Book Review: Building wealth through REITS by Bobby Jayaraman

I decided to read this book because I was interested to find out how the perspectives of the REIT managers were like when it was written in 2011. It is very easy to read, not many financial technical terms, and is very suitable for a REIT investor wannabe.

The first half of the book is the theory, which you will find boring if you already know how to read the items in the financial statements and fairly standard ratios. Nonetheless I learnt about perspectives. For example, when someone tells you to focus on the Net Property Income (NPI) of the REIT, it actually refers to the NPI as an amount, but what the analyst uses is the growth % of the NPI. For me, I prefer to use my version of NPI where I exclude the valuation gains but include other losses, so that I get an even lower value.

Two REITs stood out for me -- Saizen REIT and Capitaland Mall Trust. Saizen has been delisted, and I didn't know its history until I read this book. If I had known, I may have bought it. It was actually a set of distressed residential properties being bought over by investors when a Hokkaido bank went bankrupt between 1999 to 2000. These investors cashed out of their investments in 2007 via an Saizen REIT IPO. Such opportunities happen once in a blue moon for the folks who have the cash.

The history of Capitaland Mall Trust was also interesting because it explained the high valuation gains. The properties were bought from the parent Capitaland in 2002 at relatively lower prices. Over the years, they sold off the under-performing properties too. I never really thought about it that way, and by the same yard stick, Keppel REIT should have a high valuation gain too because they were created around the same time. I will probably pay more attention to this when I review Keppel REIT again.

One recurring theme discussed in the REIT managers' interviews is to only buy the property when the price is good. This can be either in the form of buying an old building at a good location and then renovating it, or to buy multiple properties located at good population catchment areas to leverage on a single management team to save on cost. This concept can be applied to anything, even hiring people for a job, but it's probably easy to say but difficult to execute because you need to be have the skill and foresight to know how to transform less desirable properties into desirable properties.

Although the market sentiment in 2011 was one where people were quite fearful of another crash given the fresh memories of the financial crisis and continued war in Iraq, anyone who had bought at 2011 prices would have profited today too.

Overall, the book reinforces my belief that any investment is good at a yield-accretive price. Patience will pay you eventually.

Stock Review: If I were to pick a Retail Trust

I had not done a retail REIT comparison before, so I decided to do one. Here are the REITs that I selected.

1. CapitaMall Trust (CMT)
2. Capitaland Retail China Trust (CRCT)
3. Mapletree Commercial Trust (MCT)
4. Starhill Global REIT (Starhill)
5. Suntec REIT (Suntec)
6. Fraser Centrepoint Trust (FCT)
7. SPH REIT (SPHR)

I wanted to compare the Singapore properties mainly, so I went through the financial statements and presentations to compile a table of key indicators I am interested in. These are, in order of priority,

1. Net income/lettable psf - how much income after deducting expenses per square foot of lettable space, the higher the better because it means I can earn more for each square foot. I also deducted the adjustments on fair value of properties (unrealised paper gains on property value) which will unnecessarily boost the earnings because it doesn't translate to cash income.
2. Overall profit margin - how much income per $1 collected, the higher the better because it means expenses are lower.
3. Loan interest rate - the lower the better, because it shows how the banks and debtors are perceiving the riskiness of the business.
4. Occupancy - the higher the better, because it shows that demand exceeds or matches supply. This helps to ensure that rentals can be held steady or increased.
5. Dividend/Earning per share (EPS) - the lower the better because it shows that the properties are sitting on large unrealised paper gains on property value.
6. Debt % - the lower the better
7. Yield - the higher the better, but this needs to be compared with the other similar REITs because there is a premium to pay for steady and resilient businesses.
8. Price to book - how much discount the price is to market value of the properties, the lower the better because it means I get to buy the properties cheaper, but similar to yield, there is usually a premium to pay for the steady and resilient businesses. 1 means fairly valued.

Comparison chart based on respective financial reports. May have data transposition errors, although I double checked most figures.

Overall, I like CMT the best mainly because of its high income/lettable psf, profit margin, 99.2% occupancy and dividend to EPS  I was half thinking why I didn't do this review earlier so that I can buy the stock at cheaper prices when REITs were having their great singapore sale.

My next favourite is SPH REIT, which I already own and this comparison re-affirms my decision. It's 100% occupancy (year after year) is what I like the best. Low debt is just a side kick. The rest doesn't really matter.

I will keep a watch on CMT and seek to add if prices recede closer to book value of $1.92.

My Awesome HUAT Guesses

I received an advertising mailer selling a recommended list of REITs in Singapore. When I looked at the teaser, my riddle-solving mind became very excited so I thought... it can't be that hard to guess right?

Just for fun, my awesome HUAT guesses to the riddles:

1. Ascott REIT "only REIT of its kind in Singapore... 6+%" cos Keppel DC REIT doesn't meet the 6+%.
2. Capitaland Commercial Trust "owns a handful of the sheer most valuable prime commercial real estate in the country"
3. Capitaland Retail China Trust "10 income-producing properties (in some of China’s very best locations)"
4. Capitaland Mall Trust "landlord with some 3,000 tenants"
5. Ascendas REIT "manufacturing and warehouse sites ... overseas assets... loyal clients ... 6+%" would have guessed AIMS AMP if it didn't say 6+%.
6. Mapletree Commercial Trust "more than 1 million square feet of the best commercial real estate in Singapore"
7. Starhill Global REIT "Malaysia, this REIT boasts a portfolio of dozens of prime properties... excellent lease structure"
8. SPH REIT "suburban mall play with little debt"

Any resemblance to the actual report is merely coincidental. 

Any wrong guess is also unintentional.

Stock Review: Singtel

Few years back, when Singtel prices were low, I wrote a review for Singtel in Sep 2015. I usually don't read every company's quarterly or financial report. It's a lot to read if I have to read 20 reports every quarter because I have about 20 different stocks. I usually only read up on companies which are on my shopping list and their prices are at 52-week lows, or below the past 5-years mean.

I reference Singtel's latest 3Q2018 report, i.e. 9 months ended 31 Dec 2017.

A recap of Singtel's business is that it has 3 lines of business -- Consumer (Telco), Enterprise (NCS, IT services), Digital Life and Corporate (which I will call it the rest, including rental income, start-ups, venture capital endevours), which contributes 77%, 23%, 0% profit before tax and depreciation (i.e. EBITDA on Page 31) respectively.

In the financial report, we aren't able to get a clear breakdown of telco EBITDA by geography because the report is grouped at a high-level as 100% owned and non-100% owned. Singtel and Optus are 100% owned, so the number is reported together. For the remaining telcos, they are like investments made by Singtel and the financial report itemised them and also allow you to calculate the Return on Asset for these investments. The profit (i.e. EBITDA minus depreciation, tax) by geography is available in the 2017 Annual Report (AR2017 data is 9 months old).

Data extracted from 3Q2018 Page 31

Although Airtel is not giving a good return, returns from Indonesia, Philippines and Thailand are good.

Screen shot from AR2017 Page 2

Income stream remains well-diversified with 70% of income sourced outside of Singapore. What could have caused Singtel prices to fall (and continue to fall) are possibly the reduced income from Airtel because Airtel is facing regulatory demands to the tune of S$3.75B (Page 28). To me, the worst case scenario is no dividends from Airtel, let's assume S$276M/year less profits. AIS (Thailand) is also facing regulatory demands of S$1.11B. Let's say we assume the worst case scenario of no dividends from AIS, then S$337M/year less profits. In 2017, net profit was $3.853B (AR2017 Page 6). If we assume worst case scenarios of 0 income from Airtel and AIS, S$3.24B and 16,344,561,000 number of shares (2Q2018 Page 20) translates to Earnings Per Share (EPS) of 23.96 cents (AR2017 Page 110) to 19.8 cents. This should not have any impact on Singtel's ability to pay 17.5 cents of dividends.

In terms of competition from the 4th, 5th, 6th Telco in Singapore, I don't think there will be much impact as these telcos will still need to rent the lines/bandwidth from Netlink Trust or existing telcos Singtel/M1/Starhub. These new players will also keep Singtel on its toes to keep cost low and retain their customers, which a definitely a good thing. The least we want is complacent monopoly giants.

In 3Q2018 Management Analysis Report, we can read some management comments. Usually management statements such as these are made together with the financial statements. Singtel separated it as a separate document probably because they furnish a lot more information than other companies would, which I like. I like their transparency, and it shows that they are also facing competition head on.

The report explained that the decrease in profit is mainly due to reduced profits from Airtel and reduced income from Netlink Trust as a result of selling Netlink Trust when compared on a year to year basis. Reduced income from Netlink Trust is expected to be seen in every quarterly report from Jul 2017, we will see this quarter-on-quarter reduction in another 2 more quarterly reports. I am personally not concerned with this because Singtel profited from the sale of Netlink Trust and lowered their debts as a result.

Debt was reduced from S$9,354M (D/E = 23.8%) to S$8,551M (22.5%). Debt/Equity (D/E) ratio is a measure of how much debt the company has as a percentage of shareholder value and retained earnings. ~20% is a good number. Singtel probably used the Netlink Trust sale proceeds to lower their debt, which is a good thing.

Singapore mobile revenue is 19% of overall revenue (Page 8). If there are worries about the competition in Singapore, M1 and Starhub are the ones who will face stiffer competition than Singtel because Singtel is the elephant in the room with 48.9% prepaid and postpaid market share (Page 53). In terms of debt, Singtel's debt is a lot lower than M1 and Starhub's. I have more details on the debt comparison in Stock Review: M1.

As at 31 December 2017, NCS’ order book increased by 25% to S$2.9 billion from a year ago (Page 33). There is no further elaboration of this, but these increases in revenue should be recognised in the next few years, and won't be immediate as IT projects typically have 1-2 years of implementation time.

Assuming a 17.5 cents dividend, at Singtel's last closing price of $3.33, it translates to a 5.25%. This is a very good yield for Singtel, considering how big an economic moat it has, diversed income streams, and stable dividend yield track record.

Major shareholder - Temasek - I bet they won't sell their stake in Singtel. It's anyone's guess how much lower prices will go. The previous low was $3.10 in 2011 but circumstances are very different now. It was $4.40 a year ago and how different were circumstances? The price has a history to have cycles and as long as we buy at the lower ends, we will have a higher margin of safety (to go wrong and make a loss). If you have extra cash, you can buy more and sell some away when the prices go up. For me, I am happy with a 5% yield.

Screen shot from AR2017 Page 230

The writers owns Singtel shares.

What did I buy in Feb 18?

Singtel I can't stress enough how good a deal Singtel is now. $3.35 screams lelong lelong and I don't know why there is so much selling. I bought more at $3.50 and $3.35. My next entry price will probably be around $3.20 if prices continues to fall. Anything below $3.50 (i.e. 5% yield) is a really good deal. 17.5 cents/year of dividends is definitely sustainable. I will say $3.80 would have been a fair price as its historical yield is closer to 4% than 5%. $3.60 would have provided sufficient margin of safety.

Wilmar I bought 1 lot only at $3.00 after much deliberation. It's a fair price, but I don't feel that I have sufficient margin of safety. I will see how it goes.

I am not sure if I will buy more in Feb, but I will monitor the situation as I had spent quite a bit these 2 months. I am also feeling slightly cash poor because I channelled $40k into Singapore Savings Bonds last month, and we aren't exactly in a market crash situation, so I won't be dipping too much into the warchest.

What did I buy/sell in Jan 18?

Singtel I bought 1 lot at $3.60. Fair price, not dirt cheap. Will accumulate if price dips further.

Keppel Corp I sold 1 lot at $8.16, after it gapped up consecutively and +16% over 5 days. After I sold, it continue to climb, i.e. +24% from the low of $7 after the bribery settlement news. I may cash out 1 more lot if the prices continue to gap up, to lower the concentration of Keppel Corp in my portfolio. It has been lowered from 30% to 25%.

Hyflux 6% CPS On the same day I sold Keppel Corp, I bought Hyflux 6% CPS 100 units at $91.70. I thought it was a no-brainer to buy it because the CPS redemption date is 25 Apr 2018, and the shares are going below $92. There is also a 3% dividend payment on 25 Apr. That's a total of 8% + 3% = 11% in 3 months. If Hyflux doesn't redeem the CPS, the dividend rate will be increased to 8%, which is even better right? If Hyflux doesn't redeem the CPS, they are also not allowed to pay dividends to the shareholders of the Hyflux shares. However, I dared not show-hand on this. Keep wondering if I am missing out on anything...

Stock markets around the world are hitting new highs everyday. It's feels like Apr 2015, which is the typical post financial year end reporting euphoria-effect, just that financial year end reporting has not started. This means that it can only go higher, which is probably fuelling the confidence. You would be sitting on 50% gains if you have bought the STI ETF in Feb 2016 at $2.50. Or better, you will be sitting on 80% gains if you have bought Keppel Corp in Jan 2016 at $4.70. Or even better, you will be sitting on 105% gains if you bought DBS in Feb 2016 at $13.01 (To date, I still remember this day because I was queueing at $13.00 and it didn't hit.)

Ok, enough dreaming and back to reality. It's back to the waiting game again -- waiting for the right price.

Proxy indicator - STI ETF stock code ES3

Keppel Corporation

DBS

What did I buy in Dec 17?

Singtel I bought more shares when prices hit $3.60 (4.86% based on 17.5 cents) after it went XD (post dividend). Historically, Singtel share prices cycle up and down within a year so I see this as an opportunity to buy. I would have preferred to have a higher yield though.

Stock shopping is beginning to feel more expensive, which is a sign that the market is picking up. In my view, as long as we avoid the medical and food stocks which tend to be over-priced, it's still possible to find some fair price items. For e.g., Singtel, AIMS AMP, QAF, SIA Engineering, ST Engineering. For those with weak hearts, avoid the bank stocks that have risen by 50% from their troughs in Feb 2016, 22 months ago, because you might be in for another roller coaster ride.

Outlook seems to be more positive, which may not be a good thing. Confidence breeds complacency.