Analysis – Brokers’ Take – 1 Jul 2017

General:

The online version of this news section is shorter slightly shorter than the print version. With the revamped new freesheet – thenewpaper (tnp), this section has an archive of 136 issues (latest: 7 Jul 2017). This was also compiled by Cai Haoxiang, who I believe works for The Business Times (email: haoxiang@sph.com.sg). The first issue on tnp was “Compiled by Kenneth Lim, The Business Times” – dated 6 Dec 2016.

Their disclaimer [I have put some words in bold type.] – All analyses, recommendations and other information herein are published for general information. Readers should not rely solely on the information published and should seek independent financial advice prior to making any investment decision. The publisher accepts no liability for any loss whatsoever arising from any use of the information published herein.

Focus/Breakdown (with comments in brackets and in bold/italicised):

Keppel REIT (Buy recommendation) – office space REIT

It ended trading at $1.145 per unit (interesting… 3 decimal digits). The forecasted price was $1.23 (Target Price).

  • The REIT is taking a 50% stake (seller recorded as Australian Post) ‘in a premium office tower’ to be built in Australia at 311 Spencer Street, Melbourne.
  • Favourable view towards medium term (how long is this duration?) a distribution per unit (DPU) uptick owing to 30 year lease and (I infer contractually) inherent rental escalations (But what of the Australian taxes?)
  • Predicted immediate/short term DPU ‘dilution’ (decline in unit prices?) and gearing (leveraging) forecasted to rise to 40% which would result in investor ‘pushback’ (what does this mean?)
  • This is surmounted by “…capital values in Singapore should remain steady on the back of recent market transactions and strong interest from investors looking to buy office buildings in Singapore.” (What does ‘capital values’ mean?)
  • Target Price is dependent on Keppel REIT’s Q2 2017 figures
  • The REIT has a 0.8 price to book ratio which to the “brokers” was “attractive”
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REITs Reflections – News – Jan 2017

It was my first hardcopy Business Times Weekend (Singapore) for a long while. (There was a 20% price increase but the paper quality has improved… This helps if you are a collector.)

I did not go knocking for REIT (Real Estate Investment Trust) news but two came in this issue (21-22 Jan 2017).

After the earlier research, these articles become clearer to me or at least I seem to be able to look at ‘key’ items. Only time will tell whether this amounts to true wisdom.

Note – all monetary figures are in Singapore Dollars.

CMT’s rental reversion keeps sliding – Kalpana Rashiwala

CMT = CapitaLand Mall Trust, the REIT with the longest history in S-REITs (Singapore REITs)

Rental Reversion percentage (%): rise of existing rental charges in comparison to rates the year before (not counting recently developed and remodeled units) – the rates are usually agreed upon 3 years earlier. [A two column table is used to depict the (general) downtrend.]

FY (Financial Year) 2007, it was 13.5%. It has remained below 9.7% from FY 2008 to FY 2016. Its two troughs were in FY 2009 at 2.3%, and FY 2016 at 1%. It had stayed above 6% from FY 2010-14.

Structurally, new retail outlets had been popping up to contest their catchment areas. On pure instinct (more analysis is required therefore), it seems the management made the right move to sell off Westgate Tower ($17.1 million kept for ‘general corporate and working capital purposes’) and Rivervale Mall (in 2015 with a $72 million profit, out of the $116 million price, after fees and expenses – See 15 Oct 2015 Channelnews Asia article). Funan, near City Hall MRT station, is being refurbished. 97% of CMT’s debt comes with fixed interest rates. [Hence interest rate hikes may be less threatening, depending on whether CMT is re-financing within a higher interest rate environment. The overarching environment: ‘Singapore’s interest rates are expected to rise in tandem with US rates, which will increase the borrowing costs for Reits here.’ See TODAY article, 31 Jan 2017.] The joint ventures at Raffles City and Westgate mall are not.

Gauging FY 2016 against FY 2015, Gross revenue grew 3.1%, so did NPI (Net Property Income) at 2.9%, Distributable income gained 0.6%. ‘On a comparable mall basis’, gross revenue grew 0.4% and NPI stagnated [which malls were ‘comparable’ was not explained in detail.] It was not stated if the distributions were in units or in cash; or what ratio of both.

The author suggests that the renewal of leases [51.4%/Net Lettable Area (NLA) – Bedok Mall, 35.8% – Westgate, and 30.6% Lot One Shoppers’ Mall] would allow CMT the chance to change tenant compositions. This conceivably could be used to establish different niches/marketing points or invite more profitable tenants in.

Another point that needs research: ‘counter’ or trading price versus ‘Adjusted Net Asset Value per unit (excluding distributable income)’. The former was on 20 Jan 2017 was $1.985; the latter – $1.86 on 31 Dec 2016 (equal to 31 Dec 2015). I wonder what is the value of knowing the latter value…

* Refer to this post on CMT for more details.

FCT posts 0.7% rise in DPU for 1st quarter – Lynette Khoo

FCT = Frasers Centrepoint Trust (a comparable REIT? – Bedok Mall and Bedok Point are practically side by side… Hmmm the Replacement Cost Approach?)

Interesting…

NPI for 1st fiscal quarter ending 31 Dec 2016 fell 6.4%: Causeway Point (CP), Bedok Point, and YewTee Point could not make up for income declines from Northpoint (asset enhancement expected to end in Sep 2017; note that Northpoint includes the Yishun 10 Retail Podium), Changi City Point and Anchorpoint. (REITs have different fiscal quarters it appears… Ascendas-REIT: First Quarter Ended 30 June 2016). In that quarter, CP took up 52.8% of the NPI; with second and third being Northpoint and Changi City Point. Similarly, CP constituted 52% of the NLA in the period. NPI FY 2014 = $118, 096, 000 while NPI FY 2015 = $131, 043, 000 – in other words, (rounded up) 11% expansion. [p2, FCT 4Q15 Distribution per Unit up 2.7% year-on-year].

Prior to 31 Mar 2016, FCT’s property manager accepted 20% of its fees by way of REIT units. This has been jacked up to 70% till 31 Dec 2017 in a bid to prop up the Distribution Per Unit (DPU). Including FY 2007 to FY 2016, DPU has been on a constant uptrend.

  • FY 07 > 6 cents
  • FY 08 & 09 > 7 cents
  • FY 10 & 11 > 8 cents
  • FY 12 & 13 > 10 cents
  • FY 14, 15, 16 > 11 but below 11.8 cents

The presented compound annual growth rate was 6.9%. [How much does this exceed inflation though?] Going back earlier, FCT’s 2016 Annual Report cited Bloomberg on p. 5. The latter stated that FCT’s DPU yield was 5.34% (exceeding Singapore’s Government 10-year bond yield of 1.758% by 358 basis points).

Its 91.3% occupancy is lower than CMT’s at 98.5% (period ending 31 Dec 2016). 74% of NLA are up for rent by 30 Sep 2017 (end of 2017 fiscal year). According to FCT’s press release <FCT 4Q15 Distribution per Unit up 2.7% year-on-year>, PDF dated 22 Oct 2015, FY 2015 occupancy was 96%. Annual mean rental reversion was 6.3%.

Since Chew Tuan Chiong, CEO Frasers Centrepoint Asset Management Ltd (FCT manager), referred to low gearing at 29.7%, I did further study. This detail is consistent with <Frasers Centrepoint Trust: Investor Presentation>, (Feb 2017) – a 56 page PDF document. Historically, gearing (‘Calculated as the ratio of total outstanding borrowings over total assets as at stated balance sheet date’) peaked at 31.3%, FY 2011 (ending 30 Sep 2011). Only in one year between 2007 and 31 Dec 2016 did it go below 28%; it exceeded 30% in 3 of the years in the said period. In FY 2015, roughly 75% of its borrowings were ‘on fixed interest rates or … hedged via interest rate swaps.’ [p1, FCT 4Q15 Distribution per Unit up 2.7% year-on-year] Interest Cover (‘Calculated as earnings before interest and tax (EBIT) divided by interest expense for the quarter…’) was 7 times for period ending 31 Dec 2016 and FY 2016. [It would be important to see past Interest Coverage nevertheless.] But we see that its All-in average cost of borrowings was 2.1% in FY 2016 and 2.4% in FY 2015.

Counter/trading price of FCT units was $1.965 on 20 Jan 2017.

Finally, a comparison of strategies (?):

FCT (22 Oct 2015) – ‘FCT is focused on increasing shareholder value by pursuing organic, enhancement and acquisition growth strategies.’ (above mentioned press release)

CMT (above mentioned Business Times article) – CEO CapitaLand Mall Trust Management Limited CEO, Wilson Tan, highlighted ‘asset enhancement’, ‘capital/debt management’, and ‘operational efficiency’ as channels to ‘stabilise CMT’.

REITS Valuation – Jayaraman

Now this is the earlier (2012) version of the book. There are some underlying similarities between Mark Lin and Jayaraman’s approaches. This much is clear – they remind readers to be conservative, that is to be careful. (As far as I understand, Li Ka-Shing advises likewise. On a related note, Buffett himself prefers stocks that are non-volatile. Indeed, steady does it.) For formulas and calculations though, I have yet to find many common ones, save perhaps for the factor of ‘risk free rate’.

In Chapter 6, Jayaraman initially identifies the ‘yields based’ (dividend) and Net Asset Value (NAV) methods. Then he refers to a few others.

Yields

Investors may buy REIT units at yields lower than risk-free rate (10 year Singapore Government Bonds) due to expected growth (via higher rental intake and property values). *

A REIT deemed risky would have to offer greater yields to attract shareholders. But higher yields may also be a result of loss aversion during downturns or recessions. Yields started from 10% at the beginning of 2009 (global subprime crisis).

From the book exposition, ‘market price’ is the same as ‘trading yield’.

NAV

Investors are apprised every 3 months of the NAV (assets – liabilities) in financial statements. (The Monetary Authority of Singapore mandated at minimum, annual NAV reports). But generally, Jayaraman sees this as insufficient on its own.

DCF (Discounted Cashflow)

This requires predicting rental income for the next 5 or 10 years; and the sale price (terminal value) of the property at the 5 or 10 year point. This is often done by ‘capitalising the NPI’ (Net Property Income) in the 5th/10th year. So the cap rate (capitalisation rate – stable first year net operating income divided property capital cost) value is critical in the equation. Both the predicted income and property values are combined and then discounted ‘back to present value or today’s dollar using a rate of return required by investors’ for similar property types.

Replacement Cost (RC) 

Basically: how much does one have to pay for a comparable property. To arrive at this, it entails information on:

  • recent land bid prices
  • construction costs
  • interest expense
  • marketing payments etc.

From this cost of a comparable building in the area, one deducts building depreciation (and land depreciation in case of a leasehold). Where ‘transaction costs’ exceed RC considerably, there may be eventual building oversupply since it had been more affordable to construct than to purchase/acquire existing properties.

Jayaraman cautions us that local land bidding is ‘mainly sentiment’ based, and from his experience it can fluctuate greatly in the span of 12 months.

Notes:

10 year Singapore Government Bonds were sold/purchased at around 2% yields in 2012, according to Jayaraman.

 

A REIT’s Wellbeing – Building wealth through REITs (2014)

A continuation of the previous post… (related likewise to the post on one CMT annual report)

In assessing the viability of an REIT, do analyse ‘Group’ financial statements since it is more comprehensive.

  • Revenues (income, that is % of Net Lettable Area × average rental per square foot)  should, at minimum, keep pace with inflation rates
  • Net Property Income (NPI) Ratio [(Gross Revenue – total expenses)/Gross Revenue] = benchmark basis for ‘operating efficiency’ between REITs of corresponding nature (like for like)
  • Property Yield (the ‘fundamental attractiveness’ of a REIT) = NPI/Property Value
  • Interest Cover (Interest Cost/Earnings before Interest, Taxes, Depreciation and Amortisation): For REITs with fluctuating cashflows (such as hospitality), they should ideally have this at more than 3 (times) to be considered favourable to invest in

The other portion that truly captured my attention was on funding. A ‘safer’ REIT would have:

  • Debt with spread out maturity payment dates (prevents to my understanding insolvency)
  • Manageable leverage ratios
  • Manageable total (all-in) interest costs, that is including bonds or Medium Term Notes [potential of higher refinancing costs in higher interest rate conditions]; does the REIT re-borrow (refinance) in low interest rate environments?
  • Unencumbered assets (not pledged as collateral) to sell or mortgage to repay debts
  • Varied funding avenues at sustainable costs. Such channels include:
    • Medium Term Notes (MTN): ‘best efforts’, sold often to institutions and high-net worth persons. This format allows the REIT to cumulatively raise capital. It is especially favourable when interest rates are low and markets are willing to ‘lend’ to the REITs
    • Placement (new units to other third party buyers) or Rights (units sold to existing shareholders): this involves creating more units to inject capital – there are pros and cons to this method…

Bobby Jayaraman. Building wealth through REITs (2014). Marshall Cavendish.

I first read his book in 2012. (His bio by the Singapore Business Review ‘Second Chance Properties appoints Bobby Jayaraman as Independent Non-Executive Director‘ is dated 18 Dec 2012). The book was borrowed from the Tampines Regional Library.  The latest version has a chapter on Interest Rates and REITs. For your research, there are other REITs posts on this blog, these are mostly under the Econ & Eco History or Edu & Research categories.

This is another attempt to understand the markers of REIT wellbeing (Chapter 5). In Chapter 6, Jayaraman wrote of REIT valuation. It a very brief paragraph since he spoke at some length on property acquisitions in Chapter 5. A detailed study of overall past management performance would be wise in allocating greater value on the management. If memory serves me right, Benjamin Graham (the mentor of Warren Buffett), looks at dividend returns of companies for 20 years as one indicator whether to buy its stock. [Do correct me if I am mistake though!]

Returning to Chapter 5, it was a shock to read:

Most Singapore REITs…not proven to be great deal makers.’

by which I infer that the majority of SREITs (Singapore REITs), up to 2013, had made mediocre acquisitions. A positive instance nonetheless is found with CapitaLand Mall Trust (CMT) and its purchase of Iluma (now Bugis+). The buy was financed wholly through borrowed funds. From what I gather, the underlying potential was great since the property positioning was ‘excellent’. It was low risk ($299 million of a $7.9 billion portfolio). It seemed also that CMT had ‘value added’ in prior acquisitions like IMM, Raffles City and Junction 8.

The author considers an acquisition as worthwhile when it increases Distribution Per Unit (DPU) by ≥5%.