MIIF: Realising value.

The last time I blogged about MIIF was more than two years ago although I would reply to readers' comments or emails about the counter from time to time since. I have a long history with MIIF. It was recommended to me by a friend and I got in at a unit price of $1.00. Yes, no kidding.

See the elusive Mt. Fuji?
It seems that MIIF's value will elude unit holders no more.

Through the GFC, MIIF's unit price sank and the lowest unit price I bought some at was 29.5c on 6 January 2009, if my records are accurate. I bought more over a 6 months period from then as its unit price rose to 35.5c. Coming out of the GFC, MIIF strengthened its balance sheet through certain divestments, rationalised its portfolio and concentrated on Asian assets. Its DPU also improved.

As I was convinced that S-REITs were deeply undervalued and, for me, they are also easier businesses to understand, my investment in MIIF was not nurtured further.

By middle of this year, undervalued S-REITs were hard to find except for a small window of opportunity when Saizen REIT's unit price sank 15% in May/June. As regular readers know, I was also putting money into stocks looking for possible capital gains by then since it was harder to expect that from S-REITs going into the future.

It was around the same time that I increased my investment in MIIF at 51c/unit. Relatively strong balance sheet, NAV/unit at about 70c and a DPU of 5.5c per annum. Frankly, if not for the lack of options in S-REITs, I would probably not have increased my investment in MIIF as the fund owns myriad businesses in various countries and it is not as easy to understand as the S-REITs in my portfolio.

Today, I received an email from MIIF:

The Board of Macquarie International Infrastructure Fund Limited (MIIF) today announced the completion of the Strategic Review which was initiated in June 2012.

The Strategic Review, which included an assessment by CIMB Bank Berhad, Singapore Branch (CIMB) and consultation with a cross section of shareholders, generated a number of key observations. After considering these observations and assessing the alternatives available to MIIF, the Board has concluded that in order to maximise value for MIIF’s shareholders the strategy for MIIF should change.

As a result, the Board has decided to undertake the following initiatives:

• Distribute existing excess cash to shareholders as a one-off special dividend;
• Commence a joint process with Macquarie Korea Opportunities Fund (MKOF), MIIF’s TBC co-shareholder, to realise maximum value for their investment in TBC;
• Pursue the orderly divestments of MIIF’s interests in HNE, CXP and Miaoli Wind;
• Distribute proceeds from any divestment to shareholders as soon as practicable; and
• Allow MIIF’s corporate-level debt facility to lapse upon maturity.

These initiatives have been formulated with a focus on maximising and returning value to MIIF shareholders. The Board will endeavour to execute these initiatives in a timely manner; however, these initiatives involve complex processes which will require active management and prudent actions to safeguard the interests of MIIF shareholders.

Good news for unitholders. Well, Mr. Market seems to like it anyway.

Related post:
MIIF: Seeing value.

Never lose money in real estate and REITs?

I have cautioned people that we are likely to see a decline in prices of residential properties in the next few years. Unless we are sure that we are looking at an undervalued property, we should think again about passing that cheque to the agent. After all, it is a big financial commitment.

The government continues to make more land available for new residential developments. Already, there is a rising vacancy rate in non-landed private residential properties. This would likely worsen as more developments are completed in the next two years. We could have the perfect cocktail for a deep correction in the market if interest rates should head north come 2015.

We retain our negative view on the Singapore residential sector as we continue to see a rising threat of vacancy with an acceleration in physical completions in 2013-15.

Vacancy rates for non-landed private units had increased from 5.9% to 6.1% qoq in 3Q12 as take-up continued to lag physical completions. URA estimates that completions will rise from 16.1k units in 2013 to 23.1k units in 2015, 2-3x more than the historical average occupancy rate of 8k units per year.

We forecast that physical residential prices will fall by 5% by end-FY13, with vacancy rates for private units up from 6.1% currently to 7.2%. (CIMB, 11 Dec 12)

With industrial properties, the government has also made more land available in order to keep the cost of doing business down in Singapore. With investors channelling their funds into commercial and industrial properties due to cooling measures imposed on residential properties, prices of commercial and industrial spaces have sky rocketed.

In all areas, how much of the demand is, therefore, user demand? How much of the demand is from property investors and speculators? The end result is the same. Prices are pushed up which leads to more building. We don't need a degree in Economics to know that oversupply will bring down prices. People who bought at high prices should have deep pockets to avoid foreclosure.

So, how will my investments in industrial S-REITs be affected? They will not escape unscathed, for sure. This is where the quality of the management will be called into question. Quality of management?

For example, Saizen REIT has been able to maintain occupancy of 90% or so for their properties in Japan despite the difficult conditions and much lower occupancy levels of competing properties. I believe in their management's quality.

So, if the management is up to scratch, we could see above average occupancy levels even as more supply comes on stream. However, in a situation where there are many alternative offerings, to retain tenants, rental rates would probably come under pressure.

Although we could continue to see some yield compression in 2013 as money seeks out higher returns in industrial S-REITs, I would be surprised to see unit prices rising by more than 10 or 15% next year. If people ask me if this is still a good time to invest in industrial S-REITs, I would say it is still good if we are investing for income but, perhaps, not so good if we are looking for capital appreciation.

My two largest investments in industrial S-REITs are:
1. AIMS AMP Capital Industrial REIT
2. Sabana REIT

Of the two, I am more impressed with the former's management quality. AIMS AMP Capital Industrial REIT's management have renewed many tenancies ahead of time while Sabana REIT which has almost 48% of its tenancies expiring next year is slow to show results.

So, do we press the panic button? I think not. Sabana REIT would probably be able to renew most, if not all, of its expiring tenancies as the full impact of the new supply coming on stream would not be felt in the very short term. Nonetheless, the impression I get of a management that seem to be dragging their feet nags at me.

I have stayed positive on S-REITs for quite a while now. It is now prudent to turn more cautious on S-REITs although it is too early to turn negative.

Supported by lower than average completion of new industrial space over the past few years, vacancy levels for all industrial segments (Business Parks, Multi-User Factories and Warehouses) have hit record lows. This had led to a strong surge in industrial capital values and rents by 6-26% since the start of 2012. Looking ahead, we see market dynamics turning given that close to 49.7msqft of industrial space currently under construction will be completed over 2013-2015. This, on an annualised basis, represents more than twice the annual supply over the past decade.
(DBS Group Research, 6 Dec 12)

Related posts:
1. AIMS AMP Capital Industrial REIT: 2Q 2013.
2. Sabana REIT: 3Q 2012 DPU 2.34c.
3. Staying positive on S-REITs.
4. AK71's simple strategy.
5. REITs: When to buy?