I have to say in advance that this posting has nothing much to do with Reits or investment. Just some interesting thoughts with a little connection to the general market. You may safely skip this if you want. Here goes:
I have a child who is currently about 3 years old. When she was still a baby, we have given her the pacifier. I have to say the pacifier is really one of the greatest invention of mankind. It works much better than expected, helping her to sleep better and cry less. However, we also understand that there are some potential negative effects associated with prolong use of the pacific, like dental and speech problems. So recently, we have decided to take away the pacifier from her. She has been receiving cold turkey treatment for the past few days and I can assure you that it is not a pleasant experience for us all. She will cry for the pacifier before she sleeps. She will cry for the pacifier in the middle of the night when she realizes there is no pacifier, and this can happen 2 or 3 times over the night. She will cry for the pacifier when she wakes up in the morning. When it comes to her afternoon nap, all the above will go through one more cycle.
So what has all these got to do with the market? Well in 2008 after the fall of Lehman, Central banks all over the world, especially the US, have to inject liquidity into the markets to 'pacific' them. In 2009, we find that the liquidity injection has worked much better than most of us have thought. Not only has it pacified the market, it has brought about a super strong rally. But the Central banks are also well aware of the prolong effect of too much liquidity in the market, such as inflation and creation of asset bubbles. So one of these days, they will definitely need to pluck out the 'liquidity pacifier'. When that happens, we have to see whether things are going to be ugly. But to take a positive view over this, we are taking the pacifier from our girl because we feel that she is ready for the next phase of her life. So it may not be a bad thing after all because the world economy may be ready by then for the next phase of growth without the 'liquidity pacifier'.
Showing posts with label Commentary. Show all posts
Showing posts with label Commentary. Show all posts
Wednesday, December 30, 2009
Saturday, December 19, 2009
Commentary - Bought and Subscribed the MacArthurCook Reit Rights
The MacArthurCook Reit has never really been under my investment radar. Its gearing was too high at over 40%. Its asset value was the lowest among the industrial Reits, only slightly more than half of that of Cambridge Industrial Trust. Its properties were relatively small industrial buildings with non blue-chip tenants. It was also under an Australian sponsor, and in 2008 and early 2009 period, this Reit, along with Allco Commercial Trust (now Frasers Commercial Trust) and Macquarie Prime REIT (now Starhill Global Reit), all under Australian sponsors, were apparently struggling much harder than the other S-Reits. There was also the overhang of its ability to finance the acquisition of 1A International Business Park, which it has agree to purchase in 25 August 2007.
However, when its share price dropped to the 0.200 level during its trading of rights period couple of weeks back, and with the rights trading at a discount to the mother share (0.030 to 0.045 when mother share was 0.195 to 0.205, with the price to subscribe for rights share at 0.159), it has prompted me to study the recapitalization plans, especially the pro forma figures, in more details:
Pro Forma Figures
With reference to the section on PRO FORMA IMPACT OF THE PROPOSED TRANSACTIONS in the CIRCULAR TO UNITHOLDERS on Nov 6, following are some of the pro forma figures:
- DPU for 1H 2010 (01 Apr 2009 to 30 Sep 2009) = 1.04 cents
- NAV per unit as at 30 Sep 2009 = $0.31
- Total Debt as at 30 Sep 2009 = $190,758,000
- Appraised value/purchase price of portfolio for 1H 2010 = $652,866,000
- Gearing as at 30 Sep 2009 = 29.0%
- Units in issue = 1,465,308,000
Base on the pro forma DPU for 1H 2010 of 1.04 cents, and NAV of $0.31, at the price of $0.194 via buying of rights at 0.035 and subscribing to rights shares at 0.159, the pro forma yield will be about 10.7%, and at a discount of about 37.4% to the NAV.
The Positives
Base on the above pro forma figures, following are some positive factors that I have considered:
The Negatives
The following are some negative factors:
After weighing some of the above factors, I have decided to go for the rights, subscribe for the rights shares and also the excess rights to lower the average price. The yield of most of the Reits have started to move lower with the rise in their prices, so the 10% yield, at a healthy gearing of 29%, is simply too hard to resist. But because of the risks involved, this will only form a very small part of my overall portfolio.
By the time I have decided to move in, the rights price has moved up to the 0.040 - 0.045 range. I got the rights on the last day of rights trading at 0.045.
Aftermath
Right after the trading of rights period, there seems to be strong support at the 0.200 level. The price has in fact moved up slowly to as high as 0.215. We will have to see what will happen to the share price after the rights shares have been issued.
However, when its share price dropped to the 0.200 level during its trading of rights period couple of weeks back, and with the rights trading at a discount to the mother share (0.030 to 0.045 when mother share was 0.195 to 0.205, with the price to subscribe for rights share at 0.159), it has prompted me to study the recapitalization plans, especially the pro forma figures, in more details:
Pro Forma Figures
With reference to the section on PRO FORMA IMPACT OF THE PROPOSED TRANSACTIONS in the CIRCULAR TO UNITHOLDERS on Nov 6, following are some of the pro forma figures:
- DPU for 1H 2010 (01 Apr 2009 to 30 Sep 2009) = 1.04 cents
- NAV per unit as at 30 Sep 2009 = $0.31
- Total Debt as at 30 Sep 2009 = $190,758,000
- Appraised value/purchase price of portfolio for 1H 2010 = $652,866,000
- Gearing as at 30 Sep 2009 = 29.0%
- Units in issue = 1,465,308,000
Base on the pro forma DPU for 1H 2010 of 1.04 cents, and NAV of $0.31, at the price of $0.194 via buying of rights at 0.035 and subscribing to rights shares at 0.159, the pro forma yield will be about 10.7%, and at a discount of about 37.4% to the NAV.
The Positives
Base on the above pro forma figures, following are some positive factors that I have considered:
- Pro forma yield is still above 10%, still one of the highest among the Reits.
- Still at significant discount to the NAV.
- Overhang over acquisition of 1A International Business Park will be cleared following the recapitalization.
- Gearing will be reduced significantly to 29%, which is a healthy figure.
- Assuming price is maintained above 0.200, buying and subscribing to the rights offers an immediate break even, perhaps even a profit.
The Negatives
The following are some negative factors:
- The asset value is still way smaller than the rest of the industrial Reits after the new acquisitions.
- The sponsor, AIMS Financial Group, is not the likes of Capitaland or Kepland, which are blue chip companies that are more established here.
- With reference to the CIRCULAR TO UNITHOLDERS on Nov 6, under section 11 on Financing, there are some agreements over the S$ Refinancing Facility that restricts the gearing to 38%. Following is the related section: "On 5 November 2009, the Trustee entered into a facility agreement with Standard Chartered Bank, CBA and NAB for a term loan of S$175.0 million.
The S$ Refinancing Facility, together with the proceeds from the Rights Issue, will be used to partially refinance the existing S$ Term Loan. The S$ Refinancing Facility is conditional, amongst others, on the completion of the AMP Capital Investment, the Cornerstone Investments, the acquisition of 1A IBP and the Rights Issue.
The Manager intends to draw down on the S$ Refinancing Facility after completion of the Rights Issue. The right to draw down the S$ Refinancing Facility is subject to MI-REIT’s Aggregate Leverage being less than 33.0%. The maximum allowable Aggregate Leverage of MI-REIT under the S$ Refinancing Facility is 38.0%. In addition, the minimum interest cover ratio of MI-REIT during the life of the S$ Refinancing Facility is 2.5 times.
The S$ Refinancing Facility will bear interest at the relevant Singapore dollar swap offer rate plus (a) a margin of 3.5% where leverage is less than 35.0% or (b) a margin of 4.5% where leverage is equal to or greater than 35.0%. Under the terms of the S$ Refinancing Facility, the Manager is required to hedge at least 80.0% of the floating rate exposure (which is equivalent to S$140.0 million). MI-REIT currently has in place an interest rate swap facility for a notional sum of S$100.0 million and will be entering into additional derivative financial instruments contracts such that it hedges at least 80% of the floating rate exposure. The S$ Refinancing Facility has a term of three years from the date of first drawdown and will be secured by the Existing Portfolio and 1A IBP." - There are some issues affecting the newly acquired AMP Capital Properties. Details in section 9.2 of the CIRCULAR TO UNITHOLDERS on Nov 6. Issues are relating to occupancy requirements, subletting approvals, and building approvals. Of course the manager has put in some clauses to protect the Reit in these acquisitions.
- The purchase price of 1A International Business Park (1A IBP) of S$90.0 million was agreed upon in 25 August 2007. Current valuation is S$73.0 million, according to the letter to unit holders on Nov 16.
After weighing some of the above factors, I have decided to go for the rights, subscribe for the rights shares and also the excess rights to lower the average price. The yield of most of the Reits have started to move lower with the rise in their prices, so the 10% yield, at a healthy gearing of 29%, is simply too hard to resist. But because of the risks involved, this will only form a very small part of my overall portfolio.
By the time I have decided to move in, the rights price has moved up to the 0.040 - 0.045 range. I got the rights on the last day of rights trading at 0.045.
Aftermath
Right after the trading of rights period, there seems to be strong support at the 0.200 level. The price has in fact moved up slowly to as high as 0.215. We will have to see what will happen to the share price after the rights shares have been issued.
Sunday, December 13, 2009
Commentary - Starhill Gallery in Dubai
Recently I happened to stumble upon this old news dated 17 April 2007 in the YTL community website: YTL Corp launches Starhill Gallery in Dubai
Key Points
Was unable to find any follow up news on this, so not sure whether the project is still ongoing. Anyway the last 2 key points mentioned above actually assures that YTL's involvement does not incur any capital expenditure. It is purely licensing out the Starhill brand name. So although Dubai is in the picture, this should not have much impact on YTL, and probably should not impact its subsidiaries at all.
Starhill Reit and Starhill Global Reit
One should not be confused by these 2 Reits of very similar name, both of which are being sponsored by YTL Corp. Starhill Reit is listed in Bursa Malaysia, while Starhill Global Reit is listed in SGX. Starhill Global Reit was originally Macquarie Prime REIT. It was renamed after YTL Corp bought a 26 per cent stake in the REIT, as well as a 50 per cent stake in Macquarie Prime REIT's manager, Macquarie Pacific Star Prime REIT Management in Oct 2008.
In 18 November 2009, YTL announced the restructuring of Starhill Reit and hotel portfolio under its control. The restructuring exercise will reposition Starhill REIT as a global hospitality REIT. This involves the disposal of its two retail properties, Starhill Gallery and its parcels in Lot 10 to Starhill Global REIT, followed by the injection of new hotel assets to put Starhill REIT on the path towards becoming a fully-fledged international hospitality REIT.
Key Points
- An agreement was signed by Pintar Projek, a subsidiary of YTL Corp, and ETA Star to launch Starhill Gallery in Dubai.
- Dubai's Starhill Gallery will be part of the US$410 million (RM1.4 billion) Starhill Towers & Gallery complex being developed by ETA Star.
- Pintar Projek is also the manager of Starhill REIT listed in Bursa Malaysia.
- ETA Star is a leading property developer in the UAE.
- Construction of the Starhill Towers & Gallery is scheduled for completion in the second quarter of 2010.
- Pintar Projek will provide brand management services to ETA Star in return for licensing fees and an annual brand management fee.
- There is no capital expenditure requirements for YTL Corp.
Was unable to find any follow up news on this, so not sure whether the project is still ongoing. Anyway the last 2 key points mentioned above actually assures that YTL's involvement does not incur any capital expenditure. It is purely licensing out the Starhill brand name. So although Dubai is in the picture, this should not have much impact on YTL, and probably should not impact its subsidiaries at all.
Starhill Reit and Starhill Global Reit
One should not be confused by these 2 Reits of very similar name, both of which are being sponsored by YTL Corp. Starhill Reit is listed in Bursa Malaysia, while Starhill Global Reit is listed in SGX. Starhill Global Reit was originally Macquarie Prime REIT. It was renamed after YTL Corp bought a 26 per cent stake in the REIT, as well as a 50 per cent stake in Macquarie Prime REIT's manager, Macquarie Pacific Star Prime REIT Management in Oct 2008.
In 18 November 2009, YTL announced the restructuring of Starhill Reit and hotel portfolio under its control. The restructuring exercise will reposition Starhill REIT as a global hospitality REIT. This involves the disposal of its two retail properties, Starhill Gallery and its parcels in Lot 10 to Starhill Global REIT, followed by the injection of new hotel assets to put Starhill REIT on the path towards becoming a fully-fledged international hospitality REIT.
Saturday, November 28, 2009
Commentary - The Dubai Crisis and Risk Aversion
I was rather shocked when I read the Straits Times headlines today about the Dubai Debt Crisis. I was not entirely surprised to see market react negatively, but was rather shock by the extent of sell-off in some market, especially Hong Kong. We have not seen a more than 1000 points drop in HSCI for quite sometime. Of course the drop in HSCI was probably linked to HSBC bank's large exposure to the middle east market. I was also shocked that some in the market has referred this as the "Financial Crisis Part II".
Of course some has argued that this is Dubai, and the USD80 billion is nothing compared to the losses during the Financial Crisis. While some has argued on the other hand that when the subprime crisis first surfaced in US, many have not believed it would lead to such extent of damage in Global financial systems and the economy.
The purpose of this posting is not to debate on whether the sell-down is overdone and we should make use of the opportunity to buy on dips, or whether there is going to be a big correction and we should turn towards risk aversion. Rather, as this is a blog about REITs, I will be touching on some of the possible things we can look out for if we want to assess the risk level of a particular REIT.
So what are the things to look out for if we want to assess how risky the REIT is?
Gearing
I have written something about gearing and gearing limit previously. REITs with high gearing, especially those very near the gearing limit, tend to be punished more by the market in times of crisis. Note also that low gearing does not mean the REIT is low risk as gearing is just one part of the picture. But high gearing is definitely link to high risk.
Short Term Debt vs Cash Level
Short term debt refers to debt that needs to be returned within one year. Cash level here refers to amount of cash or cash equivalent the REIT is holding. Comparison of these 2 figures is a good way to assess the risk level.
To find out short term debt, we can refer to the Aggregate amount of borrowings and debt securities section of the earnings report. Here we use the CMT Q3 2009 report for illustration:
For secured borrowings, the amount repayable within one year is S$125,000. For unsecured borrowings, the amount repayable within one year is S$315,000. So the total short term borrowings here is S$125,000 + S$315,000 = S$440,000.
The cash and cash equivalent can be found in the cash flow statement in the quarterly report. Again, using the CMT Q3 2009 report for illustration:
The last line of the cash flow statement will tell you the cash and cash equivalent at the end of the quarter, in this case it is S$363,736. If this figure is much less than the short term borrowing, it means that the REIT has to either refinance or raise equity via rights issue before the borrowing is due within a year. We know that in the time of crisis, both refinancing and equity raising are going to be difficult. Here we can also see that even if a REIT is low in gearing, if it has very low cash level and a very large short term borrowing, it will still run into serious problems in times of crisis.
Strength of the Sponsor
It will be advantageous for the REIT if it has a strong sponsor, whether in helping to source for refinancing or helping to support the equity raising directly by subscribing to the new shares. Sometimes the sponsor may also provide bridging loan directly to the REIT. For example, F&N Treasury provided a bridging loan to Frasers Commercial Trust earlier part of the year when its short term borrowing was due, and it has not come up with a sound recapitalization plan. If possible, we should also look at the financial status of the Sponsor, whether its cash level is able to support the REIT if there is really a need. For example, we know that Capitaland has its own rights issue to raise cash earlier this year. Recently, it has managed to raise some more cash through the listing of it subsidiary Capitamall Asia.
Sector
Currently the SREITs can be basically classified under the following sectors:
Hospitality, Office, Industrial, Retail, Healthcare.
In terms of risk level, usually the Hospitality sector will rank the highest, followed by Office and Industrial sectors, followed by Retail and Healthcare sectors.
Of course there may be other things to look into not mentioned here, and different investors may place emphasis in different things base on how they view the crisis. Some may even brush it off as a small blip. Anyway just to highlight again that this posting is not suggesting that this is going to be financial crisis part II, but rather it is just some suggestions on how to assess the risk level.
Of course some has argued that this is Dubai, and the USD80 billion is nothing compared to the losses during the Financial Crisis. While some has argued on the other hand that when the subprime crisis first surfaced in US, many have not believed it would lead to such extent of damage in Global financial systems and the economy.
The purpose of this posting is not to debate on whether the sell-down is overdone and we should make use of the opportunity to buy on dips, or whether there is going to be a big correction and we should turn towards risk aversion. Rather, as this is a blog about REITs, I will be touching on some of the possible things we can look out for if we want to assess the risk level of a particular REIT.
So what are the things to look out for if we want to assess how risky the REIT is?
Gearing
I have written something about gearing and gearing limit previously. REITs with high gearing, especially those very near the gearing limit, tend to be punished more by the market in times of crisis. Note also that low gearing does not mean the REIT is low risk as gearing is just one part of the picture. But high gearing is definitely link to high risk.
Short Term Debt vs Cash Level
Short term debt refers to debt that needs to be returned within one year. Cash level here refers to amount of cash or cash equivalent the REIT is holding. Comparison of these 2 figures is a good way to assess the risk level.
To find out short term debt, we can refer to the Aggregate amount of borrowings and debt securities section of the earnings report. Here we use the CMT Q3 2009 report for illustration:
For secured borrowings, the amount repayable within one year is S$125,000. For unsecured borrowings, the amount repayable within one year is S$315,000. So the total short term borrowings here is S$125,000 + S$315,000 = S$440,000.
The cash and cash equivalent can be found in the cash flow statement in the quarterly report. Again, using the CMT Q3 2009 report for illustration:
The last line of the cash flow statement will tell you the cash and cash equivalent at the end of the quarter, in this case it is S$363,736. If this figure is much less than the short term borrowing, it means that the REIT has to either refinance or raise equity via rights issue before the borrowing is due within a year. We know that in the time of crisis, both refinancing and equity raising are going to be difficult. Here we can also see that even if a REIT is low in gearing, if it has very low cash level and a very large short term borrowing, it will still run into serious problems in times of crisis.
Strength of the Sponsor
It will be advantageous for the REIT if it has a strong sponsor, whether in helping to source for refinancing or helping to support the equity raising directly by subscribing to the new shares. Sometimes the sponsor may also provide bridging loan directly to the REIT. For example, F&N Treasury provided a bridging loan to Frasers Commercial Trust earlier part of the year when its short term borrowing was due, and it has not come up with a sound recapitalization plan. If possible, we should also look at the financial status of the Sponsor, whether its cash level is able to support the REIT if there is really a need. For example, we know that Capitaland has its own rights issue to raise cash earlier this year. Recently, it has managed to raise some more cash through the listing of it subsidiary Capitamall Asia.
Sector
Currently the SREITs can be basically classified under the following sectors:
Hospitality, Office, Industrial, Retail, Healthcare.
In terms of risk level, usually the Hospitality sector will rank the highest, followed by Office and Industrial sectors, followed by Retail and Healthcare sectors.
Of course there may be other things to look into not mentioned here, and different investors may place emphasis in different things base on how they view the crisis. Some may even brush it off as a small blip. Anyway just to highlight again that this posting is not suggesting that this is going to be financial crisis part II, but rather it is just some suggestions on how to assess the risk level.
Tuesday, November 17, 2009
Commentary - MacArthur, Cambridge, and a joke
I read with interest the response of MI-REIT to CIT filed in SGX, in that MI-REIT was rather direct in finger pointing the current CEO of CITM, who was also the previous CEO of MI-REIT, as the cause of the major problems MI-REIT is currently facing. The root of the problem, according to the response, was because this previous CEO has decided to purchase the S$90.2 million property in International Business Park before securing any funding. This has actually reminded me of a joke I heard recently:
A new CEO was about to take over a company, and he asked the previous CEO for advice. The previous CEO handed him 3 letters numbered from 1 to 3. The new CEO was asked to open one letter, in sequence, each time the company faces big problems that cause the company share price to plunge deeply . So the new CEO took over the company, and all was well for the first 6 months. Then, problems started to surface, causing the share price to plunge deeply. Then he remembered the letters, and so he opened letter No. 1. The letter says "Blame the previous CEO". So the new CEO did accordly, and it really helped the share price to rebound, and all was well again.
After another 6 months, problems arise again, sending the share price all the way down. So the new CEO opened letter No. 2. The letter says "Reorganize". So he did accordingly, reorganizing all the departments he can find in the company. Again, it really helped the share price to rebound again.
Another 6 months passed by, and once again the share price plunges due to more problems. So the CEO opened letter No. 3. The letter says "Prepare another 3 letters" ...
In this MacArthur vs Cambridge saga, so far we have seen "Blame the previous CEO". If M&A really takes place, then we will see "Reorganize". How about "Prepare another 3 letters"?
A new CEO was about to take over a company, and he asked the previous CEO for advice. The previous CEO handed him 3 letters numbered from 1 to 3. The new CEO was asked to open one letter, in sequence, each time the company faces big problems that cause the company share price to plunge deeply . So the new CEO took over the company, and all was well for the first 6 months. Then, problems started to surface, causing the share price to plunge deeply. Then he remembered the letters, and so he opened letter No. 1. The letter says "Blame the previous CEO". So the new CEO did accordly, and it really helped the share price to rebound, and all was well again.
After another 6 months, problems arise again, sending the share price all the way down. So the new CEO opened letter No. 2. The letter says "Reorganize". So he did accordingly, reorganizing all the departments he can find in the company. Again, it really helped the share price to rebound again.
Another 6 months passed by, and once again the share price plunges due to more problems. So the CEO opened letter No. 3. The letter says "Prepare another 3 letters" ...
In this MacArthur vs Cambridge saga, so far we have seen "Blame the previous CEO". If M&A really takes place, then we will see "Reorganize". How about "Prepare another 3 letters"?
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