Investment Moats

The day REITs and Dividend Stocks get slaughtered

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It is not everyday that my Dividend Stock Tracker, tracking popular Singapore High Yielding Stocks showed severe negative prices.

And that includes my experience in 2007-2008.

There would always be some stocks that are positive or no change. This is unprecedented.

While we do not know the main reason, Japan 10 year bond yields edge above 1%. That psychological point could mean that higher borrowing costs are coming in the near future.

As a result the carry trade (which I thought was pretty dead) hit a snag.

Here are some charts of drastic price drawdowns:

Aims Amp Industrial Capital

While volume is not as high as the rest, it is still startling to see a 1 day 5% drop in a long time. My recent hypothesis is that this rally have all been a case of yield compression.

Hot money search for higher yields at higher risk assets.

This movement shows how a large part of the shares look to be in speculative holdings.

Cambridge Industrial REIT

At one point it went all the way back by 20 cent which is like a 25% fall. Fat fingers? Volume is high.

CapitalMall

Even one of the largest and oldest REIT isn’t spare. More and more like a foreign fund flows out

CapitaRetailChina

I got to be honest I wanted to punt this stock. Fortunately I didn’t. Else I would have been caught in this.

One of the stocks shown here with a double top. Price target $1.44?

Frasers Commercial Trust

One of the stocks that I missed, which I really should do it at $1. Perhaps rather good management and a 6.2% yield. Gearing is high but a lot of Freehold and 999 year lease properties.

Frasers Centerpoint Trust

Another trust from Frasers. The price is 14% above my average price.  As with Frasers Commercial, these are priorities.

Mapletree Industrial

One of the last REIT to run. Recently took a liking of its management as well as their development deal for the Equinix data center.

Still the worry here is that if you read the latest quarter report for a lot of companies, they seem to be moving out of Singapore.

Sabana

One industrial REIT with a similar profile to Aims Amp but for Sabana the volume is huge!

Summary

We can’t tell if this is due to the market being temporary spooked by Fed Speak or due to what was mentioned above. If  its due to the open mouth committee, then they just need the right words to set prices back. This is a non event.

I notice many folks due to low fixed deposit rates decide to chase yield. If you think current price provides you a good required rate of return yet you are not overpaying for it (based on PTB, DCF) then this should be an issue.

You may be stuck in this, and 2 years later you may learn the lesson that even good yielding stocks are poor investment if you pay dear for it.

The important thing is to develop a much more conservative risk management and valuation determination.

At times like this, I written 2 timely articles on your game plan for it

Do read them to make sense of something like this:

To get started with dividend investing, start by bookmarking my Dividend Stock Tracker which shows the prevailing yields of blue chip dividend stocks, utilities, REITs updated nightly.

FREE Stock Portfolio Tracker to help track your dividend stocks by transactions to show your total returns.

For my best articles on investing, growing money check out the resources section.

REIT Fee Structure 2

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The Edge has more coverage on REITs restructuring which we talk about in June. (See article here)

In the last article, it talks about having REITs pegging their fees to performance of share price and dividend per share, which Cambridge, Starhill Global, Ascendas REIT and Aims Amp is doing.

This week’s focus centers on the opinion of Patrick Lecomte, the executive director of ESSEC Business School’s Advance Master in Financial Techniques and Financial Engineering.

Two things that concern international investors about Singapore REITs

There are two things that most concern international investors about S-REITs.

The first is whether the fees that REITs pay their external managers properly incentivize the managers to create value for investors.

The other bugbear is that S-REITs are often backed by a major property companies and there are frequent “related party transactions” between them.

It is a huge topic for foreign investors in Asia because they think it is a way to get some benefits for the company on the back of minority unit holders in the REIT

R-Index ranking of S REIT’s corporate governance

Lecomte ranked the REITs from a score of –11 to 88. Before 2009, every single S-REIT scored less than the midpoint until 2009. Only in 2010 did some of the companies reached mid point.

The top 6 ranked in 2010 was

  1. CapitaCommercial Trust
  2. CapitaMall Trust
  3. Ascott Residence Trust
  4. Aims Amp Capital Industrial REIT
  5. CDL Hospitality Trust
  6. Frasers Centerpoint Trust

Apparently, a lot of the REIT managers were not quite happy with the ranking.

The R-index is based on a sound methodology categorized into 8 areas:

  1. fees (25%)
  2. board matters (19%)
  3. related party transactions (16%)
  4. REIT organization (15%)
  5. renumeration matters (8%)
  6. audit committee (6%)
  7. gearing (6%)
  8. ownership (5%)

Disproving that external managers related to their sponsors have poor disclosures

Close ties between manager and sponsor have made them more careful about how they operate and more willing to make disclosures.

Disproving that REITs with assets abroad have been less transparent

CapitaRetail China Trust is among the most transparent of the S-REITs. All its fees are reported in its quarterly results, and it provides investors with extensive information about retailing and shopping trends in China.

How does the R-Index affect stock price?

Lecomte found that there was little correlation between the scores and the S-REITs operating performance. But the scores did make a difference to their stock price performance.

S-REITs with higher corporate governance scores  deliver stock price performances that were 1.6% higher per year than S-REITs with lower corporate governance.

Widespread adoption of these standards would make Singapore an attractive market for REITs to list, further entrenching its leading position in the region.

Why he thinks it is better to tie fees to DPU or stock price

Most REITs pay a base fee linked to the size of their portfolio and a performance fee tied to anything from its revenue or net property income to its distribution per unit or stock price performance.

The overall fee structure tends to be overwhelmingly driven by the size of the portfolio more than anything else.

“As a unit holder, do you care about deposited property? Does it impact your return?”

In his view, REITs should have a fee structure heavily driven by their DPUs rather than the size of their portfolios.

The managers think in terms of property, the unit holder don’t think like that.

Eng Seat Moey, managing director and head of asset backed structured products at DBS Groups concurs.

“Have a performance fee, but what do you peg it to? Is gross revenue enough? Not enough. NPI? Not enough, because NPI doesn’t take into account your capital structure. You should use distributable income”

Fine Tuning Fees

Base fee should cover costs and continue with their work, it shouldn’t be allowed to inflate in lock step with the size of the REIT’s portfolio.

Eng also recommends that REITs relook the property management fees they charge to ensure that they are consistent with kinds of assets being managed. Managing warehouses and offices is less costly and requires less effort than running  a shopping mall with heavy foot traffic.

Eng and Lecomte are highly critical of acquisition fees amounting to 1%.

“Acquisitions are highly controversial. When you think in terms of a normal company, does it get fees when it buys and sells business or proprties? No”

“REIT managers argue they are doing the research on the property but isn’t this part of running the business? The way you should be rewarded is if you are creating value for your shareholders. There is no way you can justify your fees”

Eng said that in the annual report the break down of fees should be made clearer.

“Put all the acquisitions for the year together and disclose the acquisitions fee for the year, since some do many acquistions. Then group al the recurring fees for the year seperately and break down any fees charges by the manager for development projects in which the REIT is invested.”

Ascendas REIT reduced its property management fee through an EGM and aligned its leasing fee compensation with longer leases.

Ascott Residence Trust approved a transaction, wavied its 1% fee for the acquistion of the redeveloped property in 2017.

Internally versus Externally managed REITs

Hong Kong fund manager Victor Yeung has this to say about internal versus external:

“There is strong evidence that internally advised REITs are stronger.”

“The share holders want a per share return. By contrast an external managers are more likely to pursue asset growth rather than share holder returns.”

They buy something expensive and are unwilling to sell under performers.

“In Australia, you have REITs buying back shares in the last two years. Share buybacks only work for the manager if they are evaluated on a total shareholder return basis because the portfolio would have to shrink if there is  a share buyback, as the manager would have to sell weaker buildings to raise cash. That is why we think an internally advised structure is better. It allows the manager to manage the REIT on a total shareholder return basis.”

Lecomte seems to think other wise.

Singapore is a small market and the developer sponsors have disproportionate access to funding as well as assets. The market is aware of it. Usually, developer sponsored REITs tend to perform better during IPOs because investors are aware these REITs have access to property and support.

Developer sponsors have proven themselves willing to support their REITs during the global financial crisis in 2008/2009 when credit market froze up.

To follow the dividend yield changes daily as well as the valuation changes, you can follow my Dividend Stock Tracker which is updated daily.

REIT Fee Structure–Are they rewarding investors or the sponsors

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The chatter since the KREIT debacle was that the management structure of Singapore Real Estate Investment Trust (REIT) are under close scrutiny. Are they working for themselves or working for you the shareholder?

For those interested in investing in REITs they may want to pick up a copy of The Edge ($3.00) whose cover story is on this issue.  There are quite a few articles on Food Empire, Olam and MRO companies like ST Engineering and SIA Engineering.

Here are some key points from the article

Some of the past history of REIT misbehavior:

  • Some REITs do not pay enough attention to their funding as they pursued asset growth
  • MacArthurCook Industrial REIT (Aims Amp Industrial REIT) committed itself to acquiring an industrial property but couldn’t pay up
  • K-REIT Asia, Mapletree Logistics Trust, Frasers Commercial Trust turned to their respective parents for financial support
  • Capitamall Trust, the largest REIT in Singapore, tapped investors for $1.23 billion via a deeply discounted rights issue
  • 2011, KREIT Asia bought an 87% stake in Ocean Financial Centre from Keppel Land for $2.013 billion. The asset was not immediately yield-accretive, Keppel Land agreed to provide “Income Support” of $170 mil over 5 years to the REIT. To fund the purchase, a discounted rights issue to raise $983 mil was carried out

A Standard Chartered Report pointed out that most REITs in Singapore are trading at discounts to their net asset values, and sport yields that are exceptionally high, reflecting broad concerns with the way they are managed.

Layers of fees:

  • Managers don’t just get a single base fee to cover every thing they do
  • Many layers of fees on top of base fees
  • Why do some REIT managers charge project management fees while others do not
  • Analysts and some industry players say a structure that rewards boosting revenue, promote acquisitions
  • Analyst say that the performance fees should be pegged to share price and dividend per share performance
  • Cambridge and Starhill Global pegged their performance fees to their relative performance of their shares versus some benchmark
  • Ascendas REIT and Aims Amp link their performance fees to the growth of their dividend per share (DPU)
    • The overall fee structure of REITs promotes asset growth bias. Since base fee, which is usually the largest fee component, depends on a percentage of AUMs, the larger the AUMs the higher the fees

The best management talent in the business is typically found within large property groups such as Capitaland, Ascendas and Mapletree

I hope I am reading the table right because it seems that K-REIT Asia,Frasers Commercial Trust and Suntec REIT have huge management fee as % of their net income. I hope its not distorted.

To follow the dividend yield changes daily as well as the valuation changes, you can follow my Dividend Stock Tracker which is updated daily.

REITs Land Lease Renewal and Extension

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We mentioned in the past that Indonesian lease renewal and extension looks to be extremely cheap.

MRCCC extend their land lease for 20 more years for a sum of SGD 28k.

Today we got news that LMIR have renewed their land lease for another 20 years.

The Board of Directors of Lippo – Mapletree Indonesia Retail Trust Management Ltd, as Manager of Lippo – Mapletree Indonesia Retail Trust (“LMIRT”), wishes to announce that title to the retail space in the property known as “Plaza Madiun” (address : Jalan Pahlawan, Madiun, East Java) (referred to as Retail Space in  LMIRT’s portfolio) under a “right to build” title (Hak Guna Bangunan) covering total land area of 5,583 sqm, has been successfully renewed for another 20 years from the date of expiry of 10 February 2012. Therefore, the new expiry date of title of the retail space at Plaza Madiun is now 9 February 2032.

Based on the non existent discussion on additional cost we can assume it is quite cheap as well.

Renewing or Extending Singapore Land Lease

This is in stark contrast to industrial REIT land lease renewal in Singapore. For info, most Singapore industrial building’s lease is typically less than 60 years.

Taken from Cambridge Industrial Trusts Investor Relations:

Question: When a building is purchased from one seller to another buyer, is there an automatic extension of the lease to 60 years for the new buyer?

No, there isn’t an automatic extension, whatever the balance term is on the land lease, the purchaser will assume. Also, majority of the industrial land in Singapore are not freehold and generally land leases range from 30 to 60 years. Extension of land lease has to be requested through the relevant land authorities (i.e. JTC or HDB).

Question: A summary of the process of lease renewal. Will this involve a large capital outlay roughly equivalent to the purchase price of a new building or an amount consider relatively small to the original purchase price.

As mentioned above, extension of land lease has to be requested and approved by the land authorities, and the capital outlay will be dependent on the value-adding proposal for the land usage / extension.

Question: If possible have CIT carried out any industrial lease renewal in the span of their operation.

No, the Manager has not carried out any industrial land lease renewal. CIT’s balance land lease is about 36.2 years

As stated, this means that the safe estimation is that Cambridge on average have a finite lifespan of 36.2 years. It will be prudent to value a REIT as if this is a non-perpetual asset with a finite lifespan and calculate the internal rate of return as accordingly.

I suspect the IRR on Cambridge is close to 5% than the current high yield.

How much does it cost to renew or extend the land lease in Singapore?

I did an enquiry with JTC and the main reason for not renewing every land lease is due to redevelopment plans.

Should the REIT meet all the criteria of JTC or Land Authority to renew and extend, the REIT will have to pay a premium.

After lease expiry, land and building (if any) will revert to the original lessor (JTC). In line with JTC’s policy, lessee(owner) is to reinstate site before lease expires.

Upon fulfilling all the requirements for renewal, lessee (owner) is required to pay for the prevailing land rental/ Premium.

Here is a page off JTC showing the latest land rental/Premium that the REIT will have to pay [Link here >>]

Suffice to say, I calculate Sabana’s biggest building at Lorong Chuan and should they need to renew it for 30 years, it will come up to almost 16% of the current building valuation.

What can the REIT do when the building is near end of lease?

A REIT may choose never to hold on to this asset till its expiry. When the property is less than 15 years, renewal or extension process will start.

The mentioned balance land lease of 36.2 years is the average of all CIT’s land lease expiries. As such, some land lease will expire earlier or after this tenure. Therefore, the expiries will not all happen at the same time.

In the case of a land lease renewal, each asset is handled on a case by case proposition. For instance, the Manager may need to raise cash to fund plant and equipment expenditure for land lease extension purposes. Alternatively, the Manager may choose to divest the assets ahead of their expiry. In the latter case, the projected lifetime of any building is limited and it is envisaged that in many instances, well before any ground lease reaches its termination, the asset will have been sold for conversion to a better use than that represented by the continued use of the current building on the site.

What does this mean for investors in REITs?

As investors, know that unless your building are freehold properties, the assets are not perpetual. It would be safer to value their yields as if there is a maturity date to this asset.

Also note that the cost of renewing or extending land lease in Singapore and some other countries are quite substantial. We know that REITs need to pay out 90% of their earnings to investors, that leaves them with little to no money to save for these extension.

While not all the buildings will need extension at the same time, it would mean that the 2 ways that financing such a renewal can take place is through taking on debts or a cash call.

Know well the certain risks in investing in REITs.

I run a free Singapore Dividend Stock Tracker . It  contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly  here.