Investment thoughts: April

AIMS AMP industrial Reit and ESR Reit have both released their results this week, and I am beginning to feel like I have swung a little too early, as the recovery for the industrial Reit sector is unlikely to materialize before the start of 2019.

Updates

AIMS has completed its BTS at 30 Marsiling, with committed leasing for 10 years. It has also completed the redevelopment of 30 Tuas West. The manager is now also embarking on a new redevelopment of its Tuas Ave 3 property into a ramp up warehouse. The property is located near Tuas Cresent MRT and the redevelopment would increase existing the plot ratio to 1.4.

ESR has competed its own AEI of 120 Pioneer, which is near the Tuas West MRT. The manager has since embarked on a new AEI to upgrade 30 Marsiling into a High-Spec building, with committed lease for 5 years. The Manager also proposed to purchase 13 Greenwich drive, which is located in the Eastern part of Singapore. The property comes with 2 existing tenants, and it remains to be seen if the manager can improve the yields on this property considering that they are paying a premium valuation for it.

Yield & income

Gross revenue has fallen for both Reits, which is understandable considering that they have been facing considerable negative rental reversions for the last few years. While AIMS has done admirably in maintaining its DPU even after its preferential offering. ESR on the other hand has seen its DPU fall by 15%.

Thoughts

I think investors looking at Industrial Reits have mostly gone with the larger named players due to their better located properties and diversified investment mandates (data centers, integrated biz parks etc..). This has lifted their prices and most are trading above NAV.

Currently, industrial plots in semi-urban areas command a steep rental premium over those in D22. With that much oversupply in Tuas, its no wonder how AIMS only managed to lease out 85% of 30 Tuas West, despite it having recently undergone redevelopment and being next to the MRT.

As both Reits are heavily laden with properties in Tuas, they have definitely borne the brunt of the last 4 years of overwhelming industrial supply. Despite the weak demand in D22, I still believe that these Reits are well managed and by being at the end of their single tenanted leases, this puts them in a good position to ride on the potential uplift in rates.

AGM: ESR Reit

I attended the AGM of ESR reit yesterday. It was my first AGM and was an eye opening experience for me. The Reit had just announced their earnings for the 2018 first quarter in the morning and the results were disappointing. Earnings can be found here

The earnings showed that DPU was down by 15.6% from the previous Q1 a year ago, mainly due to their equity fund raising. Gross revenue rose 21.2% year-on-year to S$33.6 million, while net property income rose 20.8 per cent to S$23.8 million. Notably this impacted the mood at the AGM and some shareholders did speak out regarding the issue.

1) SCRIP Dividend policy. Unit holders complained that having a scrip dividend policy that was  inconsistent is bad for them as it results in odd lots. 

Management replied that since the equity fund raising the overall debt of the Reit has been brought to 30% and therefore the Reit has no reason to conserve cash. The Reit decided to not issue SCRIPs this quarter for that reason. I guess that in itself speaks of the policy.

2) Management not taking their management fees in units. A shareholder questioned if the Reit manager did not have “faith” in his own Reit. Several unitholders also pointed out that a good Reit manager would attempt to “balance” the DPU of the Reit by accepting fees in units during bad times and accepting in cash over the good times. Thus over the long term value is not diluted.

ESR DPU Breakdown

Management replied that it is important for a Reit “not to pay out more than it earns”. By electing to receive management fees in units, the manager is artificially inflating DPU and over the long term diluting the value of the unitholders.

The management also mentioned that they would take this step in the case where multiple properties are going through AEI and over the short term they needed to bridge the DPU.  By taking management fees in units now, there would be no avenue to do so in the future.

3) Falling DPU, and the reason behind trying to reduce the gearing at the cost of yield.

Management pointed out that the Reit is in transition and they are still looking for avenues to divest and recycle capital for properties in the portfolio that are worth between 15 – 20mil with low potential upside. In such a scenario, a low gearing for a Reit is actually beneficial as it signals good credit worthiness. For example, being able to hear multiple proposals from sellers of properties and being able to negotiate debt instruments at better rates.

Having a good level of debt means that the Reit is able to look at further AEI’s to improve the existing properties with potential upside and lock in tenants. The low gearing levels also mean unit holders do not just have to rely on the outcome of the Viva-ESR merger to grow their existing portfolio.

Investing reflections

The first quarter of 2018 has just past, finally things are beginning to look a little brighter for my portfolio. However, we are still in the midst of the early earnings season and this early optimism might evaporate quickly.

Still, I want to take the opportunity to quickly pen down my thoughts and reflections on my short 1 year investing journey.

Fundamental Investing

I thought I was a real fundamental investor. Yea, some major illusory superiority going on there. Looking back this image has been shattered, for sure. While gains have been decent, I think I can do much better.

2017 was the year to sow the seeds of the multi-baggers, but I missed this fantastic opportunity. Counters like AEM, TatSeng, Valutronics and Sunningdale were all posting positive results since 2016, but I didn’t pick up any. Instead I went for raffles medical and straits trading, which while fundamentally sound still have quite a bit of time required before their catalyst gestate.

This has taught me a lot about solid fundamental investing and picking counters at a discount. When the portfolio is small, choosing to invest in one counter over another involves a real opportunity cost. I think I can do much better to screen and pick up better value stocks.

Impulse

As much as I would like to say that I am not an impulsive person, the adrenaline of a downward price correction still gets to me. Especially when the focus is on contrarian plays and trying to pick blue chips at a bargain.

On hindsight, contrarian investing takes more skill and practice than just buying a bruised counter. The saying that “Low’s can get lower” is not lost on me, especially when doubling down involves an opportunity cost as well.

I wonder if I should change my mindset about contrarian plays to counteract my penchant to target and buy on impulse. Perhaps, it is yet better to prepare a watch list instead tag price alerts with the requisite NAV and target prices.

Catalyst

Finding and looking for positive catalyst is a difficult thing to do. As catalyst are future events, they are either already priced into the counter, if certainty is high, or are considered potential catalyst, where circumstance might/might not materialize.

Betting on catalyst is rather difficult as due to their forward looking nature are 50/50 in nature. Personally if you are investing based on 50/50, you might as well go gamble.

Catalyst are important but I’d rather have a solid track record or balance sheet. Thinking back, I think this habit of looking for potential catalyst came about after reading analyst reports and letting their opinion and research sway my own.

Conclusion

As my cash position is rather low, I will be looking forward to replenishing this in the next 3 months. During this time, I will try my best to review and revisit some counters and hopefully identify several potential counters to invest in. For now I am happy to wait for the earnings results to come in and collect some long awaited dividends.

Portfolio Update: ESR Reit (BUY)

I added another 5,600 units of ESR Reit this month. Previously, I had initiated a position in January, as I had assessed that the management has made good progress in stabilizing the reit and had executed well to divest lower yielding properties for better yielding ones. My thoughts then is mentioned here.

With the price falling to 0.535, which is even lower than the recent rights issue price of 0.54. I can only guess that other investors are spooked by the falling DPU trend.

ESR.JPG
ESR DPU negative trend

The last quarters fall in DPU was more to do with the following factors.

  • Partial income received from 8 Tuas South Lane and 7000 AMK ave 5 on 13 and 14 Dec respectively
  • Divestment of properties 23 Woodlands terrace and 87 Defu Lane 10 on the 16 Nov and 7 Dec respectively
  • Issuance of 150m perpetuities at 4.6% p.a on 3 Nov 2017. The perp is semi-annual and is callable in Nov 2022

My guess is that the income received from the two new properties should offset the cost of the perpetuity issuance and two divestments. What is unknown is the effect of the dilution due to the recent rights issue.

**WARNING THE BELOW ARE JUST MY SPECULATION**

However there is one last catalyst in the bag.. Viva and ESR merger.

I compiled my observations between the Sabana-ESR deal and Viva ESR deal in the table below.

TopicSabana-ESRViva-ESR
Who initiated the deal?Potential Merger review was mooted by a Strategic Review Committee headed by Morgan Stanley for Sabana ReitESR Funds management who is the manager for ESR Reit, submitted the proposal to Viva Industrial Trust
Duration of the deal7 Aug 2017 – 25 Nov 2017 (4 Months)29 Jan 2018 – Ongoing (4 Months)
Nature of talksNo definitive legally binding agreements entered intoExclusivity agreement signed

As you can see unlike the previous talks with Sabana Reit, this deal was solicited by the ESR managers themselves. The addition of Viva’s business park properties and their higher rentals would also uplift income vis-à-vis Sabana’s industrial properties, which I reckon ESR would have sold off anyway. 

Another point is that the recent acquisition of the 7000 AMK property by ESR reit, was bought from Ho Lee Properties which  is a subsidiary of the Ho Lee Group which is also interestingly the sponsor of Viva Industrial Trust. I think Viva shareholders would have liked to have a slice of 7000 AMK, so why sell a potential asset to a competitor reit?

The fact remains, that reits are leveraged products and an injection of the property into Viva would have come at a cost to equity. The acquisition by ESR reit would also not have been possible without the sponsors backing to pick up additional rights, they eventually picked up 13.3% with Mitsui picking up 1.6%.

Lastly and most speculatively, in a departure from previous statements by both reits, the latest update by both management teams mentioned that the exclusivity would extend to 30th April or “the date of execution of a definitive implementation agreement between the parties in relation to the scheme” as opposed to previous “talks are ongoing” statements. My speculation is that the details of the merger have already being hammered out, and that now they require buy in from the majority shareholders.

ESR reit still needs some time to consolidate and strengthen. Even if the merger with Viva does not succeed, you can rest assured that the reit will find new opportunities to grow. My experiences so far shows me that for income investors, long term growth trajectory is far more important to increase the potential yield on cost. ESR does have wobbly financials and a negative DPU but its ambition is by far the greatest among other S-reits.

 

Portfolio Updates: Mar 2018

The first part of March 2018 has flown by quickly. For wealth building, this passage of time has not been as productive. Since the start of the 2018 we have witnessed 3 flash crashes and the STI has been on a roller coaster ride.

STI_Oct_Mar_2018.JPG
Three crashes in the first Quarter weighed down otherwise buoyant STI index

Portfolio wise I have only added Singtel and subscribed to the rights issue for ESR. The current cost of the portfolio is just above 30k, but the overall value is just under that figure. Yes, I am in the red. I am telling myself that this is to be expected since I entered into some contrarian play just before the markets began in 2018. One quarter is perhaps too soon to be talking about the turnaround.

With the beginning of the first quarter earning results in April, I am hopeful that some of the counters will begin to show improvements in their financial results. For the month of March, I shall attempt to write down some of my thoughts on these counters as well as comment on their performance thus far.

**On a side note, something I observed that during market crashes it affects even my contrarian counters Singtel & Comfort delgro which I find strange. One of my original thesis was that these counters are strong negative beta stocks, and would counteract against what I thought was positive market expectations at the start of the year. It might also be an indication of turnaround traders present in this counters.**