Lendlease Global Commercial REIT - An undervalued Retail & Commercial REIT investment

In just 3 months since the great sell down of the stock market, stocks have started to rally with most REITs going up more than 20% from their lows. The big names like Capitaland Mall Trust, Capitaland Commercial Trust, Suntec REIT and Frasers Centrepoint Trust have all went up. My returns from these REITs now ranges from 10% to close to 40%. Yes, I bought quite a few REITs when Singapore was still in lockdown and all the malls were closed. It wasn't an easy decision to make since the economic situation is still quite bad out there but with such attractive valuations, I couldn't resist to put my money to work. 

With all the rally, I believe there are still opportunities to invest as the situation out there is still dynamic and STI index has not covered back to Pre-COVID-19 days. In this post, I will focus on Lendlease Global Commercial REIT. This is a new REIT which just IPO last year Oct at $0.88 and they only have 2 properties in their portfolio, one in Singapore and one in Italy. I applied for the IPO back then but did not get it. On hindsight, I was lucky not to have got it last year as I can invest in it at much lower price now. Let's start the bargain hunting. 

Lendlease REIT has 1 property in Singapore focusing on retail. This is non other than the popular 313@somerset which we are familiar with. 313@somerset contributes 2/3 of the NPI to Lendlease REIT. In Italy, they have a commercial property called Sky Complex, Milan. Let's take a look at the stock chart to see where the stock is at now.

As you can see, Lendlease IPO at about $0.88 and traded at about $0.90 consistently for the next few months. When the COVID-19 situation got worse, it went down in a straight line just as what happened to the other stocks as well. The price of the stock went down as much as 50% at the lows which was extremely attractive. It was trading at a discount to NAV of more than 50% at that point in time. 

Many investors seem to realise this and started to scoop up shares of Lendlease REIT at the low. This is like buying a property at prime land at Orchard road just above Somerset MRT at 50% of the price. The normalised dividend yield would have also been more than 10% at the low. 

The question is, will Lendlease REIT survive this crisis? Let us look into the REIT in detail.

Tenants at its properties

Majority of the leases for its tenants at 313@somerset have been renewed for FY2020 except for 5% due for renewal in FY2021. For Sky complex, Milan, its on long term leases till 2032. All in all, this will prevent a scenario where tenants demand lower rental due to COVID-19 when their renewal is up. Based on its 3Q financial results update on 5th May 2020, Lendlease still has a occupancy of 99.8% at its properties. 

Most of the leases will expire only in 9.9 years time which is a long time before the next renewal. This is because for Sky Complex, Milan, the leases are very long at average 12 years. For 313 @somerset, the WALE is 1.8-1.9 years. 

Healthy Balance Sheet

A healthy balance sheet is the most important when investing in times like this. Their gearing ratio is at 35.9% as at 31 March 2020. They still have ample room to increase their debt if needed. One thing that strikes out is their low borrowing cost at 0.86% which is much lower than any local REITs listed on SGX. This gives them an interest cover ratio of 11.2x which is a clear winner comparing to other retail REITs!

If we look deeper into their debt profile, we can see why they can get such low interest on their borrowing cost. Most of their loans are on Euro term loan at 0.58% p.a. Their average weighted debt maturity is at 3.3 years so there is no refinancing till FY2023. This would alleviate any concerns of them not being able to refinance their loans in times of the COVID-19 crisis now.

Valuation

Lendlease REIT has an NAV of $0.82. At current price of $0.715, it is still trading at a slight discount to its NAV. Normalising the DPU of 1.28 cents per quarter, we will get a DPU of 5.12 cents. This gives us a decent dividend yield of about 7%. 

On capitalization rate, 313@somerset has a cap rate of 4.5% which is comparable to properties such as Plaza Singapura in retail REITs like CMT. For Sky Complex, Milan, the cap rate is 5.75% which is normal for overseas office properties. The cap rate is the rate of return that an investment property will generate based on its current market value. It is calculated by taking the Net Property Income (NPI) dividend by the current market value of the property. 

Conclusion

With all the factors above, I believe Lendlease REIT will survive this crisis. The retail space should be the first to recover after phase 2 of the circuit breaker where we are allowed to dine in again at restaurants and more retail shops to be allowed to open. 

However, we must always understand that in times like this, stock prices can always go lower and we should only invest money which we can afford to lose and not use it for at least the next 1 year. Who knows a second wave of infection may come and Singapore goes into a lock down again. This should send stock prices diving down again. 

Nevertheless, I have invested into Lendlease REIT at lower prices than the current price and would accumulate if there are opportunities to buy on dips. With all the rally going on, a pull back should happen soon and that would be the time to accumulate. 

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Investing during crisis - Making sure the company survives

We are undoubtedly seeing a financial crisis unfolding before our eyes due to the COVID-19. Because of the lockdown of many countries around the world, governments have effectively created bigger problems to solve moving forward. Many investors have been preparing to take the opportunity of a lifetime to invest during a crisis. There was excitement at first when stock prices drop drastically and many investors started to buy stocks. The only past similar pandemic which we thought we have seen before is the SARS crisis back in 2003. No one would have imagined that the COVID-19 turned out much worse than the SARS crisis and now we are preparing for an even unpredictable future ahead.

There is no doubt many stocks are at attractive valuations now including blue chips and REITS. The problem now is many valuation methods are forward looking but there is no way we can analyse how the future will be and how a company will perform in the future. If we use macroeconomic factors to analyse sectors and industries to buy stocks, it is also very difficult now because many economists will not even know how the future will be. In the end, how the financial future will look like will depend on government policies and regulations.

Welcome to investing in a crisis

Many of us have been preparing for a crisis to happen so we can buy stocks at great prices. This has happen over and over again in the past such as the GFC, AFC and other crisis. The stocks market always goes back up isn't it?

Yes, indeed the stock market always goes back up after a crisis. However, what was not told to us is many companies also don't survive a crisis. It is therefore of utmost importance that we focus on whether a company can survive when investing during a crisis. 

I myself am investing during this crisis and it has been a roller coaster ride. I know that losing money is part of investing during a crisis but the psychologically effects of losing money is still hard to stomach. My greatest worry nowadays is whether the companies I invest in will survive this downturn. It is really hard to predict but we definitely can use some financial knowledge to reduce the risk of losing our money entirely. I shall explain some of the things I look into for my investments now.


Focus on the balance sheet and cashflow statement

During a crisis, most companies earnings will take a hit. Many companies will report drop in revenue and profits. Without the revenue to pay their staff salaries, rental, loans and other business expenses, many companies will have to dig into their pockets. If they have no cash in their pockets, they may have to close down entirely and file for bankruptcy. This is how a company will not survive a crisis. We must remember cashflow is the life of a business especially during a crisis.

With lockdown in Singapore, many companies are suffering. Tourism is the worse hit as there are no more tourists in Singapore and places such as hotels, tourists attractions and other businesses which depend on tourists for revenue will be greatly impacted. Let's look at a company Genting Singapore which is no doubt the worse hit company during this COVID-19 pandemic. The resorts world Sentosa is totally closed down during the circuit breaker period in Singapore. In the near future, tourists arrivals to Singapore will probably still be low so their revenue will definitely be affected. Can this company survive?

Genting Singapore has initiated cost cutting measures and cut their staff pay by 9-18%. The good thing is the Singapore government is also paying 75% of staff salaries for Genting Singapore employees. Staff cost came up to about 448M in FY2019 for them. Looking at their balance sheet, they have 3.9 Billion in cash which can pay for about 8 years of staff salaries even if they don't make any money. This is really a huge sum of cash they have. Their current liabilities which includes borrowings is at 703M. With their cash, they can also pay of their current liabilities if needed. If you're confused on current assets and current liabilities at this point in time, you might want to read my post on the balance sheet to understand more. 

Genting Singapore Balance Sheet for FY2019

We can use the current ratio to determine if a company is in good financial standing. A current ratio of more than 1 generally means they are able to meet short term obligations if they were to be due all at once. For Genting Singapore, their current ratio is a healthy 5.87. On the other hand, if we look at another company, Singapore Airlines (SIA), their current ratio is a low 0.44. This means they are not able to meet its short term obligations such as repayment of loans in the next 1 year. This is the greatest red flag but nevertheless, the Singapore government has pledged to make SIA survive at all cost. However, this will definitely not be good for shareholders as their share value get diluted. At the time of writing, SIA shares have fallen to below $4 from a high of $9 at the beginning of the year.


How to analyse REITs and Trusts during a crisis

Another ratio we can look at is the interest coverage ratio. It is used to determine how easily a company can pay their interest expenses on outstanding debt. The ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) or Net Property Income (NPI) by the company's interest expenses for the same period. This ratio is often used for REITs. When a company's interest coverage ratio is only 1.5 or lower, its ability to meet interest expenses may be questionable. The ability the pay interest expense is important for REITs as majority of them are financed by debt. If they are unable to meet their debt obligations, the REIT will just collapse as what we have seen recently for one company, Eagle Hospitality Trust.

Let's look at a company in the hospitality industry, CDL Htrust. Its interest coverage ratio was 4.7x as at 31 Dec 2019. Of course this would have changed now and also in future as CDL Htrust income would have reduced and thus the interest coverage ratio will be lower. They had provided an operational update as of 31st March 2020 and indeed their interest coverage ratio dropped to 4.3x. This is after factoring the first 3 months of COVID-19 impact only. I suppose the next quarter will be worse.

Another important ratio to look at is the gearing ratio. This is the debt of a company relative to its equity or other financial metrics. For REITs, the gearing limit is 45% but now MAS has increased it to 50% to allow REITs to have more flexibility to get more borrowings if they need to survive. MAS has also relaxed the rule that mandates REITs to pay out 90% of their income to shareholders. This means REITs can now retain more of their income to strengthen their financial position.


Emerging out stronger from the crisis

If we invest in the right companies and they survive this crisis, we will definitely emerge out stronger from this crisis. Many have made their money through past financial crisis where at that time many people feared the markets. It is therefore not easy to invest during a crisis as most people would succumb to the psychological effects of losing money before the crisis is over.

Many of us have prepared for many years waiting for a crisis to happen before investing and now a crisis has happened. However, I suppose many of the same people who were waiting all their lives have trouble putting their money into the markets now out of fear of losing money. I would think this crisis will be a long drawn one and it will take time for the markets to recover. It won't be easy investing during these times as anytime the companies can go bankrupt and we will then surely lose money.

I have diversified all my investments to invest in different sectors and industries and I'm cautious not to put too much money into a single company. Focusing on whether a company will survive is of utmost importance during times like this. If a company has strong financial standing, they are able to take advantage of opportunities during a crisis and emerge out stronger. This is like us who have savings and we are able to look for opportunities to put our money in the right investments and emerge out stronger after this crisis. Without savings, we can't do anything in the first place and may lose our jobs (revenue) and end up worse. This goes the same for companies in the corporate world.

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Is 6% Dividend Yield Achievable For A Singapore Market Investment Portfolio?

In my previous post on The 10 Years Financial Independence Target, I laid out the strategy to compound our money to reach financial independence in 10 years. The strategy involves having a dividend yield of 6% in the investment portfolio. There are quite a few questions on whether 6% dividend yield is achievable? Also, how do we get that 6% dividend yield?

In my years of investing experience, I've learnt that it is indeed achievable to get 6% dividend yield in our investment portfolio. Over the years, I've learnt to pick some good stocks that have generated on average 6% or more dividend yield for my portfolio. Some of these stocks I've held it for many years and they are still generating stable and good dividends for me. In fact, the dividend yield should  increase over the years if its a good stock and of course the price of the stock will increase too.

Here is a glance of some of the stocks which are generating good dividends in my portfolio:

Stock	Avg Price when bought		Dividend Yield on portfolio
Starhill Global Reit	$0.68		6.48%
Frasers L&I Tr	$1.03		6.95%
Suntec Reit	$1.65		6.04%
CDL HTrust	$1.29		7.12%
Far East HTrust	$0.63		6.35%
Frasers Cpt Tr	$1.95		6.16%
Ascendas-hTrust	$0.72		8.25%
CapitaMall Trust	$1.90		6.04%
Frasers HTrust	$0.78		6.02%
CapitaCom Trust	$1.32		6.59%
SingTel	$3.50		4.97%

Above are 11 stocks in my portfolio which are generating on average 5% and more dividends. With the exception of Singtel, all other stocks are generating 6%-8% dividend yield for me. Unfortunately, most of the stocks are not giving more than 6% dividend yield based on current price. I bought most of the stocks when the price was significantly lower. 

If you've missed the boat, fear not because there will always be an opportunity to buy stocks at lower prices again. When the market is bad, that is the time to buy. But, it is important to pick good stocks so that they can ride out the bad economic situation at that time. 

Let me share some tips and what to look out for when identifying companies to buy based solely on my experience to achieve 6% dividend yield.

1. REITs and Business Trusts are good stocks to get dividend income

The first thing you will realise is that REITs and business trust is the answer to get higher dividend yield. As compared to blue chips such as Singtel, DBS or other big companies, the dividend given by REITs and business trust is mostly higher due to the fact that they are income generating assets. They own assets which they rent out to get rental income. REITs also have to give out at least 90% of their income to shareholders in the form of dividend.

2. Sustainability of rental income affects dividend yield

As dividends are given out from the rental income which the REIT or business trust receive, the sustainability of it is important. If you invest in a retail REIT such as Capitamall or Suntec, the retail sales, traffic flow and the positions of the malls will affect its rental income. Economic changes will also affect its rental income. 

For example, there has been discussions that retail sales will be affected due to the emergence of online shopping. If lesser people shop at the stores, the stores will have lesser income and thus may not want to renew their lease. If the shop space is left empty, then rental income will be affected. 

The location of the malls is also important when it comes to sustainability of rental income for retail REITs. For example, Frasers centrepoint trust has malls which are located in sub urban areas such as Woodlands causeway point, Yishun North Point etc. The malls are also mostly located next to MRT stations. This brings a lot of shopper traffic to their malls and thus they are able to attract better tenants who are willing to pay more rental. 

Other REITs such as commercial REITs, hospitality REITs and logistics REITs will also have factors affecting its rental income. Commercial REITs rental income is affected mostly by economic market conditions, hospitality REITs are affected by the number of tourists who come and stay in Singapore or the supply of new hotels and logistics REITs are affected by economic market conditions also. This is just a general statement but if we really want to dive deeper, there are lots of factors for each REIT to talk about. 

Master lease is another factor to look at for sustainability of rental income. Starhill global reit which owns Ngee Ann City has master lease with Toshin which owns Takashimaya in the mall itself. This has contributed to stable income for the REIT as there is certainty that the tenant will continue to pay its rental income under the lease contract. 

3. Is the REIT able to generate higher rental income progressively?

Besides the sustainability of the rental income, we should also look at REITs and business trust which can generate higher rental income. This is called rental reversion. Lease of the tenants do expire according to their contract. When the lease expires, tenants may renew their lease with the REIT or business trust. Good REITs will be able to generate positive rental reversion for many years. An example of this REIT is Frasers Centrepoint Trust. They have managed to generate positive rental reversion since 2007. This is 12 years and going strong. Rental reversion is the metric that shows whether new leases that were signed have higher or lower rental rates than before.

Another way the REIT can generate more rental income is through yield accretive acquisition and Asset Enhancement Initiatives (AEI). REITs will often look out for good properties to take over. A recent big acquisition is by Frasers Centrepoint Trust where they took a major stake in PGIM Real estate AsiaRetail Fund which owns the Asiamalls in Singapore. Frasers Centrepoint Trust also did an AEI few years back where they expanded North Point in Yishun and this has resulted in higher rental income due to more space which they can rent out. 

For commercial REITs such as Capitaland Commercial Trust, they did a series of yield accretive acquisition such as acquiring Asia square tower 2 and they are doing AEI on Raffles City which will increase their rental income. Hospitality trust such as Far East Hospitality is expanding with its newly built Outpost hotel Sentosa opening this month. This will add to its income which it gets from its hotel rooms and also events management revenue. 

4. Make a trip down to the REIT's property

We should make a trip down to the REITs we invest in especially those that are in our home country. Having a look and feel of the human traffic, business activity of the property itself can tell a lot about whether its a good investment.

For retail REITs, most likely we would have visited before so what makes the malls stand out from the rest of its competitor? Some retail REITs are smart enough to take advantage of the rise of ecommerce such as Capitaland Mall is opening the new Funan mall in June 2019 with drive through click-and-collect and hands-free shopping service, where shoppers can choose to either pick up their purchases at Funan’s concierge when they are done, or have their shopping bags delivered to their homes.

For hospitality REITs, we can make a trip down or read the reviews on online websites such as booking.com or TripAdvisor. The reviews can tell a lot about its business activities.

For commercial and industrial REITs, it gets a little more tricky as we can't really visit these commercial offices or industrial buildings. But, we can still look at reports to gauge the occupancy and business activities. For this kind of REITs, most of the time they are more affected by economic cycles so its important to know what is going on around the world. Reports from CBRE are good sources of information to read more on commercial property activities.


5. Never over pay for a REIT

Buying REITs is like buying properties. When I invest in REITs, I will make sure I buy it at a reasonable price. You can see whether the price is reasonable by looking at the NAV or the dividend yield. The NAV is the net asset value which is the net value of all its assets (mostly properties for REITs). The dividend yield will tell you how much rental income you are getting and whether its worth the investment.

For example, when we buy a physical property for investment, we will also look at the location, then the reasonableness of the price (whether its below or above valuation) and then we will look at how much rental income we will get. Taking the rental income divided by the price we pay, we will get the % return. When investing in REITs, we should approach it like buying a real property also and most of the time this will make sure we get good value out of our investments.

It takes patience to get good value on our investments. Some of the REITs I waited a few years before I finally invested in it. When the price is right, I will know at that time because I've been reading up and researching all along.


In Summary
From my own personal experience, investing in REITs and business trust has been a rewarding experience. While waiting for the REIT to continue growing, I get dividends over the years to have some certainty on the return on investment in my portfolio. Even if the REIT does not do well later, the loss will be cushioned by the dividends we received.

Within the investment, I also buy and sell the REIT along the way to take some profit when it goes up and buy again when the price goes lower. 6% dividend yield and return on investment is possible and I've managed to achieve this consistently over the past few years. There are ups and downs over the years but the overall % return should still be there. Hope this post has helped you to get some insights on how to achieve 6% dividend yield in your investment portfolio.

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REITS Are Falling - Will This Continue?

REITS have been falling lately and my portfolio was not spared either. There are a few reasons to this which I will simplify and explain in this article. Investing in REITS have been a favourite among investors due to its income generating feature which provides good dividend income for investors. Typically, we can look at around 5%-7% dividend yield investing in REITS. Will this be sustainable going forward?


The Rise of Interest Rates

The main reason for the drop in REITS price is due to the rise in interest rates. Why is this rise in interest rates so damaging to REITS in the first place? To explain it simply, the main cause is because the rise in interest rates make REITS investment less attractive. There are 2 main reasons to this:

1. Interest expense reduces distribution of income

REITS are required to payout 90% of its taxable profits to shareholders in the form of dividends. As such, they have little left at the end of the day and thus have to take on more debt to boost their returns. This is the nature of a REIT's business.

All debts have interest payable just like we pay interest on the loans we take up. When interest rates increase, the interest expense which a REIT has to pay generally increases as well. There are some strategies to mitigate this which we will look further into later in the post below. The increase in interest expense reduces the cash flow that is available to pay shareholders and thereby reducing its distribution income and the dividend yield.

2. Attractiveness of REITS decreases

Building up from the above factor, as distribution income and dividend yield reduces, it makes REITS less attractive as an investment bearing in mind the risk which is involved as compared to safer assets like bonds or fixed deposits.

Furthermore, in a rising interest rate environment, those safer assets such as bonds or fixed deposits have their rates increased as well thereby making them a more attractive investment option. This is called the risk free rate.



The Rise of Other Alternative High Yield Investments

If you've not noticed, there are many alternative safe investments out there now. Additionally, the rates which these safe investments give are going up as well. Just take a look at Singapore Savings bond which is capital guaranteed and still have the flexibility to sell anytime without losing any capital. The interest rates it gave earlier this year was about 1.2% for first year but it has risen to 1.72% for the June issue. If you put your money there for a period of 10 years, the average return per year is at 2.63%. Not bad for a capital guaranteed investment. For REITS, we still can get higher dividend yield at more than 5% but the question is will people want to take the risk to get that additional 2%+ return?

From the subscription rate of the Singapore Savings Bond, it is oversubscribed every month for the past 3 months. This shows that people are rushing in to invest their money inside There was another bond which was launched by a Temasek Holding subsidiary, Azalea Asset Management. It offered retail investors a coupon of 4.35% per annum which is really quite high. Even though there should be higher risks associated with this kind of high yield, the bond was still oversubscribed by 7.4 times which again shows the interest of the retail investors in this kind of higher yield investments.

All these alternative high yield instruments started to come most probably because of the higher interest rate environment as well. In a rising interest rate environment, it actually signals the recovery of the global economy and these government or privately owned funds are more likely to issue bonds to raise money because they are more confident of getting back a higher return for the money they borrow.

Another capital guaranteed interest generating instrument, the fixed deposit accounts, have been neglected for quite some time now due to the low interest rates environment. However, if you notice, banks have actually started to raise their fixed deposit rates again. I just checked and saw that DBS 1 year fixed deposit rate is at 0.60% now. I think it was lower just a few months back. Banks are in the business of loans and they have been raising their rates for mortgage loans as well as for other loans as well. The demand for loans have probably picked up as the property market recovers and also better business environment for businesses to expand. The banks are willing to raise their interest rates they give for deposit accounts in order to get more money to loan out at a higher rate.


How To Check If Your REIT Will Suffer?

Coming back to REITS, does all the above factors mean that its the end for REITS now? It may not be the case actually. As mentioned earlier, rising rates signal a better business environment and may benefit REITS which rents out its business space to various businesses. However, as REITS have to pay high interest expense, it is a balance now whether they are able to generate more income even as interest expense increases? There are a few things we can check to see if our REIT will survive or suffer:

1. Percentage of debt on fixed and variable rate
2. Gearing ratio
3. Weighted average debt maturity
4. Average cost of borrowings
5. Interest coverage ratio

What we essentially want to check is in the balance sheet. Fortunately, we don't have to calculate or dig the financial statements as most REITS regularly report their debt profile in easy to read slides. There are quite a few terms which may be new to some of you. Let me explain more in detail as simply as I can.

Let's start off with this REIT called Frasers Centrepoint Trust (FCT). I like this REIT a lot because of its defensive nature. Its malls are located in the suburban areas such as Causeway Point in Woodlands and Northpoint at Yishun.

Below shows one of the slides which FCT has for its Q2 2018 financial results. We can see the gearing ratio, the interest coverage ratio, the percentage of borrowing on fixed rates and average cost of borrowings etc.

One look at the slides, we can see that FCT gearing ratio is at 29.2% which is not too high for a REIT. The gearing is calculated as the total outstanding borrowings over the total assets. It has 56% of its borrowings on fixed rates which is quite low in my opinion. I've seen most other REITS already have more than 70% of their borrowings on fixed rate. However, this also explains why the average cost of borrowings for FCT is only 2.4% while if we compare for another similar retail REIT, Capitaland Mall Trust, their average cost of borrowing is higher at 3.2%.

For its interest coverage ratio, it is 6.64 times which is quite good. For interest coverage ratio, it is calculated as the earnings before interest and tax (EBIT) divided by interest expense. This means the lower the ratio, the more the company is burdened by debt expense. This is expected to be lower when interest expense increases due to higher interest rates.

The last thing we should be looking at is the weighted average debt maturity. For this, most REITs would have a slide as well which is easy to refer to. The reason why we have to look at this especially in rising interest rates environment is because when the debt is about to mature, the company will have to refinance its debt. During rising interest rates environment, refinancing will definitely be more costly. We can expect the interest expense to increase once the debt matures and it is refinanced at a higher interest rate. On the other hand, some REITs may choose to pay down its debts if they have the funds to do so.

For FCT, it has $91m of borrowings maturing in FY2018. These are unsecured bank borrowings. With the banks already raising their rates, if FCT were to refinance this loan, the interest will most probably be higher.

REITS Prices Are Falling - Will This Continue?

I would think there are actually opportunities to invest in REITs again as the prices continue to fall. We just have to evaluate and make sure we buy at a discount to NAV and also take into consideration that dividend may fall in the future as interest expense increases. We can also take reference to the risk free rate such as the 10 year Singapore government securities bond which is known to be default free. Using this rate, we can determine the yield spread of REITS dividend vs this risk free rate. There are people who use standard deviation to determine a good price for REITS but I will not go into this which is too technical for this post. In simple terms, it is just to gauge the attractiveness of the dividends given by a REIT as compared to the interest we can get in a default free asset.


Some REITs are managed better than others so its important to separate the good from the bad. By looking at its balance sheet, it will tell a lot on how the management is prepared to handle this rising interest rate environment. Just look through the slides of a few REITs and I'm sure you will be able to see it for yourself as well.

Want to learn more about dividend investing in REITS and how to value them correctly? Check out this online REITS masterclass here. 

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The Two Japanese Reits Which Got Acquired - What Can We Learn From This?

It has been a fruitful journey investing into Japanese Reits for the past few years. Saizen Reit was the first Japanese reit which was acquired earlier before. Recently, Croesus retail trust, a Japanese reit which owned Japanese shopping centres was also successful acquired just last week. What makes them so attractive that both reits from Japanese were bought over at a premium price?

I've written extensively on Croesus Retail Trust as early as back in 2013. The timeline of the posts are as follow:

• Looking to invest in Japan's real estate - November 10, 2013
• Croesus Retail Trust - First Quarter results released and initiated long position - November 13, 2013
• Short interview with Jeremy Yong, Co-founder of Croesus Retail trust - April 10, 2014
• The Japan story - Croesus retail trust and Saizen Reit - June 1, 2014
• Croesus Retail Trust - More than 10% dividend yield! - August 29, 2014
• Croesus Retail trust 2nd Quarter results beats forecast. DPU 3.1% higher than forecast - November 14, 2014
• Investing in Japan's Shopping Centres - Croesus Retail Trust Retail Investor Seminar - April 29, 2015
• Croesus Retail Trust - Rights Issue 22 For 100 - October 5, 2015
• Croesus Retail Trust - Another Japan Reit Potential Takeover - May 1, 2017

The purpose of the sharing of the previous posts is to look back at my thoughts and why I invested in Croesus in the first place. Time pass very fast. 3 years plus just went past like that. As you can see, in April 2015, I went for a Croesus retail trust retail investor day where I manage to hear from the top management of Croesus itself. I wrote in my blog that I was happy with what I heard and the management knows what they are doing. As soon as a rights issue came, I immediately subscribed to it to increase my holdings in this investment.

Last week, Croesus was acquired at a price of $1.17. My average price for the reit is about $0.80. This represents a gain of 45%+. Including dividends, the total ROI for this particular investment works out to be about 81%. It was a long journey nevertheless.

What caused the Reits to get acquired?

The most important lesson is to find out what cause the reits to get acquired and hopefully we can always buy into the right companies which generates value for shareholders. In the case of Croesus, when I first invested in it, it was purely base on the fact that the Japanese government was aggressively trying to expand their economy through quantitative easing. They had a target of 2% inflation back then when Japan was facing decades of deflationary economy. Noticing that this was an opportunity, I went to search for companies which deals with properties in Japan. Saizen Reit and Croesus came up as an investment choice.

Next, I looked at the stability of its income which is important for a reit or business trust. Saizen reit was in the residential rental business so it was really stable. It was rare for a reit to be in the residential business. Croesus on the other hand is involved in shopping centres which had some risk in itself. However, upon a closer look, Croesus management were quite committed in achieving good value for shareholders through the many positive rental yield acquisitions and AEIs. They were committed in keeping the company's balance sheet healthy also.

Finally, the Japanese reits was trading at an attractive price which was below their book value. Many of their properties were valued conservatively when you compare their properties valuation against the other nearby properties. Furthermore, Japanese real estate and rental prices were going up steadily over the years which was an added positive development. All these attracted other big investors to offer attractive prices to takeover the 2 companies. Sure enough, it happened and shareholders got rewarded.

There will always be more opportunities in the future for those who missed it. For fellow shareholders of Croesus retail trust, congrats to all!

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Far East Hospitality Trust 2Q 2017 Financial Results - Review & Action

Far East Hospitality Trust just released their financial results last Friday and I thought it would be good to do a quick update since I've been writing a lot on the hospitality industry as an investment opportunity.

Net property income still decreased by -6% in 2Q 2017 as compared to 2Q 2016. However, this is a smaller decrease compared to the 1Q decrease of -10.4%. Average hotel occupancy was 87.1% in 2Q as compared to 88.1% in 1Q. Comparing year on year, occupancy increased 1.9%. RevPAR remains stable at $134 which is a good sign that it has bottomed out. Comparing year on year, RevPAR decreased -4.6% in 1Q while it decreased -1.3% in 2Q. This is a smaller decrease which is again a good sign that RevPAR is bottoming.

Credit: http://www.fareasthospitalitytrust.com/rendezvous-hotel-singapore.html

In summary, hotel occupancy has increased by 1% for the 1H of 2017 while serviced residence has decreased by -8.7%. RevPAR still remains low but shows signs of bottoming out. Far East Htrust portfolio consists of 64.8% hotels, 12.9% serviced residences and 22.3% commercial which contributes to its gross revenue. From the time I invested in this stock, the stock price has gone up by 10% and I've divested a portion of my investment in this stock at 0.67. It is still trading at a PB of 0.74 which represents a discount to NAV of 26%. The dividend yield at current price is about 6.24%. The reason for divesting it is to lock in some gains first while monitoring it for any other upside.

I also did a check on one of its competitors, Frasers Hospitality Trust and looked at its Singapore properties portfolio. I noticed that Frasers Htrust Singapore properties registered a higher RevPAR for both its properties. It is an impressive gain of 4.1% Y-Y.  For all its other countries portfolio, the gross operating profit also increased. Frasers Htrust will be the next investment opportunity I'll be looking at. However, it's trading at a PB of 0.99 and dividend yield of 6.53%. It seems to be at a fair price currently so if we want to invest now, there may be limited upside. I shall monitor and keep it in my watchlist for any good entry points.

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Outlook for REITs in Singapore and Globally

REITs have been a popular investment choice for many years now. Even for me, REITs constitute about 60% of my portfolio currently in sectors such as retail, hospitality and commercial.

Recently, REITs prices have mostly gone up which is a good time for a review now. I will look into the different sectors and the outlook plus if there's any other opportunities to continue investing in.  It may be time to sell some REITs and invest into other opportunities too.

Retail REITs

Firstly, let's look at retail REITs. In Singapore, we have a few REITs which dominate the retail scene here. Capitaland Mall Trust and Frasers Centrepoint Trust owns most of the shopping malls in Singapore. Collectively, they own 22 of the major shopping malls in Singapore which are mostly near MRT stations.

I have invested in both of the REITs for sometime now. They have provided good dividend income at around 5%-6% pa. However, retail REITs don't really have much capital gains in general as its quite hard to expand and have more shopping malls in an already competitive environment.

The retail sector will be faced with competition moving forward. The rise of online shopping means fewer people will be shopping at the stores itself. I like that the REITs have reinvented themselves where we can see most of the stores in shopping malls now are F&B. Singaporeans still like to eat outside a lot.

Image Credit: http://www.cmt.com.sg/funan.html

Capitaland mall trust recently reported their 1H financial results and one highlight is that shoppers traffic has declined -0.5% in 1Q 2017 as compared to 1Q 2016. This may also be linked to the weak employment data as released by MOM. Unemployment has gone up particularly for Singapore citizens while total employment has decreased for 2 consecutively quarters this year as seen from the preliminary figures released by MOM.

Apart from the poor outlook, we are also seeing some developments in the retail scene. For Capitaland mall, they are redeveloping Funan, which was the popular IT mall in the past. It will reopen again in 2019 with new experiences for shoppers. This will boost the dividend income from the REIT moving forward. For Frasers centrepoint trust, they are doing AEI for northpoint which is a popular shopping mall in Yishun. This is expected to be completed in end September 2017 and they aim to improve the average gross rental rate of Northpoint by approximately 9% upon the completion of the AEI.

Both REITs are trading at prices above book value now with CMT at 1.03x PB and FCT at 1.13x PB.

Commercial REITs

There are many commercial REITs in Singapore. I shall not go into the details of each REIT but focus more on the general trend of the office market in Singapore. As we see previously, total employment in Singapore has decreased but if we dive deeper into the MOM numbers, the decline is mainly due to lesser work permit workers in the construction and manufacturing sectors. This does not really affect the commercial REITs in Singapore.

CCT's One George street office tower
Image credit: http://www.cct.com.sg/our-properties/singapore/one-george-street/

I have invested in Capitaland Commercial trust (CCT) and also Suntec REIT. Both own office buildings in Singapore with commercial as their main portfolio. Suntec REIT does have Suntec City, which is the shopping mall in their portfolio but that only accounts for 7% of their overall portfolio. Office portfolio accounts for 69% of their income.

In CCT's latest 2Q financial results, I saw a distinct trend in the occupancy rate chart which they have. If we look carefully at the below chart, the CBRE's core CBD occupancy rate has declined in 2Q 2017. This covers offices in Raffles Place, Marina Centre, Shenton Way and Marina Bay. It is not looking too good for CBD offices. On the other hand, CCT and Suntec's committed occupancy rate remains quite stable.

Image adapted from CCT's 2Q 2017 Financial results

Moving on to office rents, grade A office market rent has remained unchanged Q-on-Q after seeing consecutive decline from 2015. It may signal that the grade A office market rent decline has bottomed out. Supply of office spaces is expected to continue to increase in 2017 so there should still be some pressure on the office rents moving forward.

The stock price of CCT and Suntec REIT has risen by quite a bit these few months. However, both are still trading below their book value. In terms of dividends, base on the current price, the dividend yield is around 5.2%-5.3%.

Hospitality REITs

Lastly, let's move on to hospitality REITs. A few months back, I wrote about an investment opportunity in the hospitality sector. You can read it here. There have been many articles on how this industry will do well and also coverage by various research houses and analyst. This will be an update based on the latest financial results from some of the hospitality REITs. At this point, I'm invested in CDL Htrust, Ascendas Htrust and Far East Htrust.

CDL Htrust Studio M hotel
Image credit: http://www.cdlht.com/studio-m-hotel.html

CDL Htrust just released their financial results last week with higher NPI and DPS (excluding effects of rights issue). They recently just did a rights issue at an attractive price and I went ahead to subscribe to the rights issue including trying my luck for some excess rights. Its portfolio is doing relatively well with the biggest gain from its New Zealand hotel at 91.9% increased in net property income (NPI) for 1H 2017 as compared to 1H 2016. This is really an impressive gain. The main reason is because its revenue per available room (RevPAR) for the New Zealand market surge 49% year on year.

CDL Htrust Singapore hotel market RevPAR is still declining at -1.1% year on year. As mentioned in previous articles, we should see RevPAR bottom out and start rising as hotel supplies taper off in 2018. As we can see from the case of the New Zealand hotel market, a surge in RevPAR can really improve the NPI by quite a lot.

Visitors arrival to Singapore remains high with 4.4% increase YoY. STB, SIA and Changi Airport Group (CAG) recently launched the second edition of the Singapore MICE Advantage Programme to draw more business events to Singapore as well as a S$34 million investment to strengthen Singapore’s destination appeal and drive visitor traffic.

Elsewhere around the world, Japan hotels are not doing so well as RevPAR has declined due to price competition from increase in new hotel rooms supply. We should see better performance moving ahead to the olympics games in Tokyo.

Far East Htrust and Ascendas Htrust have not reported their results yet though. In terms of valuation, CDL Htrust is already trading above book value at PB of 1.07x. Far East Htrust on the other hand is still trading below book value at 0.73x. It has gone up the past few months and my investment in this is sitting on a 10% return. Hospitality Reits have a dividend yield of around 6.2% currently. It can be a good dividend investment buying at the right price with attractive dividend yield. I'm looking to accumulate further into this sector.

Will REITs continue to perform?

I've touched on 3 different sectors namely the retail, commercial and hospitality REITs listed in Singapore. REITs present a good opportunity for those who buy at the right valuation. For me, I look at the outlook, the valuation, its financial stability, dividend yield and management strategy. Where possible, its good to check out the properties of the REITs wherever possible. Seeing crowds at a mall and all the shops having business is a good sign as oppose to an empty mall with no business.

I would look closely and monitor the developments of the retail and commercial sector while continue investing in the hospitality sector moving forward.

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CDL Hospitality Trust - Is Hospitality Industry Recovering?

Previously I blog about the hospitality industry and why I think that it may be the next investment opportunity. You can read the post here. CDL Hospitality Trust is one of the hospitality trust stocks which I own and recently it reported its Q1 financial results. Looking at its results, we can know whether the hospitality industry is still on the track to recovery. Some of the hotels they own are Orchard Hotel, Grand Copthorne Waterfront Hotel, M Hotel, Copthorne King's Hotel, Studio M Hotel and Novotel Singapore Clarke Quay.

Hotel Lobby of Grand Millennium Auckland in New Zealand

The hospitality industry, especially in Singapore has suffered quite a bit in recent years due to the poor economic conditions globally. Overall, the hotels revenue per available room (RevPAR) in Singapore has declined to as low as during the global financial crisis in 2007. This has caused the earnings of the companies in this industry to suffer.

For CDL hTrust, net property income (NPI) went up 6.4% in Q1 2017 as compared to Q1 2016. This resulted in the DPS going up 9% YoY. The increase was mainly due to higher contribution from its New Zealand hotel which was up 90.2%. For Singapore, NPI increase marginally by 1.5% only. CDL hTrust has most of its hotels (69.1%) in Singapore so the focus is still in this market.

Performance of Singapore Market

CDL hTrust Singapore hotels' occupancy rate went up from 83.9% in Q1 2016 to 88.4% in Q1 2017 which is a 4.5pp increase. However, RevPAR still declined but only marginally by -0.8%. This is a huge improvement from the -6.9% decline in Q1 2016 vs Q1 2015. It seems like the decline has slowed down and bottomed out.

For the macro conditions of the hospitality industry, STB estimates moderate growth in visitor arrivals of 2% and YTD February 2017 visitors arrival grew by 3.4% yoy with China visitors at the highest. Additionally, a S$34 million investment was recently announced by STB, SIA and Changi Airport Group to strengthen Singapore’s destination appeal and woo business and MICE visitors. This is on top of the other initiatives which I've listed out in my previous blog post.

As mentioned in previous blog post, we can expect hotel supply to gradually taper off in 2018 which we should see a stronger recovery in the RevPAR. CDL hTrust price went up to $1.55 with Price to Book ratio of 0.98. This is at fair value and not too cheap in my opinion. I bought this stock back when it was at PB of around 0.8. Nevertheless, the current yield is about 6.45% which isn't really too attractive for me. A dividend yield of more than 7% would be more attractive for hospitality stocks. I would accumulate more if there are any opportunities to buy a lower prices.

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Croesus Retail Trust - Another Japan Reit Potential Takeover

Croesus Retail Trust is not new to this blog. I've written several articles about this stock since 2013. It has been more than 3 years since I was an investor in this company. How time flies just like that. Investing in Japan Reits was a strategy I embarked on 3 years plus ago primarily due to macroeconomic reasons. Japan was starting an aggressive monetary and fiscal policy plan at that time which I saw the opportunity to invest in companies which owns real estate in Japan.

Just last week, there is a potential takeover which was announced by the company and this sent the stock price up as high as $1. The same thing is happening again which happened to another Japan Reit called Saizen Reit. If we see the same takeover as Saizen Reit, Croesus Retail Trust could possibly be acquired at more than $1 which gives a 5%-10% premium to its price to book value.

This stock has served me well over the years as an income investment. Its dividend was close to 10% in the early years and averagely it gave about 8%+ yield. Many were worried if the yield is sustainable but they have proven that it is. The last time I heard from the management face to face was during a retail investor day. I heard from the management on their strategy to grow the company by doing more acquisitions so CRT becomes an indexable stock which will hopefully drive the stock price up. In the end, they did do what they said. From a portfolio of 4 shopping centres, they expanded to 11 now. They also reassured investors that they will be responsible in delivering the DPU which they did consistently.

Whether it will be acquired or not, it doesn't really matter to me as its still a good investment. For those who are already investors in this company, let's see what happens next.

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The New Phillip SGX APAC Dividend Leaders REIT ETF

Word has spread around of a new REIT ETF which has been launched for IPO just last week and closed on 13th October 2016. The ETF will begin trading in the market this Thursday 20th October 2016.

REIT has been an all time favourite for Singaporeans as it provides higher than average dividends which is quite a good dividend income for many people. With the new REIT ETF, it will be easier to diversify between different stocks instead of being concentrated with just a few REITs in our portfolio.

Phillip Capital invited some bloggers for a dinner and Q&A session on this new REIT ETF just last week. I was there as well to find out more information on this interesting development in Singapore. As we know, investing in funds, such as unit trusts, have high costs that comes with it. However, for ETFs, the cost is relatively lower which makes a difference in our investment returns.

Understanding more on the Phillip SGX APAC Dividend Leaders REIT ETF

Let me list down some of the details as well as the pros and cons of this REIT:

REIT ETF focuses on Australian properties

The first thing that caught my attention for the REIT ETF is the concentration of properties in Australia. 59% of this REIT index consists of Australian properties with 30% in Singapore and 11% in Hong Kong.

Here are the constituents of the index:

Source: http://phillipfunds.com/uploads/funds_file/Phillip_SGX_APAC_Dividend_Leaders_REIT_ETF_Prospectus.pdf

As we can see, the REIT index consists of 30 stocks with the focus on Australian stocks.

Pros of investing in the REIT ETF

I asked the Managing Director of Philip Capital why the choice to put more emphasis on Australian REITs and he gave some reasons for it which I will share below.

Here are the reasons:

1. Australia Economy has not seen a recession for the past 25 years
2. Australia shopping malls are crowded with good occupancy rates
3. Gearing ratio is low at 30% or less
4. Rental reversion is positive
5. AUD currency has gone down and is somewhat at the bottom now
6. Strong GDP growth of average 3%
7. High productivity growth in the country

Those are the reasons I manage to capture at the dinner session. I was actually surprised to know that Australia did not have a recession for the past 25 years and their GDP growth is higher than many developed countries, including US and Singapore, with strong productivity growth.

Back home in Singapore, we are struggling with weak GDP growth, low productivity rates and weak retail outlook which the government is trying very hard to improve productivity here. In economics, productivity growth tends to increase the salary of workers which increases consumer spending and results in stronger economic growth. This is the reason why productivity growth is so important for a country to do well. 

Back to the REIT ETF, it is interesting to note that back testing was done for the REIT ETF and the annual compounded return was 13% for the past 5 years. The average dividend yield for the REIT is about 4.5% currently. 

So far, we have seen a lot of pros in investing in the REIT. How about the cons? 

Cons of investing in the REIT ETF

In every investment, there will be risk which we need to take note of. Here are some which I can think of:

1. Focusing on overseas stocks will increase Forex risks
2. 4.5% dividend doesn't seem too attractive for a REIT investor
3. Concentration in one country adds in some risks if Australia economy doesn't do well
4. We have no control over rights issue of any REITs in the component of the ETF

The risks are mainly due to the exposure to overseas stocks but if all is well and the AUD goes up plus the economy continues to do well, it will definitely benefit investors who invest in this REIT ETF. 

To me, this is a medium risk investment which beginner investor should not invest in unless they fully know what it is about. For seasoned investors, this may be an alternative investment fund to get exposure to the Australia market. What do you think of this new REIT ETF?

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