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Decided to make adjustments on the way I blog & share due to time constraints and other commitments. In the coming weeks you should see them. Short updates but more frequent & concise.

Sunday, March 24, 2013

Which are my MREIT picks for Year 2013?

From humble beginnings of RM300 million market seven year ago, Malaysia REIT industry now represents a total market capitalization of RM25 billion and it growing still (KLCC is coming in...) This investment vehicle provides investors with an opportunity to own property jewels that is otherwise very difficult for an individual investor to own in the Malaysian property landscape.

Starhill & BSDREIT
Stock Rating: OUTPERFORM (BUY)

Price: RM1.07 / RM1.83

Target price: RM1.17 / RM 1.83 
expected dividend yield of ~7.0% and 6.5% respectively with some share upside

Fundamentals: Long Term Outperform (5-year period)
Sentiment: Medium Term Bearish (6-month period)
Risk Level: Medium

**Outperform: Stock expected to do better than market return; has upside or cheap vs target price. Usually a buy call.
**Market perform: Stock expected to be on neutral, can be + - 3% to 5% either way; Usually a hold call.
**Underperform: Stock expected to do worse than market return; has downside or too expensive to buy vs target price. If fundamentals change a sell call.

Ya it's been awhile since I have these kind of pics :)
What is a Real Estate Investment Trust?
REIT is a company that owns and operates income-producing real estate which covers commercial real estate sector. REIT can also lend money directly or indirectly to other companies to finance acquisition of real estate properties. REIT gives an average investor the opportunity to invest in commercial estate by purchasing a stake in a portfolio that they would not otherwise be able to purchase on their own. These companies are then able to finance their operations by raising money from your money through sales of common stocks.

There are established guidelines in Malaysia for a company to qualify itself as a REIT. This comes from SC (Securities Commission Malaysia). Some of the more useful info as below:

  • Allow up to 70% foreign shareholding in REIT companies. Still need the 30% for Bumiputera quota.
  • REIT not allowed to acquire non-income generating real estates like vacant land or under construction real estates more than 10% of total asset value.
  • NO explicit requirement of minimum dividend payout ratio in guidelines BUT...
  • Tax exemption at REIT level provided that 90% if its income is distributed as dividend to shareholders.
The fourth guideline is attractive and I say attractive because all listed REITs in the Malaysia market has been dishing out 90% or more of its income as dividends since their listing. This is proven over a 7 year history! This is the reason why REITs are seen as a stable source of recurring dividends, amounting at least 4.5% and upwards to 8%. The dividend payout for a REIT must be high, higher than bonds 3.5% or FD rate ~4% to make it as an appeal to investors.

What I find most appealing is that REIT is viewed as bond-like instrument (because dishing out dividends) that is asset-backed! This simply means it provides investors a natural hedge against inflation (because property prices/rentals go up following inflation too). This is very much different from bonds/FD which are backed by physical money (your money doesn't grow unless you get dividends). Can understand haha?

So how does one start jumping in? Wait laaaa. First you need to determine the specialization of the REIT. I made it easier as below:

  • Pavilion: Pavilion KL Mall & Tower, Fah88 and USJ General (under development)
  • IGB: The Gardens and Midvalley KL
  • Sunway: Sunway shopping malls, Sunway buildings and SunCity Ipoh Hypermarket
  • CMMT: Gurney Plaze, Sungai Wang, The Mines and East Coast Mall
  • Axis: 29 over properties; >50% leased to logistics, services and financial services 
  • Starhill: Sponsor YTL, primarily hotel assets around Msia and global presence Jpn/Aussie
  • Boustread: 12 oil palm estates, profit sharing based on fixed rental & perf based sharing 
  • Alaqar: World's first islamic healthcare REIT, KPJ-Healthcare sponsor, 25 buildings
  • Amfirst: Ambank buildings, The Summit, Prima 9 and Prima 10
  • Hektar: Subang Parade, Mahkota Parade (Melaka), Wetex Parade & Classic Hotel (Johor)
  • UOA: UOA Centre, II, Daman and Wismas + Menara UOA Bangsar
  • AmanahRaya: Govt-owned company, diverse assets e.g. industrial, segi and some commercial
  • Quill Capita: Quill buildings 1-10, part of plaza mon't kiara KL and tesco Penang
  • Tower: HP Towers, Menara HLA, Menara ING
  • Atrium: Warehouse and storage; DHL, SAF-Holland, Century, CEVA and Unilever, 100%.
I am not going to share what to look out for in REITs as I have posted previously in back in June 2010: Investing in Real Estate: Real Estate Investment Trusts

What I'm going to do is simple
Share my thoughts on each REITs & talk about it's NAV + Dividend Yield. In theory, the quoted share price should not stray too far from its NAV (good read here). 

"We find that the level of premium to NAV is positively related to REIT size (market capitalization), debt to equity ratio and the level of REIT liquidity as measured by the relative effective spread.  Changes in premiums to NAV over time have a strong common element across REITs, which is related to but not entirely explained by a common element in REIT liquidity." quoted from the research article.

I will talk about those that I will avoid investing:
As you can see the 5 of the top 4 are all malls and you have to pay a premium due to the share price-to-NAV. IMO the valuations cannot be justified any further without killing the dividend yield as their DY is roughly 5% now.

Alaqar healthcare has a debt-to-equity ratio of nearly 1, futher expansion of the REIT is limited, and yet is selling at a premium now. Hektar is too small for a mall player and has a high DE ratio of 0.76 too. Furthermore its DY is already 5% and further valuations cannot be justified.

Offices REITs have nice dividend yield >6.5% to 8%. However the risk of oversupply in office space in KL is looming. This is further compounded by our Jib Goh's plan to build the Tun Razak Exchange, adding more empty space to empty space, apa ini?. 

So what's left?
Starhill: Restructuring completed. It has DE ratio of only 0.12. Due to the restructuring of its portfolio by selling all its mall assets and choosing to focus on hospitality, its profits went down. The attractive thing about this REIT is it is going global. It has acquired hotel in Japan and recently from Australia. And I actually like companies that don't just do domestic. Expected yield >7.0%! with some upside on share price. More news: Attractive yields from Starhill

Boustead: It also has a low DE ratio of 0.16. Recent bad news on low CPO prices is a very good opportunity to accumulate its shares. Forget Europe whose banning palm oil, furthermore their economy is in shambles  They are small compared to markets like China and India whose growing appetite for palm oil is not waning owing to a increasing middle class. Expected yield >6.5%! with neutral stance on share price, trading sideways most likely. More news: Revaluation boost for BSDREIT

These two command the place of 7 and 8 of the biggest REITs in Malaysia as such have decent liquidity for trading. Also as you can see I place bad news as an opportune time to accumulate more of these hidden gems!

Some of you know I hold BSDREIT shares for some time and you may wonder how am I doing since the stock went from a high of 2.18 to 1.83 now. Let's do some math: I bought at RM1.32 and divs I have accumulated so far is 3.8sen (2010) + 10.2sen (2011) + 12.5sen (2012) + 5.5 sen (2013) = RM0.32. In short I have gained RM0.83sen or 63% profit. That's how much I've made in 2.5 years. Why should I sell lol, is palm oil going away? Key note here: In REITs look for dividend yields first, capital gain is secondary (bonus laa). When you buy make sure you buy at the right time, if you were to buy at high price you risk wiping out your dividend gains from capital loss. Then you panic and sell and you will say REITs no good. Actually they are good, just not all are good buys.

Disclaimer: The reports, analysis and recommendations in this blog are solely my personal views. I do not link to any investment body or company. As such, I will not be responsible of any of your investment decision. Consult your investment adviser or come to your own conclusions before making any investment decision.


XiuHa said...

what do you think about the debt ratio for these both REIT??

Intelligent Investor said...

It is stated above :)

Starhill at 0.12 and BSDReit at 0.16. In comparison to the rest of the gang, both of them in the above has the lowest ratio.

This simply means debt is not used as a leverage for higher revenue hence they are more sustainable.

XiuHa said...

What formula you use to calculate your debt ratio? I use debt to asset which the debt = 50% of asset.
Hence I believe Stareit is going to raise fund from investors soon

Intelligent Investor said...

Interest bearing debt/Shareholder equity is my formula. However I am using latest FY report of june 2012 hence the 0.12 value. Due to more recent borrowings to fund overseas expansion in Aussie, the gearing is at 1 now. This means the net gearing is about 50%, the maximum allowable by REIT. It cannot raise funds anymore. And the effect of the acquisition will be felt in June reporting and full effect by YR14.

The debt will have to be repaid in bullet payment by Nov 2017. This would probably happen via selloff of one of its assets.

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