idea. If the NPI yield of the property to be purchased was higher than the NPI yield of the existing portfolio, which it was back then, quite simply, we have a green light.

However, there is always the question of price. Yes, the price has to be right, as always.

The 7 for 40 rights issue which is now being proposed by AIMS AMP Capital Industrial REIT is at a price of $1.08 per rights unit. At the closing price of $1.415 per unit today, a theoretical ex-rights price (TERP) of $1.365 has been calculated.

So, buying at $1.08 represents a discount to the TERP. This is more important than the discount to the closing price. Why? We want to be forward looking since we are investing for the future and not in the past.

Imagine that after the rights issue, given the increased number of units in issue, each unit should proportionally be trading at $1.365 if all else remain equal. If we were then offered to buy more units at $1.08 per unit, would we bite? Of course, we would. That represents a discount of about 20% from the future market price, in theory.

Now that we have resolved the issue of price, we come to another important consideration and that is one of value.

Value could be enhanced but value could also be destroyed. I said that the rights issue of 2010 was pretty straightforward. It was to buy a yield accretive property. The rights issue this time is not as straightforward.

80% of the funds raised will go towards:

1. AEIs which include re-developments to possibly max out plot ratios.

2. Development projects (or green field projects, I suppose).

3. Third party acquisitions (i.e. completed properties).

20% of the funds will go towards:

4. Paying down borrowings.

5. Working capital.

6. Payment of fees related to the rights issue.

This is where I see a bit of a problem. I like the fact that 80% of the funds raised will go towards measures which would possibly improve income and, ideally, distributions for unit holders. However, the lack of details make it impossible to calculate the benefits from the proposed rights issue. So, we really must have faith in the managers to do the right things.

In an earlier decision to add to my long position in Croesus Retail Trust, I decided to reduce my investment in Sabana REIT while keeping my investment in AIMS AMP Capital Industrial REIT intact because I felt that the latter was a better investment with a stronger management who have their interests more aligned with unit holders'. Following that line of reasoning, I will take up my allotment of rights units and also apply for excess rights.

When the nil paid rights start trading, unit holders have the option of selling them away if they do not wish to fork out money. A fair price for the nil-paid rights would be, assuming market price stays at $1.415 a unit, $1.365 - $1.08 = $0.285. This more than compensates for the 15% dilution which a unit holder who does not wish to subscribe to the rights issue would have to suffer.

If you have never encountered a rights issue before, it could be a good idea for you to read some of my older blog posts on past rights issues. See related posts below. Nice little activity for the weekend.

See presentation slides: here.

Related posts:
1. AIMS AMP Capital Industrial REIT: Rights issue.
2. First REIT: Rights issue.
3. LMIR: Proposed 1 for 1 rights issue.

Croesus Retail Trust: DPU above forecast at 5.24c.

Croesus Retail Trust did not disappoint as expectations that DPU would come in above forecast has materialised. A DPU of 5.24c for the period of 10 May to 31 Dec 2013 will be paid on 31 March 2014. This means a 6.02% return for anyone who got in at 87c. Not bad.

Some numbers
(as at 31 Dec 2013):

Gearing: 41.8%
Interest cover ratio: 5.9x
All in cost of debt: 1.59%
100% of debt hedged.
Occupancy: 100%
NAV/unit: JPY 74

We could reasonably expect performance to improve in future as more expiring leases in Mallage Shobu, one of the Trust's 4 malls, are replaced with new tenants. Already, two tenant replacements have shown positive rental reversions.

Hopefully, more AEIs will be carried out and AEIs carried out at Aeon Town Moriya brought in new tenants like UNIQLO which bumped up total income.

If we annualise the Trust's last quarter's DPU of 2.02c, we are looking at 8.08c per annum or a distribution yield of 9.29% for anyone who got in at 87c a unit. Further upside is possible as more tenant replacements take place with positive rental reversions this year.

We want to be reminded that Croesus Retail Trust issued a $100 million MTN and that is not part of the numbers for the period reported here. In a blog post last month, I said:

"The hard numbers tell us that finance costs will jump by some 30% because of this S$100 million MTN and unless put to good use it will also reduce DPU by about 5%. So, the funds raised should not be left idle for too long."
See:
Croesus Retail Trust: Overnight BUY order filled.

So, I would also want to see the Trust make a DPU accretive acquisition very soon. Of course, this should mean more distributable income for unit holders.

For anyone who believes that Abenomics will snap Japan out of 20 years of deflation and that Japan's economy will be revitalised, investing in Croesus Retail Trust is a decent enough proposition even at the current price of 90c a unit. This is especially true for anyone who wants a meaningful stream of income from an investment with a good chance of capital appreciation thrown in over the next 2 to 5 years.

See presentation slides: here.

Related posts:
1. Croesus Retail Trust and Perennial China Retail Trust.
2. Added more Croesus Retail Trust.
3. Croesus Retail Trust: Initiated long position at 87c.

LMIR: 4Q and FY2013 results.

Exactly one year ago in 2013, I divested a big chunk of my investment in LMIR at 52.5c a unit. At the time, I said that selling at that price meant giving up a distribution yield of some 5.7%. The reason for the partial divestment was the unimpressive performance of the REIT since its rights issue.

Today, one year later, I made my first purchase in an S-REIT since the middle of 2012 as I increased my long position in LMIR, adding a quantum that is about a fifth of what I sold one year ago. So, you can say that, for various reasons, some of which have been discussed here in my blog before, I remain cautious.

At a recent lunch gathering with some friends, when asked, I said that LMIR was still not trading at a price that I would call cheap. Yes, the price I got in today was not cheap but I was looking at a prospective distribution yield of 8.6% which seemed like a fairer proposition compared to 5.7% a year ago but, everything else remaining equal, cheap would mean a 10% yield or higher. Impossible, you think?

When I remind myself that the lowest I paid for LMIR was 18.5c and that I got a huge chunk of rights at 31c, you see what I mean. Prices could plunge again for whatever reason or we could see another rights issue, again, for various reasons.

There was another reason from a FA perspective why I decided to add to my long position. When I blogged about LMIR in August last year, I said that the REIT's term loan maturing this year in June worried me but this concern was addressed when they used the proceeds from the issuance of a 3 year bond to repay the term loan a few months early. This also lowered the REIT's average cost of debt from 6% to 5.3%. A big improvement. Read it: here.

Technically, it also seems to me that the downtrend has been broken and that LMIR's unit price has been consolidating for a while. Of course, no one could tell that unit price has bottomed until after the fact but support seems to have formed at 39c. What is being formed now could be just a floor. We don't know but the momentum oscillators suggested that selling pressure had eased.

Now, the news.

LMIR released their full year results tonight. Here are some of the numbers for 4Q 2013:

DPU: 0.56c
Gearing: 34.3%
Occupancy: 95%
NAV/unit: 41c

The numbers are much weaker than expected. If we were to annualise 4Q DPU, we are looking at a vapid 5.53% distribution yield at 40.5c a unit, my buy price today.

Now, what do we do as unit holders? Press the panic button?

Taking in the bigger picture, what is affecting LMIR's performance in S$ badly is probably the weak Rupiah. However, the Rupiah will eventually bounce back. It always did in the past. In the meantime, the REIT's management will have to hedge the risk.

Looking at the REIT's numbers, it did not do too badly in terms of NPI, reducing 5.5% in S$ terms, thanks to contributions from new properties probably. What really caused DPU to reduce drastically year on year was the 37.5% increase in financial expenses related to the issuance of the MTNs. Now, if these expenses do not recur in the next quarter, then, DPU could improve by quite a bit in the same period.

The next time the REIT has to raise funds could be end of this year or early next year as a $200 million MTN matures in July 2015. So, it is very likely that DPU for the next quarter could be higher. How much higher?

All else being equal, I think that a DPU of 0.66c in the next quarter is realistic. Of course, if the management works hard at bumping up occupancy, DPU could even surprise on the upside. All this is assuming that the Rupiah stays at current levels. Even a slight strengthening of the Rupiah could provide a lift to the REIT's performance.

Of course, there is no saying how Mr. Market would react although a sell off tomorrow would be quite natural. 39c could indeed be just a floor and not the bottom. Next support could be found at 35.5c, the low of 4 June 2012.

See slides presentation: here.
See financial statement: here.

Related posts:
1. LMIR: Divested 42.5% at 52.5c.
2. LMIR: 2Q 2013 DPU 0.93c.

Saizen REIT: Is the half yearly DPU of 3.25c sustainable?

Saizen REIT has announced a slightly higher DPU of 3.25c compared to 6 months ago. Post consolidation, the DPU 6 months ago would be equivalent to 3.15c. This means DPU has gone up by some 3.17%. Income will be distributed to unit holders on 21 March 2014.

Unit price of Saizen REIT's closed at 92.5c. So, annualising 3.25c means a distribution yield of 7.03% per annum. This yield is quite attractive for freehold residential buildings in Japan.

I really do not have any major concerns with holding on to Saizen REIT as an investment for income. I believe it is a stable income generator in S$ terms even with the JPY at historic lows. After all, the REIT hedged the exchange rate risk at S$12.32 to JPY1,000. This is pretty darn low.

The REIT will be hedging exchange rate risk again for the next six months but will employ a range this time. S$12.20 to S$13.12 : JPY1,000. Everything else remaining equal, it means that we could see DPU 6 months later either declining by 1% or rising by as much as 6.5% in S$ terms. Sounds good? I think so.

The rest of the numbers, Saizen REIT has prepared very good presentation slides as usual and I am sure they are self explanatory. I am more interested in how more recent developments could impact DPU in future.

Remember that in November last year, Argyle Street Management, which holds 8.9% of the REIT asked for cash which the REIT was holding to be returned to unit holders? That amounted to JPY4.86 billion or more than S$60 million in cash at the time.

Now, if this were to happen, it would affect not just the NAV of the REIT but also its DPU. This is because Saizen REIT's loans are amortising in nature and why this is actually a good thing over the long run has been mentioned in this blog a few times before.

Amortisation or principal repayment should be from income generated by the REIT's properties. This is only logical. The REIT, however, uses its cash resources to effect this principal repayment which enables it to distribute more of the income generated by its properties to unit holders. Out of the half year DPU of 3.25c, this measure accounted for 1.19c or some 36.6% of DPU. This is significant.

Annual amortisation approximates JPY 633 million. So, this means that with the cash the REIT has in hand, it could continue to use its cash resources to effect principal repayments for almost 8 years which would help to maintain a higher DPU.

However, if the cash were to be returned to unit holders instead, then, we should expect DPU to decline to approximately 2c every 6 months or 4c a year. I would not expect unit price to stay at 90c then either. I would expect unit price to fall to the region of 70c a unit or a bit lesser and with a DPU of 4c, we would then be looking at a distribution yield of some 5.71%.


A distribution yield of 5.71% is still pretty good for the kind of assets the REIT owns, especially when the loans are amortising in nature. Of course, one has to remember that in such a scenario, existing unit holders would most probably have had received some 20c per unit in "special dividend" too. This is not bad at all especially if we got in at the lows.

Blogging about the results in this way is really to remind myself of what is the underlying reality in Saizen REIT's DPU and to prepare myself for change which could be on the way.

See slides: here.

Related posts:
1. Saizen REIT: DPU of 0.63c.
2. Saizen REIT: A special dividend?

FCOT: Distribution Reinvestment Plan (DRP).

Received another DRP offer and this time it is from Frasers Commercial Trust (FCOT). This is probably not going to see any take up because the price of $1.2389 per new unit to be allotted is higher than what we could get from Mr. Market now which is $1.235 per unit.

It is probably good to be reminded that the headwinds for REITs could get stronger and if we want to invest in REITs, we have to recognise this. One of these headwinds is an environment of rising interest rates.

So, the DRPs which S-REITs are pushing out now make sense because, if taken up, they will lead to lower gearing levels. The REITs could pay down their debt with the funds as well when they fall due. This is probably a good thing for unit holders too.

To me, it only makes sense to take part in DRPs if we want to increase our long positions in the REITs concerned. However, with rising risk free rates, unit prices of S-REITs will continue to experience downward pressure, everything else remaining equal. So, to me, it doesn't seem very prudent to take part in DRPs at this point in time or in the near future.

I am not against others taking part in the DRPs to strengthen the balance sheets of the S-REITs I am invested in, however. In the meantime, I am quite happy to continue receiving income from these S-REITs and possibly increasing my investments in them only when Mr. Market makes offers too attractive to ignore.

Related posts:
1. Distribution Reinvestment Plan: First REIT and CIT.
2. AIMS AMP Capital Industrial REIT: DRP.

CapitaMall Trust: Buy the retail bond or the REIT?

CapitaMall Trust is offering $200 million worth of bonds. They will mature 7 years later in 2021 and will have a coupon of 3.08%. Is this a good thing?

Well, as the REIT has quite a bit of debt due for repayment this year, this fund raising effort is necessary and timely. The coupon of 3.08% is also lower than their average cost of debt of 3.4% as at 31 Dec 2013. So, this is a good thing for unit holders of the REIT. DPU won't be negatively affected.

As S$150 million of the retail bonds will be offered to the public with the minimum investment sum set at only $2,000, it is within reach of regular retail investors like you and me. If we look at this as a kind of forced savings, a pseudo-CPF if you will, and hold it for the full 7 years period, I think it is not that bad a proposition. Why?

Well, if we hold it for the full 7 years, we won't suffer any capital loss which could happen if we decide to sell before maturity.

You mean we might lose money if we cannot hold for the full 7 years? Yes, possibly, especially with expectations that interest rates will continue rising.

So, if the risk free rate should rise by 1%, investors might expect a 4.08% return from this instead of the 3.08% being offered now, for example. The bond price would have to fall in order to offer this higher return. How much must the bond price fall to give this return? Approximately 25%.

Pause.

Pause.

Pause.

Yes, 25%. The good news is that if we were to hold to maturity, then, we are safe. So, what to do? We buy the bond with money we don't need for the next 7 years. We will get back our principal when the 7 years is up, well, if CMT doesn't go belly up. (See comments by Charlie and AK71 in the comments section below.)

So, this retail bond offering could benefit anyone investing for income in two ways. Invest in the REIT for a distribution yield of 5.64% (unit price of $1.815 at closing) or to buy the bond for a coupon of 3.08% over the next 7 years.

Wah! AK71 so silly. Of course, invest in the REIT. The yield is so much higher! Well, remember that REITs are leveraged investments. Without the gearing of about 35%, the distribution yield wouldn't be so much higher and would be closer to 3.75%. Gearing is a fantastic thing, isn't it?

Wait a minute, 3.75% is still higher than 3.08%. So, investing in the REIT is still a better choice. Indeed, it seems to be the case and that would be my preference too.

Remember that this analysis has taken place in a vacuum, totally ignoring other factors which could have a bearing on the performance of the REIT or the retail bond. However, comparing the two options thus gives us a clearer picture of which option an investor for income might want to lean towards.

Read: CapitaMall Trust launches retail bond offering.

Related post:
Saizen REIT: Risk free rate and unit price.