Reflections of investing journey on 2018

2018 is definitely not an easy year for me in terms of investing because I now understand how it felt to have some of my shares tanked by 5 - 20% in few weeks after I bought those shares.

Below are some of the examples:

1) First REIT:

After a series of bad news on its sponsor Lippo Kawarichi's liquidity issues, bribery scandal in Indonesia & credit rating downgrading, the First REIT's share price tumbled by about 20% in just few days. I bought its units a few weeks before I witnessed such unfortunate outcome.

Although I choose to continue to hold on to it because of the underlying hospital assets, I do expect some kind of fund raising acquisition from existing unitholders soon as OUE might be trying to off-load some of its healthcare asset to First Reit. This means if I didn't take part in rights subscription, my existing unitholdings and DPU will be diluted. I will see how it goes.

2) Global Starhill REIT:

Its DPU declined for 2 straight consecutive financial years, causing its share price to continue to fall.

As per AR FY 2018, the management does have plans to acquire overseas assets. However, I do believe that asset acquisition will take years to complete, not withstanding the possibility of the company to raise funds from existing unitholders and the difficulty to acquire each new asset with property yield higher than its current dividend yield. This means that the chances of its DPU to continue dropping in FY 2019 is higher. As such, I decided to sold off all the units and deployed the retained capital somewhere else.

Bad news aside, 2018 is also a year where I learned deeper in stock investing along the way.

1) Portfolio construction/maintenance:

After I bought additional new Reits, I decided to focus on non-Reit income stocks with proven record in paying dividends over the past 5 to 10 years & growing DPS overall over these years with no unjustifiable & repeating share dilutive exercise.

I want my early retirement years to be blessed with reliable dividend income stream and not to be bothered about right issue subscriptions on REITs which could affect my monthly passive income's reliability.

2) Stock valuation:

a) Do not buy a stock simply because its share price reaches 52 weeks low.

I could get myself a falling knife and get my hands burn instead.

b) Do not buy a stock simply because it has attractive dividend yield.

The ultra high 7 - 10% yield is either due to a sharp declined in share price, or a huge special dividend payout which is one-time event.

c) Growth quality of the company matters in the long run.
If the company's earning and revenue are already consistently declining, its share price and ultimately its dividend per share will eventually decline.

3) Malaysian stock market investing opportunity.

Althought Malaysia stock market is not as developed as that in Singapore stock market in terms of corporate governance, I do see hidden gems in some Malaysian stocks. As a developing nation, Malaysian economy relies on exports (raw materials & manufactured goods). As more MNCs are setting up production plants/facilities in SEA region, there will be increasing demands on raw materials and that's where natural resources-rich nations such as Malaysia can be benefitted.

Also, as the economy is progressing, there is a trend to shift from manufacturing based economy to value-added service based economy. I do see growth potential on value-added service based sectors as well.

To avoid country bias in my investing, I will inject more capital on Malaysian stocks in 2019.

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.

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.