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Tuesday, July 31, 2018

Starhill REIT - Missed the boat?

Starhill REIT closed at $0.70 today.I blogged about Starhill couple of weeks ago. Then, it was trading around $0.68. After my post, Starhill dropped further to a low of $0.635.

I did not have sufficient capital to take a meaningful position in Starhill at the time of posting. And now that I have some additional liquidity, it appears that the boat might have sailed.

But as the (slightly sexist) adage goes, guys regret the girls they didn't sleep with, but girls regret the guys they did. Which gender perspective will my failed purchase of Starhill ultimately adopt? I guess only time can tell.

Perhaps it is sour grapes at work, but alarm bells were going off stridently in my head when i read Starhill's latest quarterly report.

1) I had estimated DPU for FY 17/18 to decline to 4.57 cents, the actual DPU was 4.55 cents.

2) Office space occupancy did recover as expected, with occupancy rising to 95.% from 90.7% in the preceding quarter.

3) Starhill's stake in Wistma Atria and Ngee Ann city contributed 62.2% of total revenue. Wisma Atria saw its tenants’ sales and footfall declining by 3.9% and 12.7% YoY in 4QFY18.

4) NAV dropped slightly YoY from $3.136 billion to $3.118 billion, mainly due to divestments in Japan and a drop in AUD.

Item 3) is particularly worrying. Such large declines in sales and footfall cannot be sustainable. Existing tenants may have to terminate their leases due to inability to continue operation, and expiring leases may have to be renewed at markedly reduced rates. Future vacancies may also take longer to fill as Wistma Atria becomes an increasingly hard sell to potential tenants.

So while Starhill is still trading at a huge discount to NAV, it is no longer as cheap as it was a few weeks back.

I may revisit this REIT if there is a significant correction, but there appears little reason for me to add positions in Starhill at current price, especially given its rather gloomy outlook.

Friday, July 27, 2018

A lifetime supply of free coffee

I am an avid coffee drinker.

Two cups a day is my minimum. On particularly strenuous days, e.g., when I am having a marathon 3 hour Fun Run session, I might even take three.

Because I am your typical Singaporean Ah Pek, I drink the kopi siu dai type of coffee. I mean, Starbucks is good, occasionally. However, for my daily coffee fix, it needs to be that eluted mixture of coffee beans sinfully roasted with butter, and dosed with a splash of condensed milk.You could say, I am the reverse coffee snob.

A cup of coffee costs around $1.30 - 2.00 now, depending on where you get it from. Ya Kun and Fun Toast are starting to get too pricey for me. Time was when you could get a nice hot cuppa for 1.00 - 1.20.  What is progress without crazy inflation right?

Hence, you can imagine how glad I am to have now secured a lifetime supply of coffee.  

No, i did not suddenly strike TOTO, or get a sponsorship from a coffee brand. Although I would welcome both with open arms.

Truth is, my salary came in today. Which is always a joyful event.  I had a reasonably sweet adjustment to my salary for the current financial year.  Moreover, my pay was a bit more substantial than usual because of the additional paid weekends I worked in June. 

Without even a second thought, I had farmed the entire amount into my investment account. Based on a modest 6% annual yield, my earned salary this month would provide me with a passive income stream of around $110 a month.

At $2 a cup of coffee, this month's capital injection alone would pay for 55 cups of coffee a month for the rest of my life. 

Looks like my caffeine addiction is not going to go away any time soon.

Tuesday, July 24, 2018

Defensive REIT at 6.5% yield

Some REITs are by nature defensive.

I like to call these reits the Zettai Bogyo REITs. Naruto fans would know what I am talking about. Offensively, these REITs may be nothing to crow about but defensively, they are analogous to Gaara's Shukaku.

Healthcare REITs are one example.

Commercial REITS with office/malls in their portfolio are constantly experiencing risk of non-renewal of leases, and/or the exit of an anchor tenant . Recall the impact of HP not renewing their technopark lease on Frasers Commercial Trust.

Industrial REITS tend to have short 30 year leases and tenant fluidity is relatively higher due to business volatility. Recall how Soilbuild was dragged down by Technics Oil going belly up.

On the other hand, it is difficult to imagine a hospital terminating their lease to save a few psf in rent.

For this reason, healthcare REITs are highly defensive.  But the whole world knows this. As a result, for this safety buffer, investors have to overpay significantly over NAV for healthcare REITs and have to be content with anaemic yields

Two healthcare reits come to mind:

Parkwaylife REIT
First REIT

At the time of writing, Parkwaylife REIT is trading at $2.8 a share. Which is nearly 1.62 times NAV (around 1.72)!! You are basically overpaying to the tune of 62% for its assets. And for what type of return you may ask? It's trailing yield at $2.8 is around 4.7% (Distribution per unit around $0.132 per share).

To put that in context, Singtel recently traded around S3.03 for a $0.175 yield - i.e., 5.77%.

Translation: Plife REIT is cray-cray expensive. That said, this REIT has a fantastic track record of growing dividends.  Given its defensive portfolio, this can be a good "hold-until-retirement" REIT for people with lower risk appetite or simply wish to diversify their portfolio.

What about First REIT?

At the time of writing, First Reit is trading at a $1.29-1.31 XD band.  It's price to NAV is around 1.3 times, i.e., overpaying 30% above net asset value per share.   Based on the trailing yield of 8.57 cents per unit, the yield is around 6.6%

Accordingly, on a purely financial ratio perspective, First REIT is more attractive than PLife REIT. However, investors should note the reasons why First REIT has to be priced more attractively and dish out a higher yield:

1) Concentration Risk

16 out of its 20 properties are based in Indonesia. 15 of which are hospitals operating under the Siloam name, which are majority owned by its sponsor PT Lippo Karawaci. Any changes to the operating environment, e.g, political instability, anaemic economic growth, could disproportionately affect the income stream of First Reit.

2) Sponsor Risk

There are persistent rumors (unsubstantiated) that the Sponsor may seek to divest its stake in First Reit. This may lead to leases not being renewed when they expire or are renewed at an unfavorable rate.  Furthermore, any divestment by PT Lippo Karawaci will also mean that First Reit loses a good pipeline of hospital assets to be added to its current portfolio.

I have a reasonably healthy risk appetite due to the stability from my earned income.  Accordingly, all things considered, I may take a small nibble at First REIT to diversify my REIT holdings.