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!