The REITs have just concluded releasing their latest quarterly results.
What you would notice is that most REITs faced a challenging slow down that they have not seen in the past. Particularly so, the industrial segment in Singapore are facing some serious headwinds.
Amongst the industrial REITs, Mapletree Industrial Trust (dividend yield 6.4%), for the first time, showed some weakness in their lower end segments. The smaller REITs, such as Soilbuild Business (dividend yield 9.3%), Aims Amp (dividend yield 7.9%), Cambridge Industrial (dividend yield 8.4%), Sabana (dividend yield 9.6%), Cache Logistics (dividend yield 9.1%) showed struggling occupancy and rental revisions.
Only Viva Industrial Trust (dividend yield 9.3%), which owns mainly business park assets, are doing better since their occupancy was low to begin with.
The economy is slowing down, velocity of money is slowing, net profits and cash flow for Singapore based business is down. The industrial REITs are mainly very Singapore based, save for Mapletree Logistics Trust (dividend yield 6.6%) and Frasers Logistics and Industrial Trust (dividend yield 6%) which are more globally diversified and Australia based respectively.
This more or less means their Organic Growth component in their Total Return (Dividend Yield + Capital Growth) is likely flat or negative.
Still I would like to point out 2 recent examples how Inorganic Growth can be achieved for REITs.
Aims Amp Industrial’s Green Field Built to Suit for Beyonics
The first example is that on August 4, Aims Amp announces that they will be developing a green field project for their client Beyonics.
Beyonics is a manufacturing company that was listed but was brought private. It is surprising for me considering in this reporting season, you seldom find much manufacturing company delivering good results.
What Aims Amp would do is to purchase a new land from a third party vendor, in this case Seiko Instruments Singapore and engage Boustead Projects to build this Build to Suit.
This is the first time Aims Amp is doing build to suit, where in the past they are experience in doing a few asset enhancements by tearing down existing owned buildings and rebuilding them for a higher rental ROI.
From the sheet above, there are much benefits in that the lease to Beyonics will be long. The question you will ask is how strong is Beyonics as a strategic long term tenant to work with.
In the slides, Aims Amp tries to make some justifications there on this tenant.
The Net Property Income Yield is 8.9% and would likely be fully funded by debt. Aims Amp have a tradition of keeping debt leverage at a low 30% so they have debt headroom to fund this.
If funded by debt, this venture will be accretive, and Aims Amp indicated that this will add 0.30 cents to the annual dividend per share.
The lesson learn here is that while the environment is a struggle, it also means that opportunistic prospective tenants are also trying to take advantage to secure some quality spaces, investing in additional capex when prices are correcting.
As a side note, Aims Amp, which is what I considered a small REIT, have the ability to fund a development project with not more than 25% of their deposited property (previous 10%).
This means that many of the similar sized industrial REIT can take up development work or AEI, and then sell off their weaker assets with shorter land lease to optimize their portfolio.
This is also bad for Boustead Projects, because they have the intention to do more Design, Build and Lease so that they have more recurring income.
With the REITs also doing this development, their competition just got so much more intense.
Something to note for the Boustead Projects investors.
Ascendas REIT’s Acquisition and Asset Enhancement Initiative
Ascendas REIT (dividend yield 6.3%), the top 2 biggest REIT in Singapore on Aug 1 announces that they are raising money by way of placement of 64 mil new shares at $2.41 to institutional investors. The share price was trading closer to $2.54.
The amount raised in the placement will be use to continue their acquisition trail in Australia with a business park property in Sydney and a logistic property in Melbourne. They will also be doing an asset enhancement on a property in Singapore, converting a multi-tenant building to a single-tenant building.
This example underlines what I wrote about how a REIT could Grow when the share price is high relative to book value (read how does a REIT grow).
Ascendas REIT have a lower dividend yield that they could find more accretive assets to buy by issuing new shares via placement to new shareholders. In Ascendas REIT case, these placement also reduces their net debt to asset ratio, reducing the leverage risk.
Acquiring overseas also seem to indicate a diversification of assets geographically, or that Singapore is not the place to be in the next few years. I see this move to Australia more as an appeal of getting exposure to a better consumption based economy then the extreme downside of Singapore.
The asset enhancement initiative, for me highlights the greater opportunities that good managers come across. In this rather challenging times, we are seeing more industrial REITs facing a need to convert single master lease property to multi-tenanted and they manage to do one that is in the reverse.
Good and Resourceful Managers is an Advantage
What the Aims Amp and Ascendas case studies show us are some evidence of managers that are resourceful or have the connection to come across opportunities in a very challenging climate.
It is during these times that we can examine the quality of managers better.
This would aide us in prospecting these REITs to correct our conviction in these individual REITs. It will affect your decision to pare down, sell, or increase your capital in the REITs.
Of course quality of managers is just one of the metric of evaluation, and it is as equally important to pay attention to the others.
Have you come across any good examples of manager’s actions that reveal the quality or lack of quality in management? Do share with me.
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