Portfolio @ October 2018

October

PortfolioPortfolio Value

Performance Indicators / Dividends

  • YTD Time weighted return: -2.26%
  • Dividends collected: $2,932.94
  • Upcoming Dividend Receipts:
    • Yuexiu Transportation Infrastructure: HKD 900
    • AIMSAMP Capital Industrial REIT: SGD 150
    • Capitaland Mall Trust: SGD 110.96 (Excluding Advance Distribution)

Commentary

Hunted by Red October

As you may know by now, October has been an especially tough month for global investors. I personally wiped out all my gains for the year and turned to losses. While I still outperformed the STI, which has declined about 10% for the year, it still feels bad when you lose money. In light of the volatility, I eliminated Tencent and Bank of America from my portfolio. Initiated a small position in DBS yesterday as it is now yielding 5% for a business that I admire. That said, the downward pressure continues, which is why I only bought a small position. I’ll relook it again when it reaches $20-21, if it gets there.

Given how low the STI has gone, I’m awfully tempted to start a regular investment plan into the STI ETF or just straight out buy the ETF. Will update you guys if that happens next month.

Work backlog and ICT

October has been a bit slow on the work front due to my annual high key ICT. It’s my 6th high key ICT and 8th ORNS cycle, so 1 more high key ICT and I’m done with the majority of my NS obligations. So looking forward to my NS HOME award in my CPF account when I’m placed into Military Reserve.

Unfortunately, as a result of my ICT, I’m looking at a extremely fun backlog of business trips I must complete by the end of the year. Going to be a hardworking run till the end of the year, so don’t expect very regular posts till year end.

Good luck and stay safe everyone.

Happy Hunting,
KK

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Flashnote: Capitaland Mall Trust Westgate Acquisition Update & 3Q Results

It was a busy news day for Capitaland Mall Trust, with the REIT reporting their latest quarter of results and launching a private placement to raise funds for the Westgate Acquisition. So I thought I’ll give a quick review of each piece of news.

Check the 3Q results and Private placement announcements for more information.

Third Quarter Results

Capitaland Mall Trust posted a pretty decent set of results for the third quarter of 2018. Here are the highlights per the announcement:

Revenue and DPU

3Q DPU

3Q NPI

Source: Capitaland Mall Trust 3Q 2018 Results Announcement

DPU reached 2.92 cents in the quarter, up from 2.81 cents in 2Q 2018, partly due to $4 million released to unitholders which was retained from 1H 2018 performance.

Financial Indicators

Financial Indicators

Financial indicators remain healthy with relatively low leverage and good interest coverage. Leverage is likely to rise to 34% as explained later.

Rental Reversions

3Q Rental Reversions

Rental Reversions refers to the increase / decrease in rental rates once new leases are signed for the respective properties. Overall a slight positive of 0.6% positive rental reversion across the portfolio. Interesting to see the negative rental reversion and low retention rate at Westgate, a property they will be acquiring the remaining interest of really soon.

Overall an acceptable set of results and looking forward to the distribution receipt in November.

Westgate Acquisition Update and Private Placement

As predicted in my previous post on the acquisition, the acquisition will be funded by a mix of debt and equity – through a private placement. Based on the private placement details, it seems like they have gone for highest amount of equity modeled for in the EGM circular (70% LTV).

Funding details

Funding raised: At least $250 million with $25 million upsize option
New units: 122,011,000 units
Issue price: Between $2.049 and $2.097

Update @ 26 Oct: 134,089,000 units was ultimately issued at $2.07

Gearing Comparison

DPU Comparison

Source: Capitaland Mall Trust EGM Circular

Based on the above illustrations in the acquisition circular, the acquisition is yield accretive / neutral. However, do note that the illustrations were determined based on the unit price of $2, which is lower than the unit price range. This means that the acquisition is definitely yield accretive now as the REIT is issuing about 500k less units than illustrated. So that is definitely good news.

Update @ 26 Oct: The $25 million upsize option was exercised resulting in 11 million extra units being issued. This means that this private placement was ultimately slightly yield destructive, but it results in a slightly stronger balance sheet.

Advanced Distribution

As part of this private placement, an advanced distribution has be declared as well. It is currently guided to be 1.38 to 1.48 cents, so when added to the 2.92 cents declared for 3Q 2018, a Cumulative dividend of 4.30 to 4.40 cents is expected to be paid out.

Final Thoughts

I’ve been rather satisfied with my purchase in Capitaland Mall Trust since April and its good to see management making shareholder friendly acquisitions and funding decisions. Will look forward to seeing the rest of the reporting season play out for my other investments.

Happy Hunting,
KK

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My thoughts on T2023-S$ Temasek Bonds

Following on from the Astrea IV private equity bond issue in June, Temasek Holdings has made the latest tranche of Temasek Bonds (known as T2023-S$ bonds) available for retail investors to subscribe. Personally, I’m not a fan of bonds due to my risk profile, but I support any move to convince more Singaporeans to invest / diversify away from property investments. So here’s a quick overview of the Temasek Bonds and a comparison to its competitors that are available to retail investors.

More information and offering circulars on the T2023-S$ bond can be found here.

Product Overview

Features

Tenure: 5 years
Maturity: 25 October 2023 (expected)
Interest rate: 2.70%
Interest payment: Semi-annual payments
Credit ratings: Aaa (Moody’s), AAA (S&P)
Minimum application: $1,000 or higher, in increasing multiples of $1,000
Application period: 17 – 23 October 2018

How to Apply

The process is pretty much the similar to applying for Singapore Savings Bonds (SSBs). You just need a CDP account and a bank account with the 3 local banks to apply through the following channels:

Application channels

Sample application screens:

DBS application

DBS Internet banking application

OCBC application

OCBC Internet banking application

Comparisons

For the purposes of this comparison, I will only look at bond options easily available to retail investors as well as examine the main risks associated with bonds – Default risk and Interest rate risk.

Comparison

SSB figures based on Nov 2018 SSB issuance

As you can see, the Temasek bond provides a slightly better yield compared to SSBs for a similar level of risk. If you compare the SSB’s 5 year yield of 2.12%, it is a much better bond for you if you have a 5 year bond timeline.

The main downside of the Temasek bond is the relative lack of flexibility should you wish to sell your bonds before maturity as you are subject to market forces. Given that interest rates is expected to continue to rise, the value of your bond in the market is likely to continue to drop as the years go by. However, this is not a concern if you hold to maturity.

Astrea IV and Corporate bonds are comparatively riskier due to the assets backing the bond is not as strong compared to Temasek bonds. However, you are compensated accordingly by the much higher yield.

My thoughts

The Temasek bonds is a mid term low risk investment instrument, as such you should avoid using the Temasek bonds as a vehicle to park your emergency funds or funds you expect to use within the next 5 years.

As for CPF funds, I may consider using CPF OA funds for a little bump in interest but definite not use SA funds as Temasek bonds are lower yielding. Personally, I would avoid using OA funds as well as 0.2% more interest is not worth the effort. I’ll rather keep the funds to boost my equity warchest when the market becomes depressed.

Other than the above, if you are prepared to hold to maturity, Temasek bonds can be a useful tool in your portfolio if you have a low risk profile and are using it as a instrument for capital preservation.

Remember to make your application by 23 Oct 12 pm should you decide to subscribe.

Happy Hunting,
KK

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OCBC 360 Account Interest Changes (November 2018)

Competition between the local banks for your deposits have been heating up recently as they try to one up each other on savings account interests rates. The latest salvo from OCBC relates to the changes in interest rates for their OCBC 360 Account effective 1 November 2018. As a account holder, I thought I’ll review the changes and share my 2 cents.

Current interest structure can be found here, while revised interest structure can be found here.

Overview

Summary of Changes

Source: OCBC Website

That is a lot of mambo jumbo to describe the changes. To illustrate the changes, here’s a practical comparison between the old and new interest structures.

Comparison

Interest rate comparison

*Interest only applies to first $70,000 of balances

For core interest, I’ll assume most people are able to satisfy the $500 per month credit card spend requirement. At face value, most account holders are worse off as core interest has been reduced for balances below $35k. Actually, due to the tier system, account holders with balances below $70k but more than $35k are also worse off. Here’s a graph to illustrate:

Interest Curve As you can see from the graph, Core Interest has suffered mainly due to the removal of the payment category, which accounts for 0.3% interest. Core interest is only unchanged if you have exactly $70k in balances.

That said, if you include the new Step Up interest category, which requires you to have at least $500 more in month on month average balance (which I assume most Singaporeans are able to satisfy), you will then be able to push your interest to exceed the old rate of 1.8% to the max of 2.25% for balances more than $35k.

My Thoughts

The objective of the changes made is pretty obvious to me – OCBC wishes to increase their deposit base, as seen by the introduction of the tiered system, the Step-up category and to a lesser extent, the Boost category. It’s clear they wish to drive people to have at least $35k balance in their 360 accounts as that’s where the better interest rates come from.

In general, account holders like me who do not hold large amounts of cash, these changes are bad. However, this will have minimal impact on me due to my minimal cash balance anyway. That said, my guess is that risk averse Singaporeans who love to hold large amounts of cash will love these changes.

As a side point, I find it interesting that they also chose to cut the Wealth category interest to 0.9%, probably to help fund the new Step Up interest category.

What do you think of the changes to the OCBC 360 Account? Share your thoughts in the comments.

Happy Hunting,
KK

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Portfolio @ September 2018

September

Q3 is over! 1 more quarter to go to drive returns for this year.

Portfolio ValuePortfolio Performance

Performance Indicators / Dividends

  • YTD Time weighted return: 4.34%
  • Dividends collected: $2,932.94
  • Upcoming Dividend Receipts:
    • Yuexiu Transportation Infrastructure: HKD 900
    • Bank of America: USD 10.50

Commentary

A roller coaster

September turned out to be a roller coaster month, with US-China trade war fears dominating most of the price action. At one point I was down up to $3k month on month! Ultimately my portfolio turned it around to ultimately settle at almost a wash. Other than that, it was quiet month for me with no transactions made. Gains in portfolio value was mainly due to capital injection into my warchest.

The macro-economic and geo-political environment is getting pretty complicated, with the ongoing trade war, emerging market crises, US White House turmoil and the looming US mid term elections in November. Where all these will lead us and how it will be resolved, nobody knows. I only know that I need to raise cash to be ready for any opportunities.

Till then, keep calm and collect dividends.

Happy Hunting,
KK

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Flash Note: Capitaland Mall Trust acquisition of remaining interest in Westgate

Today, Capitaland Mall Trust finally released more information on its proposed acquisition of Westgate as part of its EGM circular to unitholders. As a unitholder myself, I thought I’ll dive in, give my quick thoughts and speculate a bit.

The circular and presentation can be found here.

Overview

Capitaland Mall Trust is proposing to acquire the remaining 70% interest in Westgate that it doesn’t own from its sponsor, Capitaland. It will be holding an EGM on 10 am, 25th October 2018 to obtain unitholders’ approval to proceed with the acquisition.

Westgate.jpg

As most Singaporeans know, Westgate is a mall located next to Jurong East MRT and is part of a mixed use development of retail and office space. It is also located within the Jurong Lake District, the planned 2nd CBD in Singapore. As such, it is a fantastic property location wise with some growth potential as the Lake District develops and matures.

Financing Details

The main details that were revealed as part of this circular relates to potential funding structures and their potential impact on the key valuation metrics of the REIT. 3 potential models of funding was illustrated: 70% debt funded, 85% debt funded and 100% debt funded, with the balance funded by equity where necessary.

Gearing

Gearing Comparison

Source: Capitaland Mall Trust EGM Circular

As you can see here, the REIT has ability to fully fund the acquisition with debt without busting MAS gearing caps. Whether they choose to do so really depends on economic conditions at the time of fund raising.

Distribution per Unit

DPU Comparison

Source: Capitaland Mall Trust EGM Circular

A key assumption for this illustration is that equity is raised at $2 per unit, which is a 8.3% discount to today’s closing price of $2.18. Under the above conditions (No more than 30% of funding raised by equity and at $2 per unit), the acquisition is yield accretive. This is only true if management keeps the financing structure within these parameters.

Net asset value

NAV Comparison

Source: Capitaland Mall Trust EGM Circular

NAV post acquisition doesn’t change much. This means that the REIT is highly likely to be able to issue equity at a premium to book (based on illustrative price of $2 versus NAV of $1.93), which explains why the acquisition is able to be yield accretive at up to 70% LTV.

My Guess

Here we enter the realm of speculation, let’s assume the acquisition is approved at the EGM, which is highly likely given the merits of the deal.

First question: What would the final financing structure be?

Whether they ultimately choose to fund it entirely through debt or partially fund it with equity really depends on economic factors like interest rate and cost of equity. As the REIT is currently trading at a premium to NAV, cost of equity is low as it is able to issue equity at a premium to valuation. Coupled with the fact that the REIT potentially might need the debt headroom for other acquisitions or to complete the construction of Funan, it definitely makes sense for the REIT to issue equity.

Second question: Since equity is likely to be issued, will there be a rights issue? In order to answer that, let’s take a look at a hypothetical scenario – if it was a rights issue for 70% LTV scenario, what would be the likely structure of the deal?

Rights issue ratio.JPG

For convenience, I ignored the effects of the acquisition fee. I also included a “worst case” scenario where the Managers fund the acquisition at NAV.

A whopping 3.5 units per 100 shares! Given a rights issue / preferential offering is much more expensive to conduct as compared to a private placement, my money is on the REIT managers doing a private placement instead, should they choose to partially fund it through equity.

So my best guess is that the acquisition will be funded by a mix of debt and equity, while equity will most likely be raised via private placement. So don’t feel too compelled to raise cash to participate in a potential rights issue. Let’s see if I’m ultimately right 😛

Do you agree with my guess? Let me know your thoughts!

Happy Hunting,
KK

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OUE Commercial REIT rights issue – a case study of value destruction

Logo

Regular readers would know that I have shifted to a more income approach over the past year and as part of that strategic shift, it involves purchasing more REITs for my portfolio. Also, I have in the past espoused my love of rights issues / preferential offering as seen in my participation in the Frasers L&I Trust preferential offering.

Unfortunately, just as stocks are not born equal, REITs are also not born equal. Whether a rights issue is value accretive or destructive very much depends on the structure of the deal, with that heavily influenced by the REIT Sponsor and Manager. If you invest in a REIT that has a Sponsor who’s interest is not aligned with the interests of minority shareholders, you can get shafted with some pretty bad deals.

Today, I’ll examine one such example – OUE Commercial REIT’s proposed acquisition of OUE Downtown from its Sponsor, OUE Limited, and its associated rights issue.

“Art” of the Deal

Here’s a summary of the significant effects of the acquisition and associated rights issue:

Issue summary

*Calculated based on 10 September 2018 closing price
#Based on REIT data from The Fifth Person website

Right out of the gate, you can see that the rights issue is ridiculously dilutive to your investment, with your distribution yield falling from 7.02% to 6.21% if you only take your own entitlement of rights. Pay you my hard earned cash and I get less dividends as a result?

Thanks bro.

The market rightfully recognised this and the REIT’s price corrected over the past week.

OUE Commercial Chart

How low must the price be before you get the same yield post acquisition as pre-acquisition?

Let’s work this out backwards, pre-acquisition distribution yield was 7%, as such for distribution yield to remain at 7%:

Target TERP = $0.0354 / 7 x 100 = $0.505.

Target Price cum rights
= (0.505 x 2,852,129k post acq units – $587,500,000 proceeds) /  1,546,769k pre acq units
= $0.55

That is a whopping 17.3% drop from the 10 Sep price and a further 9.1% drop based on yesterday’s closing price of $0.605!

The worst part of this, this is of no fault of the REIT’s existing property portfolio performance. It’s like passing the ball to your soccer captain and he takes the ball, turns around and scores an own goal, leaving you wondering what you did wrong.

Moral of the Story

Investing in REITs require close examination of Sponsor and Manager behaviour, and not just studying them from a numbers perspective. Some REITs tend to have management and sponsors who couldn’t care less about minority shareholders and it is important to understand management before investing. If not, you risk being exposed to such value destructive behaviour.

For those invested, I feel you and I hope the rights issue works out well for you (ie you get a lot of excess rights, and I mean A LOT). For me, I’ll avoid this REIT like the plague until it is at a much much cheaper price.

Happy Hunting,
KK

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