REIT vs Interest Rates - Volume 2

I've received mixed responses further to my prior post regarding interest rates and REITs and decided to blog part two to it. I mean, a sequel is always fun right?

What affects the price of a REIT?
There are numerous factors affecting the price of any equity, including REITs. However, the two primary reason for any adjustments in the price of a REIT is:

Revenue (mainly rental income)
Expenses (mainly interest expense)

Interest expense
The traditional notion and theory behind interest rates and REIT's price is an inverse relationship. I mean, its simple right?

" Higher interest rates = higher interest expenses for REIT = lower DPU as most REITs are highly geared. "

Well then, let's look at a chart from investopedia.

Oh wow! Looks like there's really an inverse relationship as a result of a knee-jerk reaction. Investors who applies the above "formula" will quickly sell off their REITs when interest rates rises.

Look closely again, realise that the performance of the REIT somewhat "lags" behind the effects of treasury yield? That's because we should always remember why do interest rates rise and fall.

What affects interest rates (at least in U.S)?
Supply & Demand
Higher economic activities and business growth/expansions tend to lead to higher demand for borrowing. This leads to higher interest rates, ceteris paribus.

Inflation
Higher inflation likely leads to higher interest rates as lenders seek to compensate for the reduction in purchasing power when their money is repaid in the future

Government/ Federal Reserve (Fed)
Fed lowers or hike interest rates when the economy needs a boost or cooling down respectively.
When the Fed raises rates later this year, it is because economic data continues to improve and that rates should finally normalise after being kept artificially low for long period of time.

Revenue/Rental income
The traditional notion above, tends to forget that there are many moving parts to this equation. Interest expenses can increase and decrease. So can Revenue.

When the economy continues to grow, there will be higher demand for leases.

Starting in June of 2004 and ending in August 2006, short-term rates were hiked 17 times from a starting point of 1.00 percent to a peak of 5.25 percent. Over this two-plus year period, GDP grew steadily and commercial property values increased. Importantly, REIT investors were rewarded with more than a 60 percent return over this time frame, beating the overall stock market’s 20 percent rise. When including the past 6 tightening cycles going back to 1977, research has shown that REIT stocks appreciated in all but one. (source:forbes)

With rising GDP growth and economic activities, REITs can demand higher rental revisions to boost their top-line.

Do not forget the underlying business you're investing in
REITs with good management can display this. Capitaland Mall Trust, is one such example:

Source: http://www.fool.sg/2014/10/23/can-capitamall-trust-continue-to-grow/

CMT has an excellent track-record in increasing its revenue and distributable income, even during times of recession and rates hike. This proves that a superb management can ride the storm and even beat the market.

What about Singapore?
All that have been said is mostly reference to U.S, what about Singapore?

Singapore's economy is largely dependent on the major economies like U.S & China. Continued growth in those countries will have positive impact to Singapore.

Interest rates in Singapore
SIBOR is affected by two main factors: Oversea's interest rates and strength of SGD against other currencies.

MAS does not directly dictate our SIBOR rates (some say we say interest rate takers). However, MAS manages SIBOR indirectly by adjusting the strength of SGD against a basket of currencies. This is MAS's method of managing Singapore's economy is it is very unique.

The other variables
I started the post mentioning that there are numerous factors affecting the price of REITs. One other important factor is the industry. Some industries are more resilient while others are more cyclical. Investors should also take into account such factors when making decisions.

Rights issue
AK written an excellent post about REITs and Rights issue here. I think I couldn't put it more clearly than he did.

Its not all about the price
All that have been said relates to the price of REIT. But really, should long-term investors be bothered by the prices of the ticker? In the short-term, the price of a stock may not reflect the true value of the business.

I like to believe in investing good businesses for a long period. A look at CMT's share price since IPO (2002) shows a tremendous increase from $0.96 to $2.22. This includes rights issue but excludes dividend distributed. Past performances doesn't guarantee future growth. But I know as long as the management maintains the good work done, I'll have little worries over my purchases.

We should always remember that there are many types of REITs in the market. Pick wisely, and you can sleep soundly :D

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Interest rates have very little effect on REITs in the long term

You heard it right. Fellow blogger Got Money Got Honey wrote an excellent piece here and I simply love this quote some much it warrants the title of this post.

GMGH pretty much summed up the REIT Symposium very well in the blog post and I'll like to reiterate the point in the subject title.

Interest rates have very little effect on REITs in the long term.
And why is that so? Because these are equities, REITs are not bonds, and do not behave like bonds in the long term. 

Equities share price largely tracks the business performance in the long run; this is true for all equities. If the underlying business is junk, you'll get junk returns.

REITs are businesses that can grow, improve their profits year-on-year. They're not merely Fixed Deposits/Bonds that pays out coupon, with no capital upside/downside.

In fact, rising interest rates very little NEGATIVE effects on equities. Look at this article by Fool.sg. They did an amazing job at showing that stocks rose during 12 out of the 14 times US Fed increased interest rates.

The world, after all, has fifty shades of grey, eh?

Yellen says
Last week, Yellen had said that "the Fed may tighten more quickly if the economy performs better than expected or raise rates at a slower pace if it disappoints".

Interest rates are raised when the economy is performing well. This means that in the overall scheme of things, businesses improve, the economy up and running. REITs can revise, eventually, achieve higher positive rental revisions.

Investors, who are calm, will realise that higher interest rates is a good thing. It means that the economy is doing well. Any short-term market correction could be a good time for investors to accumulate good businesses.

But of course, we must first identify if we are traders or income investors. Your strategy and decisions will then be vastly different.

Not all REITs are equal, and I like this one a lot

Parkway Life REIT ("Plife): one of my favourite REIT. I got to know of this when I just "joined" the investment community and read it on Dividend Warrior blog. He is one of my greatest inspiration. :)

Now, let's have some fun dealing with some FAQs.

"REITs are going to suffer from the impending interest rate hike"

a) Gearing 35.2%, additional headroom of $298.8M to hit the cap.

b) Lowest all in cost of debt of 1.4% (that's insanely low). 

What PLife is doing is to have all of their loans be variable rates (thus the low cost of debt) to have the upfront interest-savings now. 

I feel this is also a wise move as the FED is unlikely to have interest rates hiked to the normal levels anytime in the short to mid-term. 

Having the loans swapped to fixed rates (at about 3%) now is not going to benefit Plife much when they're currently saving 1.6% of interests. Plife will only "lose out" if their floating rates exceeds 3% by a large margin. (because that will have to be "offset" against their current accumulated interest savings)

c) Interest rate hike have mostly been priced into REITs.

d) When will the FED finally raise interest rates? It was delayed from Q4 2014 to Q1 2015 and now Q2 2015?

Even when they do, Yellen has said that it will be done at a gradual and slow pace - I'm not going to expect interest rates rise to 3-4% in a short period of time.

"Stagnant performance"

69% of their portfolio is CPI-linked. (inflation protected)

93% of their portfolio has downside protection.

"No Margin of safety - trading 1.4x Book value"

The healthcare industry is defensive in nature and typically is trading at a premium to its book value as a result.

PLife has 67% of its revenue from Singapore and 32% from Japan

Singapore is poised to be medical hub. DBS has projected that medical tourism will grow by 8% through 2018.

Japan - the "king" of ageing population. Demands for nursing homes and hospitals will always be high in this country.

Worried about forex risk (Japan Yen)?

Japan's results are hedged for the next few years, shielding the REIT against any forex volatility.

"Low div yield (4.9%) compared to the average 6%"

Well, it is a defensive REIT in the first place, and thus its future earnings are more predictable and its DPU are more sustainable.

If you're a long term investor of Plife (which we all should be investing for long term), look at this chart below.

IF you had bought Plife in 2008 at $1.09 (with a 6% yield) and held on to it to 2014, your current yield would be 10.5% (with a capital gain of >100%)

That's the power of holding good businesses for a long term.

"Singapore Saving Bonds will put downward pressure to REITs"

In the short term, yes, the market will react to that by selling off REITs.

However, with quality-REITs like Plife, earnings will grow, NAV will grow.

DPU (hopefully) will eventually grow.

I always believe that "in the long run, the market will behave like a voting machine" and I still do.

There are some REITs capable of having capital gains, and not merely dividend yielding instruments.

"Is this the right time to buy Plife?"

There is no definite answers for these type of questions. But if you want to avoid buying Plife at a "high price", see the chart below.

Plife has been trading at a tight range for the past 12 months. Should you enter now or not? 

There's nobody who cares about your money that you do. When making such decisions, please perform your due diligence and weigh your options.

Nibbled Vicom despite the "looming down cycle"

Vicom, the name that is ubiquitous with all car owners in Singapore.

Recently, its share price has been falling due to worries of the lopsided ageing of the private cars and thus, the massive de-registration of the vehicles at the end of their 10 year lifespan.

Why then did I decide to take a small position in Vicom today?

Excellent Balance Sheet

1. Massive Cash holdings that is increasing year on year
2. Constant free cash flow generated (refer to point 1)
3. ZERO debt
4. Constant increase in dividend payouts

Market Leader

Like SATS , who is the market leader in its own industry, Vicom commands more than 70% of the Vehicular testing in Singapore.

Massive De-registration?

Owners may choose to extend their COE instead of bidding for a new COE when the prices are sky high. If that happens, these vehicles would require more frequent testings and this bodes well for Vicom.

Price Adjustment (after GE)?

Vicom adjusted its Car Inspection price in 1997, 2001, 2005 and 2006. Ever since there hasn't been an increase in pricing.

I believe this is a deliberate and calculated move made by management. Notice the last revision was almost 9-10 years ago (where most of the vehicles, now due for their 10th year mark, were less than 3 year old?).

Vicom seemed to have timed their price adjustments to compensate for the lopsided ageing of the private car segment. We believe with rising labour and other operating costs for the last 10 years, Vicom will adjust its price during this "down cycle". (most definitely after the General Elections as well, =p)

SETSCO 

A subsidiary of Vicom which performs inspection and testing services (non-vehicular). To put things into perspective, the breakdown of Vicom's Vehicular and Non-Vehicular profits is 1/3 and 2/3 respectively. 

This segment is considered cyclical and is affected by:

1. Manufacturing and Construction (New MRT Lines, BTO flats)

2. Oil & Gas industry (current experiencing downturn)

3. Aviation (expecting a boom in Singapore in the long run)

Good Business overall

Vicom is like a mini SATS to me (except for the pure Singapore play). I believe it will do well in the long run and I found the opportunity to take a small position for many more good years ahead =D 

SATS soaring to greater heights?

When people think of SATS, they think "Aviation". That's pretty such true to a large extent. From its incorporation in 1999 where Aviation took up 100% of its revenue, the sector still takes up 80% of the current revenue in 2015.

Air Traffic Outlook in the region
SATS recently published the presentation slides for dbAcess Asia Conference 2015 and I suggest fellow readers to take a look at it. In it, it presented the following chart:

The increase in Airport's Capacity is not without substantiated thought behind it. Boeing's report on Air traffic outlook depicts that Asia Pacific is project to grow at an annual rate of 6.3%, the highest amongst the other regions.

Singapore, being frequently voted as one of the best Airport in the world, will stand to gain from this boost in traffic growth. To make the image even rosier, let's not forget that SATS has a great presence in the Asia Pacific Airports as well.

The rise of the Middle East hub

Dubai, as we all know, is the rising Air Hub in the world, mainly due to its geographical location. What amazes me is how "80% of the population is within an 8 hour flight from the Middle East hubs".


A look through their annual report and I found that SATS had a presence in the Middle East via its Associates or JV holdings.


Chairman has also said that there're constantly looking to strengthen their presence in the Middle East and Asia. Let's hope this materialise.



Set your horizon far and SATS should do well

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” ― Benjamin Graham

 I'm intending to hold on to SATS for a long period of time and let the market does its weighing. Be patient and keep calm guys.

:)

Why I divested Genting and never looked back (nor regretted)

I gambled (and won't do it again)
I once dipped my feet into Genting Singapore. I bought one lot when it was at 52 weeks low, hoping to gamble my way through and make a quick profit when it bounces back.

But it never did.

I did my basic assessment. Balance sheet was not bad (huge cash position). There's prospect in Japan and Jeju (Korea) for the Company. Jurong's Hotel is opening soon. I convinced myself that "everything is going to be fine".

Yet, i've forgotten that this is a Company about gambling after all.

And I gambled my money away in this stock. > 20% loss suffered.

Why was it bad?
The business is divided into two main segments - Gaming, Non-gaming.

Gaming
It all depends on two huge factors - gamblers (mainly foreign Chinese) volume + Casino Win rate.

Know that the tourism industry is sort of cyclical. There'll always be peaks and troughs. What's worse is the tightening of the Chinese Government in cracking down corruption back home that affected rich travellers from coming down to Singapore (they've to lay low).

This spells trouble.

Next, Genting has a serious issue - a defunct credit policy. Bad Debt expenses has been climbing quarter on quarter, presumably to reel in VIP gamblers from MBS in order to gain market share. But what good does having a larger market share does when you cannot collect the cash from your debtors? During one of their earlier results announcement, management even tried to fool investors by saying that "higher bad debt expenses were a result of prudence and accounting requirements", and something along the line of "we expect such provisions to be reversed in the near future".

Being from an accounting background, this statement is merely a smokescreen. Auditors would never allow management to over provide for bad debts. There must be concrete evidence showing that the debts cannot be recovered for such provisions to be booked in.

Win-rate ratio plays a huge part in determining Casino's profit. In quarters where Genting win-rate ratio dipped lower than the average, their profits suffered accordingly.

Isn't this equivalent to gambling? Your investment is based on pure luck. 

This isn't something I would be ever comfortable with.

Non-Gaming

Mainly derived from Hotels and Entertainment (USS, Oceanarium, Adventure cove etc).
These, again, are cyclical. Highly dependant on tourist arrivals in Singapore. But still, slightly more predictable than the Gaming segment. Unfortunately, the non-gaming segment only makes up less than a quarter of Genting's revenue.

I was glad that, after analysing the business model of Genting again, I decided to cut my losses and set myself free and few months ago.

Last notes
Oh, oh, oh. Japan's expansion seems to be facing a huge obstacle.
Jeju's project seems to be stuttering as well. Doesn't seemed too good for me, eh..?

Looks like I may be too pessimistic and spreading too much fear on Genting.
But I wasn't ready to gamble. I wasn't intending to gamble. I'm not gambling my money away.

Should you be worried about Starhub's Q1 result?

Starhub released its Q1 results today and here's a snapshot:

Service Revenue: down 0.6%

Total Revenue: up 8.1%

Operating profit: down 15.0%

FCF: from positive $104.6m to negative $46.3m

Service revenue dipped 0.6%

Service revenue dipped 0.6% mainly due to the continued price competition in the Broadband. ARPU decreased from $39 to $33. However, we see that the dip seemed to have stabilised and moving forward we shouldn't see much decrease in the ARPU.

Total revenue up by 8.1%

Total revenue ticked up by 8.1% mainly helped by increased sale of handsets (iPhone + Samsung I guess) which contributed to an additional $49.9m of sales. This, however, is cyclical and dependant on the handsets dished out by the makers. 

Operating profit dropped 15.0%

Operating profit decreased by 15% largely due to the lower margins on the sale of handsets (change of mix of products). Correspondingly, EBITDA margin decreased from 32.6% to 30.0%.

What's encouraging is that their other operating expenses have been kept controlled and decreased by 2% (including staff costs).

Negative FCF

I'm actually taken aback by their negative FCF this quarter. A quick look at it and the large difference came from the drop in cash from operating activities. I'll be watching their FCF for the future quarters carefully.

Improved "stickiness"

They've continued to improve their Hubbing strategy for who-knows how many quarters. I view this as a positive sign in the long term as this helps in keeping their customers. This is evident in their low churn rate at about 1% for all their segments.

What's next? Is it doomsday?

The short answer is no, for me.

They're actively targeting the SMEs for NGNBN services. Commercial segment tend to have higher margins and lower churn rates. Whether they're gonna be successful, is unknown. But at least we know management is trying their best.

Monetisation of mobile data. We noted Singtel had 61% of their postpaid customers on tiered plan, and reckon Starhub's data shouldn't be too far off. There's still room for data monetisation and its a space to watch.

Hubbing/Homehub packages are already casted wide and afar, presumably to defend their customer base and to prevent any new entrants from causing significant damage to their market share.

Dividend expected to maintain at 20 cents and EBIDTA margin to resume to 32% for the full year.

Let's hope both comes true!!

So, am I worried about their results and ready to divest? Nope. Long term wise, this business is still going to do fine.

SATS, the sleeping dragon, is awake

SATS announced its Q4 and full year results today. Boy oh boy, things are looking good.

Results Summary

Revenue declined by 1.9% amidst the challenging environment

Operating Profit increased 4.1% due to excellent cost control

Underlying profit increased 7% due to increased contributions from their JV/Associates.

These are really impressive numbers, considering that revenue has shrank and yet SATS managed to improve their profits year-on-year.

I reckon their coming quarters to yield better results due to the additional cost savings stemming from the reduction and rebates of aeronautical fees in Changi and their continued productivity drive.

Future Catalysts

Over the longer term, with the upcoming completion of T4 and T5, Changi should see a further increase in air traffic. SATS, having about 80% of Changi's market share would stand to benefit largely from Changi's growth as well.

Also note that SATS has a foot in Singapore SportsHub via its wholly owned Subsidiary SFI. Should the Government's vision of creating a vibrant sporting country come true, SATS would also stand to gain from this.

Increasing core dividends

Core dividends also increased from 13 cents to 14 cents. Note that SATS' core dividend has been steadily increasing. That's another encouraging sign for long term investors.

Market Leader

Lastly, what I love about SATS is its great reach and market share it holds in the industry.

In-flight caterer/Ground Services - Market Share

Singapore - 80%

Vietnam - 75%

Maldives - 70%

India - 67%

China - 60% 

Japan - 50% in Narita, 40% in Haneda

Hong Kong and Taiwan - 30%

Macau - 100% (only in-flight caterer)

A footing in the Cruise Industry

SATS also owns Marina Bay Cruise Centre and their average market share of the Cruise Segment is about 40%

Owns SFI (Singapore Food Industry)

If you've served the Army, you would know that SFI is one of the caterers for the Army's cookhouses. SFI is also used for events like YOG, NDP parades etc. How "safe" can this business be?

At the closing price of $3.21, that translate to a dividend yield of 4.36%. Yummy!

Singtel - Chugging along, strong and steady

Singtel is a telecommunications company with regional business. They've announced their full year results ending 31 March 2015 today and its looking great.

Revenue up 5%

Net Profit up 5%

Ordinary dividend up 1 cent to 17.5 cent

Overall, Singtel's FY15 results is encouraging and steady. What I like most is that its results has been consistently improving year on year (excluding currency fluctuations). Most importantly, core dividends have been steadily increasing too.

I love these kind of businesses: boring, plain, no surprise.

Only then will I have a peace of mind. 

Also, what's encouraging is that 61% of their postpaid customers are on tiered plans, with 26% of those exceeding their data caps. This shows that there's room for growth in data monetisation.

Being a regional telco, we can either say that they've diversification or that they have multiple risks of vulnerability. Either way, as long as Singtel is performing well, I'm happy! :)

What's more, Singtel is the market leader in Singapore, and the second biggest telco in Australia. Like Warren Buffett, I believe in choosing the best of a particular industry.

Singtel closed at $4.36 today, giving a dividend yield of 4%. I'll be happy to accumulate more if prices are attractive once more.

Sembcorp Industries - should you be worried with the slump in prices?

Sell off

SCI's share price has been steadily dropping, this follows the general drop in oil prices. However, SCI recently announced their quarterly results and both Marine & Utilities segments aren't doing too well. In fact, the decrease in Utilities profits is larger than Marine's.

Should we be concerned?

Majority of the decrease in Utilities profits is due to the continued intense competition in Singapore. The increase in contributions from India isn't enough to offset the decrease in Singapore's profit.

JIA LAT! How? Many investors are dumping this business (which explains the drop in share price).

SCI closed at $4.19 today, and has been steadily defending the support at $4.20.

The next crucial support is at $4.10.

This seems very TA-ish for me. What happened?

Are you a trader or investor?
Well, I'm still a FA guy. My investing horizon isn't 12 months. I'm not particularly concerned with these fluctuations in prices. Some people, however, love to get excited about the rise and fall of SCI's share price. Since I'm not trading, intra-day fluctuation doesn't bother me much.

I still believe that SCI is a solid blue-chip. It has superb management driving the business. It has gone through the 2008 GFC and bounced back. The pipeline for the Utilities segment is strong and encouraging. Marine should recover in the future (i hope).

Accumulate?
Once it drops to $4 - $4.10, I'm looking to average down on SCI. I've faith that SCI will do well in the next 5 years. I don't particularly like to buy and sell off my holdings too frequently to realise my gains/ cut losses. The most important element in investing is time, and time is our best friend.

SATS, the hidden dragon, is awaken?

SATS' share price has been slowly creeping up.

It further creeped up when Changi Airport Group announced the rebates and reductions of the aeronautical fees at Changi. This is targeted at providing support for airlines and ground handlers, to boost Changi's competitiveness as an air hub.

This comes as air traffic through Singapore is still showing softness in the data. Changi registered a 0.9% drop in passenger during Q1 as compared to a year ago.

The introduction, and extension, of the reduced fees benefits SATS tremendously. Though the impact of the cost savings from these incentives would not be reflected in its next announcement, shareholders are expecting the results to show in the coming quarters. 

This, together with "productivity push" (which unfortunately has not been elaborated further), should see an improved bottom line for SATS.

Healthy balance sheet

I'm still keeping my stake at SATS. This hidden dragon may soon be awaken :)

The May Effect is back?

Last year the May Effect didn't occur. For the 6 days since 1st of May 2015, the Singapore stock market has been trending downwards. Is the May effect back?

Back or not, I'll be closely watching my watch list prices. Not because I want to sell off stocks to "minimise loss", but to watch out for great opportunities and scoop some value good stocks to add to my portfolio.

Currently watching out for:

1. CMT
2. OCBC
3. Sheng Siong

Pity I'm very low on my war chest now. I need to make very wise decisions in deciding what to buy.

Happy shopping everyone :)

Sheng Siong expanding its footprint

Sheng Siong is set to expand its total retail area in the coming months.

The Group has secured two new leases with the HDB at Bukit Panjang (5,220 square feet) and Punggol (3,360 square feet) and both of these stores are expected to commence operation in early May 2015. The Group was also the successful bidder for another HDB shop at Pasir Ris (3,200 square feet) and is waiting for HDB to grant the lease.

This would expand the group's total retail area by about 2%.

I'm loving my investment in Sheng Siong because of its excellent balance sheet, excellent cash flow and consistently profitable quarters/years with substantial growth. We should note that one way Sheng Siong could grow its top line is by opening new stores.

*huge cash holdings, no debts.

Sheng Siong is also superb in managing its costs. This is achieved by lower their input costs derived from their distribution centres. SS also owns the 506 Tampines Central instead of leasing the area. This helps control their costs over the years and also gives them the opportunity to lease out excess areas to earn additional income.

SS's share price has shot up quite substantially over the past month. I would be accumulating more lots should the price come down a bit more.