Recent moves: Amazon.com, Starhill Global REIT

Recently, I made some adjustments to my portfolio – I swapped out part of my Google position into Amazon.com; and bought into Starhill Global REIT. Am I breaking up with Google? Isn’t Amazon.com’s valuation insane? Isn’t Starhill Global REIT’s DPU falling?  Here are my thoughts.

Amazon.com

Amazon (NASDAQ: AMZN) has been one of those stocks that I’ve been eyeing forever but due to traditional valuation metrics I’ve put to one side for a long time. It all started when I was contemplating buying either Amazon or Google (now Alphabet (NASDAQ: GOOGL). I ultimately chose Google over Amazon purely due to valuation.

he-chose-poorly.jpg

AMZN proceeded to provide a more than 150% return since then. Admittedly, Google provided a not too shabby 50% return since, but you can see the relative under-performance. I’ve come to realise that Amazon cannot be owned based on valuation. They are seeking to dominate the world, so they need to spend and spend in order to get there first. Sure, they can rest on their laurels and immediately turn a profit by cutting spending. But that is not Jeff Bezos’s goal. What’s more he is executing on his strategy like clockwork – no. 1 e-commerce platform in the US, best Voice Assistant in Alexa, most widely used cloud platform in Amazon Web Services (AWS), the list goes on.

As such, to invest in AMZN was not because the stock provides value, but in your belief that Jeff Bezos is the Messiah that will bring you to the promised land of ecommerce, cloud services and AI, among the insane number of initiatives and moonshots going on at that company.

After yet another blowout earnings report by AMZN and another good but not great quarter by Alphabet, I decided to take the leap from GOOGL to AMZN on weakness. Which I promptly did last week thanks to Trump’s tariffs and Gary Cohn’s departure. I still retain 5 shares of Google purely for “diversification purposes”.

Will I crash and burn at the altar of overvaluation? Only time will tell so watch this space.

Starhill Global REIT

My continuing effort to build yield into my portfolio probably reached its end (for now) when I purchased Starhill Global REIT recently. This is a name that I don’t think people outside the investing community would know about so here’s a brief introduction.

Portfolio of Properties

Portfolio Overview

Source: Starhill Global REIT

The Singapore, Australia and Malaysia properties account for 62.5%, 22.1% and 13.2% of revenues respectively. This means that the fortunes of Ngee Ann City and Wisma Atria greatly determines the DPU of the REIT. Do note that they do not own the entire Ngee Ann City and Wisma Atria. Judging by the strata title plans, they own the whole of Wisma Atria excluding Isetan. As for Ngee Ann City, they own Office Tower B and the retail shops excluding Takashimaya department store.

Key Metrics

  1. Occupancy for SG retail and office space: 98.6% and 89.4% respectively
  2. Weighted Average Lease Expiry (WALE): 6.4 and 4.8 years (by Net Lease-able Area (NLA) and Gross Rent respectively)
  3. Price to Net Asset Value (NAV): 0.78
  4. Gearing: 35.3%
  5. Weighted average debt maturity: 4.0 years

The above set of metrics seems rather attractive to me because:

  1. Relatively high and stable occupancy for SG retail, however a lower occupancy for SG office space due to oversupply in office segment. With the anticipated recovery in office rents, the impact of lower occupancy might be offset partially.
  2. WALE being 4.8 years by Gross Rent means great DPU visibility over the next 5 years.
  3. The REIT is trading at 22% discount to NAV, which can be a buffer to further downside in the REIT price
  4. Gearing of 35.3% gives the REIT some room to lever up for acquisitions, if any, to increase future DPU (REITs are prevented from gearing up beyond 45% by MAS)
  5. Weighted average debt maturity of 4.0 years means the REIT doesn’t have a large amount of immediate debt obligations to service. With that said, the REIT has maturities in FY 2021 – FY2023 for a significant portion of the debt (approx 50-60% of the current debt). I guess they’ll figure it out then.

My Hypothesis

The main reason why DPU has been falling over the past year is a combination of factors:

  1. Lower office occupancy
  2. Lower Orchard Road traffic
  3. Threat of E-commerce
  4. Ongoing Asset Enhancement Initiatives (AEIs) and renovations
  5. Weakening of AUD and MYR

For point 1, as noted in the latest Q2 earning results, office occupancy is expected to recover in Q3 as committed occupancy only commences then. As such, Q2 drop in DPU is likely to be an anomaly.

For point 2 and 3, unfortunately there is little they can do beyond moving towards a more experiential mall concept rather than traditional retail concepts. The upside is that with Singapore tourist arrivals continuing to boom, Orchard Road traffic might recover as a result.

For point 4, AEIs are great for REITs as they usually result in increases in NLA and thus more revenue when the area is rented out. However, while the AEI is ongoing, that portion of the property has to be shut down, resulting in a short term decrease in DPU. The Wisma Atria food court only opened for business after renovation in November 2017. With a full quarter of operation, it should contribute more to DPU in Q3. Also, there are ongoing AEIs at Plaza Arcade (Australia) and Lot 10 (Malaysia) set to complete in Q3 and open in Q4, which is definitely accretive to DPU.

For point 5, the Manager has partially hedged their Forex exposure but this will continue to be either a headwind or tailwind.

Going forward, given the above discussion, I feel that there is potential for DPU recovery at least in the 2nd half of 2018. Further potential catalysts of increasing Singapore Office occupancy and average gross rents will further drive DPU growth. The market has already punished it for its relative under-performance to the big boys like Mapletree Commercial Trust, Frasers Centrepoint Trust and Capitamall Trust. Given that it is yielding a relatively attractive 6.8% yield and trading at a multiyear low, it is worth a punt despite the potential headwinds.

Conclusion

With the latest changes I made to the portfolio, I have a 3+% projected yield from my entire portfolio based on StocksCafe projections. I’ve also roughly split my portfolio into 50:50 SG and US stocks, with my SG portfolio focused on undervalued yielding stocks and REITs, while my US portfolio is focused on growth. Looking at it, I’m very happy with where my portfolio is at the moment and don’t expect to adjust it by much for the rest of the year (unless something drastic happens).

Happy Hunting,
KK

Disclaimer: The information I present are for general information only and does not constitute a call to buy or sell any shares. Individuals should consider the suitability of the information presented in this blog to their own specific situation before acting. Invest carefully my friends.

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