O5RU – AIMS AMP CAP INDUSTRIAL REIT

Background

I bought 5,100 units of the REIT on 23 May 2018 as part of my dividend income portfolio construction. I guess after attending the AIMS AMP AGM 2018 which was held yesterday, I should pen down my thoughts on this REIT to remind myself of the decision I made.

AIMS AMP CAP INDUSTRIAL REIT is an industrial REIT that has 25 properties in Singapore and 1 property in Australia. About 60% of its Gross Rental Income (GRI) is derived from warehouse sector. In terms of geographical diversification, about 85% of GRI is from Singapore along and the remaining 15% from Australia.

The Pros

1) Prudent capital management

During the AGM yesterday, I sense overall dissatisfaction from the unitholders. For instance, there is one unitholder criticizing top management team being “overly conservative” in terms of purchasing additional properties to further grow the DPUs for its unitholders. Also, another unit holder questioned the validity of continuously maintaining good credit rating when the REIT has sufficient room to fund more debt to purchase additional property to grow more DPUs.

The management team, however, has long term view. For instance, they were waiting patiently for the Australia property market to go bearish so that they can purchase high quality assets at cheaper price. Also, they saw a need to maintain good credit rating so that when the market is bad and when there is a need, they can refinance their debt with less restrictions.

2) Growth Driver

According to “Building Wealth Through REITs” by Bobby Jayaraman, there are three ways for a REIT to grow organically: asset enhancement initiative, capital recycling and rental increment.

Currently, there is asset enhancement initiative (AEI) being performed on redeveloping its property located at 3 Tuas Avenue 2. The redevelopment is in line with the Singapore government’s masterplan to develop and upgrade the Tuas region into a high-performing industrial space anchored by the development of the new Tuas Mega Port. When completed, the Tuas Mega Port will be able to handle up to 65 million standard containers annually, almost double the current capacity. It will be due for completion in the second half of 2019.

Also, for the capital recycling, the REIT has completely divested one of its properties located at Soon Lee Road on 29 March 2018 for SGD 8.17 million. The net proceeds of approximately S$8.0 million was used to repay existing debt to reduce aggregate leverage and create additional debt headroom for future acquisitions, asset enhancement initiatives or development opportunities.

3) Unencumbered Assets

As of 31 March 2018, the REIT has 10 unencumbered Singapore properties out of 25 Singapore assets with a total value of S$406.7 million or 33.1 per cent of the Singapore portfolio of S$1,228.7 million. The REIT can use these assets to persuade the banks to lend money when there is an urgent need.

The Cons

1) Tenant Market (oversupply situation)

Based on FY 2018 Annual Report, there is a consistent decrease from year 2016 to year 2018 in Gross Revenue (by 6%), Net Property Income (by 7%) & DPU (by 9%). This is probably due to prolonged weak industrial market, coupled with the recent Trade War and rising interest rate enviromnent. Under this situation, it is very tough for the REIT to negotiate for higher rental and thus its tenants have higher bargaining power on the rental.

Quite a munber of unitholders attended the AGM is overly concerned about the future prospects of the REIT. Personally, I do believe this situation will last for a few years but I intend to hold this REIT for long term as my primary objective is to get dividend income, not capital gains. I just have to be patient for the market to take time for self-recovery.

Reasons why I buy

a) Gearing Ratio (take into account Perpetual Securities if any) < 40%. Based on FY 2018, my calculated gearing ratio is 33%.

b) Dividend Yield (DY) > 6%. Based on unit price of SGD 1.37 with the DPU of SGD 0.1105, the DY calculated was 8.06%. Also, the DY of the past five year is about 6.8 – 8.8%. This means buying the units at 8.06% DY is reasonably cheap.

Violation on either one of these will trigger me to sell all my existing units.


***Latest update***
I sold the entire position because I decided that blindly chasing dividend yield alone is not the right approach in dividend investing. In this case, the AA REIT is operating in challenging environment as the industrial property market is cyclical in nature, hence the high yield.

Besides that, I am not a fan of dividend reinvestment plan (DRIP) and I do not like companies that frequently raise funds from capital markets. In the case of DRIP, if I choose not to subscribe it, over the long run my ownership on this position will be diluted. As for the latter, AA Reit issue private placements quite frequently to raise funds from institutions. Retail investors have no choice but to stand and watch. In either case, current ownership is diluted.

About Tutoring

I have been thinking a lot on how to monetise my freetime during weekends recently.

Yesterday, I had a chat with my NUS junior in a coffee shop and I had mixed feeling after the gathering. He shared with me Robert Kiyosaki's Cashflow quadrant and that one must go through the process from becoming employee, to self-employed, then to business owner and lastly to become investor in order to be rich and escape rat race. To me, I dislike being self-employed because it simply takes too much work just to set up my company and maintain business for years, not accounting the risk that new business will fail 90% of the time within the first 5 years. I prefer to invest directly without going through Robert's Cashflow quadrant process. It can't help that I am a "lazy" and "carefree" person and yet I need extra money to grow my investment portfolio. So, at least a part time job is still needed.

Few months ago, I was introduced to tutoring by a friend of mine who is seeking early retirement by 35 in Singapore. He told me currently he is having a 12-hour shift on Saturday as he is agreesively taking on additional tuition jobs.

Fast forward, I started my first tuition job on 30-Jun-2018 and I will be taking another secondary school student on 15-Jul-2018. Assuming if I am taking 2 students right now, the pay rate from them are SGD 30/hr and SGD 35/hr respectively and I teach 6 hours per month for each student. It means SGD 65/hr x 6hr = SGD 390 per month which is not too bad. SGD 390 per month is equivalent to SGD 4680 per year, more than my AWS. If I think the current workload is manageable, I will want to take 2 more students.

You may ask why I decided to become part-time tutor. I choose tuition as my side gigs because it doesn't require capital to start your business except that you need to be familiar with MOE syllabus of the subjects you want to teach, the pay rate is scalable to the amount of effort I put in (ie, I earn more by take more tuition assignment jobs) and I want to get some tutoring experience now so that after my early retirement I still can leverage on it to earn extra income and kill boredom.

About Professional Ambition

Nowadays, conversational topics like career advancement, salary and romantic relationship are becoming increasingly common in my social gatherings with friends and colleagues. While most of them are eyeing on glamorious job titles and wish to climb the corporate ladder as soon as possible, I couldn't care less about my career development. To me, being deeply rooted in corporate world will only add further sorrows in my life as my career will consume more of my personal time and put extra stress to my life. Of course, in exchange I will have additional digits in my bank account every month and the sense of job satisfaction which has short shelf-life and is subjective in nature.

I prefer to earn extra bucks through scalable work such as teaching on part-time basis. At least the amount of effort I put in is proportional to my pay. Getting promoted doesn't provide me this scalability and you are expected to sacrifice more personal time to work overtime. Despite saying this, if my boss decides to promote me one day, I will have to take the offer because I do not want to reject and offend him/her indirectly in the process. Unfortunate!

Some people will criticise me as being "unambitious", "lazy" & "loser". While they are partially correct in the sense that I do not fit into societal's definition of success, I have different views about it. To me, freedom from compulsory work is one of my major milestone I strive to achieve before 40. As I am going to retire early in my hometown Ipoh which has much slower pace of life and lower living expenses, I have extra buffer to not to aim high in professional development in Singapore while building my retirement income portfolio at the same time. If I am being criticized of having this mentality, so be it.

To be able to choose my lifestyle without having to worry about cash flow is my definition of success and it is much easier to achieve as compared to climbing to the top corporate ladder. Till then, I shall wait!

P40U - Starhill Global REIT

Background

Starhill REIT mainly focuses on retail sector, although it has some exposure to office sector (about 84% of total gross revenue from retail sector while remaining 16% from office sector). Its sponsor is YTL Corporation, one of the biggest conglomerate in Malaysia with USD 6.8 billion market capitalization. It owns real estates in Singapore, Australia, Malaysia, China and Japan. About 62% of its total gross revenue is derived from Singapore investment properties (Wisma Atria & Ngee Ann City).


The Pros

1) Asset-Enhancement initiatives (AEIs)

Starhill REIT management has been actively seeking ways to growth its DPU for its shareholders by focusing on Asset-Enhancement initiatives (AEIs). For instance, asset redevelopment works at Lot 10 in Kuala Lumpur has recently been completed and accessibility to the mall from Bukit Bintang MRT station exit has been improved. This will ensure higher human traffic flow to the mall and subsequently generate higher sales income to the existing tenants. In addition, Plaza Arcade’s anchor tenant UNIQLO has commenced renovation works, target to be completed by 2H 2018.

2) Prudent Capital Recycling

Starhill REIT recently divested Nakameguro Place property in Tokyo, Japan and this represents the fifth divestment in Japan since 2013 as part of Starhill REIT's ongoing strategy to refine its portfolio. The sales proceed alone generated about S$ 6.41 million or 25.0% premium to its latest valuation and it is higher than the gross revenue contributed by Japan of about S$ 3.1 million in FY 2017 (1.4% of total gross revenue).

I think the REITs is slowly divesting all of its investment from Japan properties because unlike in other countries, Japanese real estates tend to depreciate over time possibly due to natural disasters and depopulation. As of now, 4 more Japan properties left to be unloaded.

3) Unencumbered Assets

Unencumbered asset means it is free of debt or other financial liability.

In Annual Report FY 2017, approximately S$2.3 billion (73%) of the Group’s investment properties are unencumbered. These assets currently are not in collateral for banks and the REIT can use them to persuade bank to borrow money during economy crisis.


The Cons

1) Taxes

The rental income from Malaysia segment (about 13% of total gross revenue) has been impacted by weak market sentiment due to the recent introduction of GST and new withholding taxes in Malaysia. Because of this, Mr Market becomes unforgiving and punishes the REIT's unit price. But thanks to the recent general election results, I believe that Malaysian market will eventually recover from the current pessimistic state, leading to the appreciation of of the Malaysian ringgit against the Singapore dollar. In time we shall see.

2) Forex Risk

Starhill REIT is subjected to Forex risk because it has foreign investment properties in Malaysia, Australia, Japan & China. Nevertheless, the REIT partially offset the volatility of the forex risk by adopting foreign currency denominated borrowing as a natural hedge, and short-term foreign currency forward contracts to fix the exchange rate within a stipulated timeframe at a price agreed upon today.

3) Interest Rate Risk

REITs have to borrow money from banks because they have pretty much nothing left after distributing at least 90% of their net income to shareholders to enjoy tax transparency. If the interest rate rises abruptly, REITs might not have sufficient liquidity to clear debts. Nevertheless, Starhill REIT hedges substantially its interest rate exposure within the short to medium term by using fixed rate debt and interest rate derivatives including interest rate swaps and caps.


Why I vested

To remind myself, below are the reasons why I vested into Starhill Reit on 29 Mar 2018:

1) Gearing Ratio (factored in perpetual securities issued) < 40%

REITs will have to borrow money from banks for organic or inorganic DPU growth. To ensure that they are not over-leveraged, gearing ratio < 40% rule is followed (MAS set gearing ratio < 45%).

2) The latest gearing ratio (FY 2017) is 35.2% < 40%.

Undervalued in terms of P/B ratio & Dividend yield

This is to ensure margin of safety before buying any stocks to prevent huge capital loss. I will buy shares at a relatively low price and sell when they are over-priced.

The historical dividend yield was roughly in the range of 5.08% to 7.40%. At unit price of S$0.72 with DPU of S$0.0492 (latest financial year 2017), the dividend yield was 6.83% which is closer to 7.40%.

The historical P/B ratio was roughly in the range of 0.76 to 1.06. At unit price of S$0.72 with NAV per unit of S$0.9212 (latest financial year 2017), the P/B ratio was 0.78 which is closer to 0.76.

I vested at the unit price of S$ 0.72.

3) Dividend yield > 6%

For someone who is aiming for early retirement, I will place heavy weightage to income stocks in my portfolio.


***Latest Update***
I sold the entire position because their DPU is steadily declining. Their main bulk of income, which is derived from the two properties in Orchard, is slowly deteriorating. I believe this is due to a fundamental change in both consumer taste on discretionary goods and the perception of Orchard as the shopping highlight of Singapore. This hypothesis, perhaps is further solidified when Starhill REIT announced their plan to look elsewhere to expand its footprint.

About Me

Welcome to my blog!

I am The Ipoh Investor, an ordinary man from Ipoh in his late 20s currently working in Singapore & striving to retire early by 40 in Ipoh. I am constantly thinking of ways to earn more, save more and manage my investment portfolio prudently so that I can consistently beat the market. I believe that only through discipline, hard-work & patience, I can achieve the dream of retiring before 40 and I know I can achieve it! Life is not just about compulsory work. It has to be more than that.
Thus, this blog shall exist with the sole purpose to document my investing journey, thoughts and lessons learned along the way for as long as I utilize it.


My background

I graduated with an engineering degree at NUS. Engineering courses trained me to be attentive to details and analyse information from sets of data and charts. But interestingly, I was insensitive to my monthly expenses because either I don't really care about money in the past or I was plain lazy and carefree. However, things changed when I get exposed to the ugly side of human nature in corporate world.


How I got into investing

I had complicated feelings towards my first job as I have learnt some of the most important lessons from corporate world. Just like video games, you need to know how to play the corporate game in order to survive and thrive to the top. All these "wisdom" reduced me from a passionate person to a typical ordinary wage slave, just like the rest of people with emotionless face (perhaps with little frustration) you will expect when squeezing through tiny spaces in MRT every single day.

Despite my relatively young age, I begin to feel sick from playing this kind of game. I can't imagine myself to continue like this for decades. So, I spend quite some time to figure out how to get out of the rat race. It was through reading blogs and self-help books, I realize that I can get out of it through having passive income streams with enough cash flow to at least cover your living expenses. To me, there are two ways to build such income: entrepreneurship or investing. As I am timid, reserved & laid back, entrepreneurship is clearly out of my league. So, I decided to spend more time perfecting my investing skills.

My Investing Styles

There are two ways to earn money from stock market: Capital Gain or Dividend.

I am more inclined towards income investing, meaning I will invest in stocks that provide dividends in cash because the dividends I received do provide me a sense of security. However, I soon learned that one shall not blindly chase after dividend yield alone, especially when the dividend yield is above 8% under un-depressed stock market condition. Such high dividend yield is unsustainable and sooner or later the company will cut its dividend payout, causing its share price to drop further.

So, after researching on multiple books and blogs on investing, I decided that I will go for dividend growth investing - invest in stocks with consistent dividend per share growth over the past 5 to 10 years.

Occasionaly, I will invest in value-growth stocks and asset-play stocks for some capital gains.

My Investment KPI

The word "KPI" surely will stress people out as your employers often use that to access your performance during performance appraisal or career promotion justification. Unfortunately, it is a necessary evil because we need it to quantify and track performance. Even Singapore market itself has Straits Times Index to do the job.

As of now, my current KPI is to achieve the first SGD 100k by 2023. If I commit to save 20k per year, I can achieve this KPI easily.

My end-game KPI: to achieve monthly passive income of at least RM 3500 (I intend to retire in Malaysia) + settle all my student loans before 40 years old. Then, I will settle down in Ipoh to enjoy my life of freedom.

Thanks for reading!