Malaysian REITs in 2015 (Some Opportunities Exist)

Source: Dynaquest SPG, Kenanga Research, MIDF Research.

Potential Upside/Downside = Current Price/Net Asset Value
OP = OutPerform (more upside potential than downside risk)
UP = UnderPerform (more downside risk than upside potential)
MP = Market Perform (limited upside)

***My order of evaluation: Yield > Prospects > Discount/Premium Rate. Below are key highlights that I extracted from various sources as indicated above. And I generally ignore smaller REITs due to them being too illiquid & boring (ARREIT is an exception, covering it for a friend).

KLCCP Stapled Group (Diversified, Market Cap: RM12.583 billion)
Gotten shareholder's approval to raise funds of RM1.2b supposedly for potential asset acquisitions within KL's Golden Triangle (Suria KLCC only 60% owned, KLCC Convention Centre, Traders Hotel and Impiana Hotel. A key positive factor is PETRONAS being sole lessee of two key assets (Twin Tower & Menara 3 Petronas) under triple net lease arrangement for 15 years providing very good stability of income. OP because of acquisition prospects & triple net lease arrangement.
Kenanga Research RESULTS NOTE - KLCC STAPLED GROUP - 06 MAY 2015


Pavilion REIT (Malls, Market Cap: RM4.55 billion)
Da Men is expected to be completed in 3Q15 and Pavilion Extension done by mid FY16. The management still views the outlook for 2015 to be challenging amid weaker consumer sentiment due to GST and significant increase in the supply of new retail space in the Klang Valley hence MP rating (mall REIT usually commands a premium based on my 5 years data)
Kenanga Research RESULTS NOTE - KLCC STAPLED GROUP - 06 MAY 2015


IGB REIT (Malls, Market Cap: RM4.59 billion)
Owner of Mid Valley Megamall & The Gardens Mall. IGBREIT is unlikely to make any acquisitions in the near term despite their low gearing level of 0.32x. MP rating due to GST and retail space oversupply (mall REIT usually commands a premium based on my 5 years data)
Kenanga Research RESULTS NOTE - 29 APRIL 2015


Sunway REIT (Diversifed, Market Cap: RM4.81 billion)
Sunway Putra Mall (SPM)'s official reopening (refurbishment) with at least 50% occupancy -> 70% by Aug15. Sunway Putra Hotel (SPH) refurbishment almost completed while refurbishment for Sunway Putra Tower (SPT) is still ongoing and is expected to be fully completed by 4QCY15. Acquisition of Sunway Hotel Georgetown was completed on January 2015. MP rating due to GST (mall REIT usually commands a premium based on my 5 years data)
Kenanga Research COMPANY UPDATE - SUNWAY REIT - 16 JUNE 2015


CapitaMallsMalaysiaTrust (Malls, Market Cap: RM2.49 billion)
The acquisition of Tropicana City Mall (TCM) and Tropicana Office Tower (TCOT) is expected to complete by 3Q15. Earnings to be reflected in FY16. Strong income growth from East Coast Mall is expected to cushion the negative impact from the MRT work discruptions to Sungei Wang Plaza. Proposal for placement of new units to raise up to RM395.5m to fund its purchase of both TCM and TCOT (which have been priced at RM565.0m) is ongoing. MP rating due to GST (mall REIT usually commands a premium based on my 5 years data)
MIDF Research CMMT - DECENT 1Q15 RESULT


Axis REIT (Diversified, Market Cap: RM1.94 billion)
AXREIT has completed the acquisition of three assets, namely; (i) Axis Shah Alam DC3, (ii) Axis MRO Hub, and (iii) Axis Shah Alam DC2, and has already signed the SPA for the Industrial facility in Johor. However, the Prai asset is the only remaining asset yet to be acquired, and the due diligence is expected to be completed in 2Q15. Dividend payout increased in CY14 largely due to gains arising from disposal of Axis Plaza, this will not repeat in CY15. AXREIT also announced a 1:2 share split on 3rd March 2015, which is pending approval from SC, and to be followed by approval from unitholders. UP rating due to high premium rate leading to low yield. Way below the average REIT yield figure.
Kenanga Research RESULTS NOTE - AXIS REIT - 21 APRIL 2015


YTL Hospitality REIT (Tourism, Market Cap: RM1.35 billion)
Trust's property asset value of ~RM 3.0 billion comprising hospitality assets located in Malaysia, Japan and Australia and has more than 50% of investment in properties (by asset value) located abroad. Proposed increased in fund size from 1.324 billion units up to max of 2.125 billion units.
OP due to prospects of better earnings (weaker currency from all three countries good for tourism) and providing the best yield among all REITs.


AmanahRaya REIT (Diversified, Market Cap: RM510 million)
Earnings will be surpressed due to non-payment of rent by SilverBird Factory (11% of gross rental income) and shortfall of rental income from Wisma Amanah Raya Bhd after CIMB-IB tenancy ended in 2013. Acquired Wisma Comcorp for RM30 m in Dec 2014. Better to err on the side of caution until more information on earnings is clear. For CY15 it will be boosted by the disposal of Kontena National Distribution Centre 11 for RM34 million. Maintain MP due to uncertainty, however the good yield and discount more than offset the uncertainty.

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.

Malaysia REITs - Looking For My 2nd Durian Runtuh

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.

You may look at my track record of BSDREIT (I highly suggest you read more of this to understand REITs) which has since went private. Here I begin my launchpad for a second time investing into a REIT. Why now? Yields have begun to look juicy and I desperately want to diversify more.

Take note of Market Capitalization (bigger is better), NAV/price (higher is better) & Premium/Discount Rate (-ve is better)

My Thoughts:
A bigger REIT has the advantage of providing ample liquidity during trading. Malls are especially big in Malaysia and diversified asset type coming in second.

Malls and retail REITs have low NAV/Price ratio (less than 1) leading to huge premium rates. As you can see the, 5 of the top 4 are all malls and you have to pay a premium due to the NAV-to-share price. They are too expensive and the valuations is hard to justify further without killing the already very low yield of ~5%-6%.

It is important to note that REITs are supposed to generate a higher returns (due to the higher risk factor) in terms of yield % than Fixed Deposits (3.5%) or Bonds (~4-5%). Because of this no big investor (fund managers) will pour more money into an already overvalued REIT that will lead to even lower yields.

As such I will put focus into drilling down into YTL, AmanahRaya and lastly AmFirst in that order. YTL is particularly interesting: it is averagely sized, has superb yield of 10% and is slightly on a discount now. Stay tuned!

Time To Revisit mREITS (Possible Opportunity in 2014)

I finally received my 'durian runtuh' (windfall) after investing in BSDREIT since 25th August 2010 @ the purchase price of RM1.32. I have actually thoroughly researched mREITs several times and posted them:
06.2010: Investing in Real Estate: Real Estate Investment Trusts
07.2010: Malaysian REITs (Part 1)
08.2010: Malaysian REITs (Part 2 - Updated)
08.2010: MREIT: Al-Hadharah Boustead
03.2013: Which are my MREIT picks for Year 2013?


In July 2013, Boustead Holdings Sdn Bhd announced that it is going to take its REIT unit private, merge it with its plantations unit and then list the unit (new IPO), seeking economies of scale at a time when crude palm oil prices are falling. It was taken private at the price of RM2.10.
Annoucement 1: "We intend to consolidate our plantation assets under Boustead Plantations, while achieving economies of scale and business synergies in our operation."

Announcement 2: "The selective unit redemption by BREIT of all undivided interest in BREIT (“Units”) that are held by all unitholders of BREIT, other than BPB (“Entitled Unitholders of BREIT”) for RM1.94 for each Unit (“SUR Exercise”); and the special dividend of RM0.16 for each Unit that is held by the unitholders of BREIT (including BPB) as a condition to the SUR Exercise as set out in Section 1.3 (ii) above (“Special Dividend”)."

Hence a total return of almost 65% including cumulative dividends over the years. From Aboi's portfolio that's RM9000->RM15000. A very handsome profit indeed after holding it for 3 years. As such it is time to revisit this sector once again. You may read this article as well: Investment REIT attraction for long-term investors. As early preparation, a week ago I have started making two tables; [1] to track mREITs price movements [2] to monitor target price when it hits good yield.

[1] NextView customized Portfolio view - I take a look at this when I'm free

[2] i3Investor customized Portfolio view - Once the Price Diff column hits even point or minus, we reach the targeted good yield (7.5% to 8% depending on which REIT)

I have not come into any conclusion as to which mREIT I will be targeting next partly because it takes time and more importantly there is still room (one to two quarters) before opportunity kicks in (due to economies; long grandfather story), I will leave that for Part 2 and it is going to involve a decent amount of calculations and ratios so stay tuned :)

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!

P.S.

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.

MREIT: Al-Hadharah Boustead

UOA Real Estate Investment Trust

There was a mistake in my Part 2 where I was looking at UOA Holdings instead of the REIT :( Was a big mistake but luckily I caught it. After dwelling some thoughts, Boustead remains my only choice. I have updated Part 2 with corrected ratios for UOA, do read it again. 

Bear with the corporate structure. UOA REIT sponsor is UOA Holdings Group which is involved in commercial and residential property development, construction and investment. And then you UOA Holdings who is a subsidiary of UOA which is incorporated in Australia and listed on ASX (aussie stock exchange). The UOA group itself has vast experience & expertise in Malaysia real estate since 1991.

Botanica.CT, Balik Pulau, Penang

Al-Hadharah Boustead

From the name above we know that the sponsor is Boustead Group and the Al-Hadharah makes it an Islamic REIT. It is a strong dividend yielding REIT (~8%) whose primary source of revenue and profitability is driven by plantation assets and CPO prices. How? 

The major revenue source ~75%. BSDReit assets are leased back to Boustead Group for 3-year renewable tenancy with a cumulative period of up to 30 years! Fixed rental of RM41.3 million is locked for the 1st tenancy and can be adjusted upward as applicable with injection of new assets. The fixed rental review is based on historical, prevailing and expected future CPO prices, cost of production, extraction rates and yield per hectare. Boustead group has 97,700 ha of which 16,400 ha is being held by BSDReit. Boustead if not mistaken is the 5th largest plantation company by land size. It is also a government-linked company. Unco Tan's iCap holds Boustead shares as well due to his stand that their assets are severely undervalued & have much potential to grow.

Another 25% comes from the second portion which is CPO price. BSDReit enjoys a 50:50 annual profit sharing of actual CPO (crude palm oil) and FFB (fresh fruit bunch) prices realised during the year which is above the reference price of CPO. BSDReit has 10 estates in which 8 has a reference price of RM1500/MT and the other 2 at reference price of RM2000/MT. With prices of palm oil in the uptrend for the last 25 years because there is increasing demand, there is minimal downside risk I would say. Right now Aug'10 it stands at RM2650/MT.

The closest competitor of palm oil is soybean oil which has not been picking up as fast given palm oil's discounted price to other edible oils and is highly sought for biodiesel. Palm oil has other advantages as well: (1) Highest yield per hectare and (2) Lowest cost of production for vegetable oils. Demand for CPO is driven by health preferences related to transfats, renewable fuel and energy source and for food in emerging markets like China and India with huge population base.

What are the risks (by order)?
Malaysia is no longer world's number one CPO producer & exporter. It has recently lost to Indonesia. Indon could very well be future CPO price benchmarker by setting up new CPO contracts to rival our Bursa Derivatives Exchange CPO (FCPO) which is currently the world price benchmark for CPO. This means we might lose out in attractiveness among international investors and fund managers.

Another problem is scarcity of suitable land in Malaysia. We are running out of land unless Sabah and Sarawak is more developed. Research now is focused on producing better yielding clones such as Sime Darby and Genting Plantations on cutting-edge genome research which may hopefully provide our industry with new breakthroughs.

The Plantation sector in Malaysia is estimated to employ as much as 570,000 workers. With the local workforce demanding higher wages compared to foreign workers there is a problem of inadequate manpower. Further more, they are certain quarters who want to limit the number of cheap foreign labour into Malaysia. Things are quite uncertain in this area particularly the government's long term strategy.

Adverse weather can impact CPO production such as the La Nina wet weather causing floods in plantations, hampering collection activities and wet conditions impede growth of palm flowers. La Nina happens during November and December where stock can be affected and probably see price soaring slightly. There is also the El Nino.

Overall over the long-term, palm oil consumption is sure to grow hence good prospects but the question is who will hold the crown, Indonesia or Malaysia?

Read this for more info: Trends & Potentials of Malaysia's Plantation Sector

In a Nutshell

BSDReit has very good financial health, lowly geared and has a lot of room to leverage up for future asset expansions perhaps from the Group and to increase its future earnings. Palm oil industry is relatively recession proof as 80% of the oil are used as basic food needs and is something i looked upon as sustainable business.

One major drawback of REITs is their inability to benefit greatly from capital gain, unlike real estate. Investors can do without taking on the risk of mortgage payments, unscrupulous tenants and rising tax rates. However, less risk obviously comes with less reward. Again I would like to stress that REIT and real estate is a totally different playing field.

• For someone who wants to have more control of their assets and is willing to improve their value, investing in residential real estate can be a good choice.
• For someone looking for passive real estate investment, with the added benefits of portfolio diversification and liquidity, a REIT is a good option to consider.

For me, I will purchase REITs as part of a balanced portfolio (10% of my total portfolio). It is important to purchase a REIT at a discounted price as a lower invested price will translate into higher dividend yield automatically. Note that BSDReit stakeholders are Boustead Properties (60%), LTAT (14%), Tabung Haji (10%), thus only 16% free float. It would be hard to get a lot of discount on its fair value unless there is another big meltdown like the 2009 one. Too bad I missed the boat in 2009. BSDReit currently trading at 3% premium to its NAV/share.

Until I have enough capital to enter the real estate market till next time... for now it is just learning and observing other people's mistake :) This ends my REIT research since it started in late June. I am still eye-ing news on Starhill very closely. Also there is no education based REIT yet in Malaysia, perhaps we will see one in future.

Malaysian REITs (Part 2 - Updated)

We have seen how I filtered through 14 mREITs in Part 1. If you need a recall the link is here. There are like 40 financial ratios that I have seen but only a handful are being used and some on a need basis. I will not go through the formula abo you sure blur =p 


Debt Ratios
These are the most important ratios in my opinion. Do you agree if I say that debt ratios in short are equivalent to the company's & shareholders' financial risk since the greater amount of debts, the higher the risk of getting into bankruptcy. This is the sole reason why I use debt ratios for screening. Even if the company is generating enough cash to service its debt, growth & expansion will be hampered in a way as well.

• Gearing Ratio: the amount of leverage being used by a company. More leverage simply means more borrowings. In general a debt ratio of more than 0.5 is considered high, anything above 1.0 is very high. In Part 1 I used borrowings only, this time I use total liabilities to be more accurate.
• Debt-Equity Ratio: shows a different viewpoint of leverage being used by a company. Shows you how much money the creditors (money lender) have vs the company's equity holders (like you and me). In general D/E Ratio of more than 0.5 is considered high, anything above 1.0 is very high.
• Interest Coverage Ratio: shows how easily a company can pay interest expenses on outstanding debts. Creditors have high comfort level if the company is able to service debt interest payments. Start to question or doubt a company that has debts with interest coverage ratio of 2.0 or lower.

Armed with knowledge, let's relook at the debt ratios of the REITs, this time it has been expanded to include the other two more ratios.

Starhill, Boustead, UOA and PNB have very little debts with strong revenue to service them. You then have Sunway, Tower and Atrium in the sweet spot while the rest showing signs of increasing struggle in servicing debts through profits over the last 3 years. I would certainly avoid Hektar and KPJ, both are certainly aggressive in their expansion but one must know how to control the pace of it. 


Liquidity Ratios
These ratios attempt to measure the company's ability to pay off its short-term obligations such as debt, operating expenses and etc. Better liquidity will mean that a company is able to service its debts that are coming due in the near future and at the same time able to fund its ongoing operations with ease. In general we can use three ratios and each differs by type of assets used in the calculation.

• Current Ratio: as simple as getting the proportion of current assets available over current liabilities. Note the word "current" which means short-term (one year). This ratio is the used most extensively by analysts but it is by no means able to provide a clear picture to investors. Simply because not all assets are as liquid as compared to cash.
• Quick Ratio: a.k.a acid-test ratio further refines the current ratio by using most liquid current assets over current liabilities. Only differs by excluding inventory or any other assets that are deemed difficult to turn into cash.
• Cash Ratio: only taking into account current assets like cash, cash equivalent or invested funds over current liabilities. It is the most stringent and conservative of all three liquidity ratios. I would personally favour quick ratio as a balanced ratio.

Now let's check out the liquidity ratios of the REITs, previously I just added a column to show you the amount of current assets that has one year liquidity. This time we compare the ratios, this will be interesting.

In REITs, liquidity are mainly used for asset maintenance & other short term obligations while debts are used for asset acquisition. UOA is a special case, they do sales of properties as well and that is considered as inventory thus a big difference between current ratio to quick ratio, nevertheless I took current ratio because property development is part of their core business. Boustead is another unique one, they have a big portion of receivables because it is a performance-based profit sharing from the estates, dependent on the planted commodity prices. Therefore their quick ratio vs cash ratio varies a lot. It is fair to take quick ratio. If the company generates far enough revenue with respect to its interest payment (look at int cvg ratio in debt section), to me liquidity is not a problem for them. See Hektar, high leverage and low liqudity, scary isn't it? 


Profitability Indicator Ratios
Give investors a good picture of how well the company is utilizing its resources in generating profit and increasing shareholder value. A company that has long-term and sustainable profitability will ensure its survivability & determine how much returns the shareholders have. In short it tells you how much hard work is your money working for you :)

• Return On Assets: indicates how profitable a company is relative to its total assets. The higher the return, the more efficient the management is in utilizing its asset base.
• Return On Equity: indicates how much the shareholders earned for their investment in the company. The higher the return, the more efficient the management is in utilizing its equity base and results in better returns for investors.
• Return On Capital Employed: indicates a company's ability to generate returns from its available capital base. This is more comprehensive as it gauges management's ability to generate earnings based on company's total pool of capital.

The second ratio, ROE is widely used by analyst but it does have a profound weakness. A company with more debts would translate into smaller equity base and thus pushing up the ROE ratio higher. Very misleading as the profitability comes with a price which is a lot more debts! So it is better to use ROCE (the last ratio) vs ROE. Why I never use ROCE in my previous stock reviews is simply because the companies I chose doesn't even have debts :) But REIT is a different scenario. If you see that ROCE differs a lot from ROE it simply means the profits come at the cost of more debts. In the end, I find that only Starhill, Boustead and PNB have good profitability ratios. Tower and UOA seems OK too. 


Investment Valuation Ratios
The most anticipated part by most investors, they are used to estimate the attractiveness of an investment and to get an idea of its valuation. For REITs the terms and jargons are different than that of normal equities. Below are the valuation ratios that can help us determine where we park our money.

• Price/Adjusted Funds From Operations: FFO is net income which excludes depreciation unlike normal stocks. "Adjusted" means it takes into account capital expenditures required to maintain the existing portfolio of properties. Much like normal PE ratio for stocks, everyone should avoid buying too high multiple for Price/AFFO.
• Dividend Yield: REITs are suitable as income generator and thus as an income investor, this yield number matters a lot as a valuation measurement.
• Dividend Payout Ratio: indicator of how well earnings support the dividend payment. We should expect at least 90% payout ratio.
• Net Asset Value/Share: an expression that represents a company's value per share. Supply and demand of the market can push stock price above or below the NAV per share of a company.
• Premium/Discount Rate: the rate at which the company's value with respect to NAV per share price. Plus denotes overvalued (premium) while minus means undervalued (discount).

 

Tower and PNB are trading at a big discount currently with Tower having lower Price/AFFO ratio. UOA is interesting at low ratio. because rental income is not their only source, they do property development and sales thus can be excluded in comparison to the rest. There is limited data on the just listed Sunway and CapitaMalls so there was no conclusion to be made. Boustead is there again with low ratio compared to the industry average.

Conclusion

1. The big players Sunway & CapitaMalls has just been listed and have little convincing data apart from "textbook" prospectus. Both have some leverage on debt and it would be interesting to see how they perform in the coming years.
2. Starhill is in the midst of being repositioned as a hospitality REIT so what I am doing now is a waste of time LOL, we need to observe their new strategy in coming years. We will see, for now they are doing what they do pretty well. 
3. There are REITs which are in the neutral ground a.k.a in unforeseeable future. It includes AmFirst, Axis, Quill Capita & AmanahRaya. They have higher leverage but with decent earnings to service them for years to come. Room for future expansion will be tight for them unless they dispose some of their assets.
4. Tower, Atrium and UOA are more favorable but they are very small in size. Can see income here but growth is slow.
5. KPJ is overvalued and overhyped. I would also avoid Hektar. PNB is boring, really boring. The big discount is probably because investors are not even interested at all.
6. Boustead and UOA is the only choice I will make. Thus I will have a short writeup on it soon. I really do like Starhill but because of the repositioning it is difficult to see what will happen. I will continue to take note of Sunway, CapitaMalls and Starhill and perhaps might invest in them in the future. The rest they say is history.

Malaysian REITs (Part 1)

Remember that I mentioned we first need to ask ourselves what is your investment strategy, financial goals and the risk we are willing to take for mREITs. You can recap it here: Investing in Real Estate: Real Estate Investment Trusts.

The concept of REIT is similar to Unit Trusts, they will invest, manage and distribute rental as dividends back to the investors, like you and me. REITs are traded in Bursa Malaysia so it makes it easy to buy and sell just like a normal equity. REITs are not new to the world for they have been in many other developed countries for decades providing steady fixed income.

The average returns for REIT in a developed market is around 3%-5% yield BUT in Malaysia it is still in the infant stages as our nation's property values are still a gap behind those of developed countries. Perhaps it will take 15 years to become mature. Let's compare our REIT market capitalization to other nations:

• Malaysia REITs: USD$4.6 billion (year 2010)
• Hong Kong REITs: USD$8.8 billion (year 2007)
• Singapore REITs: USD$22 billiob (year 2007)

You can say that we are in a transition period from a developing country to be a developed country and this happens to be an opportunity with attractive yield rates of 6.5% to 8.5%. REITs do offer a good platform for long term investment, properties are hard tangible assets which their values will never go down to absolute zero. People like to see returns vs risks so let me put it in a simple flow chart from highest to lowest:

Returns: Equity > mREITs > Bonds > Fixed Deposit

Risks: Equity > Bonds > mREITs > Fixed Deposit

*This is strictly my opinion & solely on Malaysian REITs

Before putting our hard earned money to work, there is a screening process to be performed. One thing to be learn is that during the financial crisis in the US there were a lot of US and Australian REITs that have lost a lot of their value due to the buying of over of inflated assets using cheap loans. Using this key lesson I must say that a REIT has to be both income-safe and also capital value-safe.

Below is a summary of all fourteen mREITs listed in Bursa Malaysia. Note that I have screened out five for further analysis in Part 2.

REIT Specialization & Example

REIT Portfolio Composition

REIT DY & Debt Ratio

Sunway REIT www.sunwayreit.com Being the biggest matters as its large size will give it greater transparency to local and foreign investors from large funds. It has the second highest free float amongst all other mREITs of ~48% offering liquidity for investors which can spur interest. Bandar Sunway township is still growing with high population traffic flow from crowd puller Sunway Pyramid. Looking at its books, it has low gearing ratio with sufficient liquidity. Read here for more info (very in depth analysis by another blogger). 

CapitaMalls Malaysia Trust www.capitamallsmalaysia.com Largest pure-play shopping mall REIT in Malaysia which is sponsored by CapitaMalls Asia, the leading integrated shopping mall owner, developer and manager in the region and is a subsidiary of Singapore-listed CapitaLand. It is able to leverage upon the parent company who has a good track record in managing REITs. It has highest free float amongst all ~58%. Among two REIT giants, CapitaMalls books don't look that good & already thinking of more acquisitions. 

Starhill REIT http://www.starhillreit.com/ People call it the six-star REIT having efficiently run their assets and ensure they are well maintained. It is a property trust controlled by diversified firm YTL Corp Bhd and has a free float of 49%. It is to be repositioned as a global hospitality REIT with proposed disposal of Lot 10 & Starhill to SG counterpart while it will be injected with world-renowned luxury Pangkor Laut, Tanjong Jara and Cameron Highland resorts plus heritage hotels such as The Majestic Malacca and business hotels known as Vistana chains in KL, Kuantan & PG. Its low gearing and ample assets does provide capability for more acquisitions. 

AmFIRST REIT http://www.amfirstreit.com.my/ Performance driven mainly by expansion of major tenant AmBank Group while it has recently tried to diversify through retail via The Summit Subang USJ & into hospitality via Summit Hotel. This REIT does not offer anything spectacular & has some amount of gearing. 

AL-AQAR KPJ REIT http://www.alaqarkpjreit.com.my/ The KPJ hospital group has a niche market and is outside the normal REIT portfolio. It gets net rent from hospital operators which are run by dedicated professionals with as large as 19 hospitals under its belt. They will need to balance dividend yields to keep investor's interest depending on market conditions. I for one, is not attracted due to its current gearing ratio. 

AXIS REIT http://www.axis-reit.com.my/ Islamic compliant REIT focusing on office & industrial estates. Looking for the acquisitions of new logistics warehouses & retail warehousing in Johor plus a new venture into office building in Cyberjaya. Fresh capital will be raised from proposed placement of new units instead of further borrowings. 

AL-HADHARAH BOUSTEAD REIT http://www.al-hadharahboustead.com.my/ First in the world to raise funds for plantation. Malaysia offers world-class palm oil companies & infrastructure and is a bee hive for the plantation sector. Plantations have a life span of 25 years before replanting, thus acquisition of new land is key (though Malaysia is running out of plantable land) to maintain future dividend yields and investor interest. With low gearing, raising finance is not a problem. I have always favoured plantation related investments. 

QUILL CAPITA TRUST http://www.qct.com.my/ Run by a joint venture between Quill, a Malaysian project developer and CapitaLand Singapore. It has 100% tenancy and occupancy of its buildings. Like CapitaMalls, it is able to leverage upon its partner who has a good track record in managing REITs. Its gearing is much better than CapitaMalls but has a free float of only 40%. I like it because it has a well balanced portfolio distribution combined with a good mix of local and foreign tenants & still allow room for more acquisitions. 

HEKTAR REIT http://www.hektarreit.com/ Retail-centric REIT and has a strategic partner named Fraser Centrepoint, a Singapore-based REIT manager who is an aggressive investor. Has the highest gearing among all REITs and I see nothing outstanding in their future pipeline. 

AMANAHRAYA REIT http://www.arrm.com.my/ Trust listed by Amanah Raya Berhad, a corporation wholly owned by the government of Malaysia. Well diversified throughout industrial, educational, commercial and hospitality sectors. Being Malaysia's premier trustee company they would be looking at sustaining competitive dividends for investors and avoid riskier opportunities. Just a decent & stable REIT. 

TOWER REIT http://www.tower-reit.com.my/ Has some similarity to AmFIRST REIT, performance is mainly driven by retention of major tenants; HP and ING & to perform asset enhancement. This REIT does not offer anything spectacular except that it has low gearing. 

UOA REIT http://www.uoareit.com.my/ Has a status of being a pre-eminent developer & commercial landlord in Malaysia. It is extremely good at what it does best which is to put focus on modern & pleasant looking office buildings with standard designs. It has a mega project known as Bangsar South City (MSC status granted) & has plans to further develop the area depending on market sentiment. The bulk of revenue comes from sales & but they also have rental income. 

ATRIUM REIT http://www.atriumreit.com.my/ Focused portfolio on logistics for industrial estates and its portfolio is 100% leased to multi-national corporations which I find lacking in diversification. 

AMANAH HARTA TANAH PNB http://www.pnb.com.my/ Don't bother, it is the most boring. They are currently seeking RM65 million in revolving credit to upgrade and refurbish Plaza VADS, that's all really. I rather park my money in AmanahRaya REIT than this.

Now you would ask me why I pick those 5 only. It comes back to the three questions & well, everyone has their own answers. What is yours? 

• What is my investment strategy? Income (dividend) and growth (capital gain). mREITs offer exposure to commercial assets with huge potential and a suitable time now as interest rates are low and high yields. Opportunity! 
• Financial goals? Fixed income allocation to provide 6% to 8% returns per annum. REITs fit perfectly. My fixed income portfolio could do some diversification apart from just investing in mixed assets fund (70% bonds & 30% equity). 
• The risk I am willing to take? REIT to have low or reasonable gearing, the call to buy when share price is at a discount to its NAV. REIT also must have or developing what I call trophy assets (Boustead is an exception here) and have a clear & focused strategy. 

Should you invest in REITs? 

Certainly Yes! (unless you are a short term investor & have appetite for higher returns). REITs are not stocks, they are traded just like stocks but they have a totally different risk profile. With REITs your income comes from rental streams where tenants are locked into long leases. This is different than owning a stock like IOI Corp where you are exposed to business risks because it is trying to run a palm oil plantation (Boustead REIT is an exception here). I'm sure everyone prefers to collect rent over operating a business. I am looking to select two REITs for my portfolio so the "Finals" we will held in Part 2 :) Until then sayonara till we meet again...

Investing in Real Estate: Real Estate Investment Trusts

Grab a drink, this is a long posting.
 
I left out my posting on Ajinomoto in favour for REITs as I am looking for opportunities in another vehicle of investment a.k.a diversification, and this time by exposing myself to real estate properties. Apologies to those who looked forward to Consumer stocks, I will continue to post them when I have the time. Why not buy and sell property instead of REITs? Because REITs suit me, me only la with some pointers as below:

• Direct buy/sell requires large liquidity; cash in hand. I do not have that privilege, I am talking bout RM40,000 to RM100,000 depending on which property. And I will never borrow to do investment.
• Chasing for tenants can be tiring and chumbersome, this is handled by the trust managers of REITs. No headaches on seeking right tenants or collecting rentals, no running around.
• There is bigger risk in direct buy/sell as there are more stakes involved such as big capital spending & time spent.
• REITs do not suffer from upfront charges like unit trusts. You can buy and sell REITs from Bursa Malaysia just like any other typical stocks. Thus, what you need to do is sell your units when unit price is higher than NAV, or just sit back and wait for dividend cheque which happens every quarter.

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) which I find difficult to get the latest one, all Malaysian website sux btw. Some of the info here might not be correct (I will update it once I get the data). This is after all an ongoing research which I just started a week ago, "Kelian" me ma.

• Allow up to 70% foreign shareholding in REIT companies. Still need the 30% for Bumiputera quota, burdens man.
• 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 payout ratio in guidelines BUT...
• Tax exemption at REIT level provided that 90% if its income is distributed as dividend to shareholders.

Analyzing REITs: Qualitative Factors
Stability
REITs are generally viewed as more stable than other investment types besides bonds and fixed deposit because of the dividend requirement if SPECIFIED. A high payout ratio means more cash back in the hands of the stockholders on a regular basis, therefore stabilizing returns. It is also more stable due to the underlying real estate operations. Properties are hard, tangible (can touch and hold ahhh..) assets that do not fluctuate in value as quickly as other assets. Contracts in commercial real estate industry also tend to be long term in nature (I.E. leases 5 years or more by tenants).


Timing
Because the nature of being illiquid when we deal with hard assets, there should be a lag between a REIT performance and with the rest of the economy since tenants are locked into their rents until their leases expires. There's a writeup by BizTheStar on how REITs behave in relation to our KLCI here.


Operations
Investment Strategy. What does this REIT do? Determine the specialization of the REIT. Examples: YTL-REIT is focused predominantly on the retail trade via investment into Starhill and Lot 10 shopping complex. UOA and Tower REIT have their attention on office space. KPJ Healthcare REIT on investments in hospital buildings.

Portfolio Composition. Once a strategy has been identified we must look at its current portfolio health.

1. Size: Number of buildings and number of sq feet. The larger the more diverse but more complex in terms of managing the portfolio and driving growth.
2. Geographic distribution: Focus on certain markets so their relative strengths and weaknesses of its strategy must be assessed.
3. Quality distribution: Does it hold high-quality class A/premium properties or cheap one? Holding cheap ones and redevelop them into higher quality assets can be a possible strategy for the REIT so take note.
4. State-of-service: The breakdown of buildings that exists and in-service (being currently utilized by tenants) vs those that are still under construction or in development stage (for further growth).

Other Business Lines. Does it have other sources of revenue instead of rents and mortgage interest? Such as consultation work or third-party property management services.


Operating Metrics. To assess performance of portfolio & potential for growth or decline.

1. Occupancy/vacancy & trend in occupancy/vacancy over the years: A good rate will be 90% or above though vacancy provides the opportunity to increase operating income by renting the space to tenants.
2. In-place rents vs market rents: This piece of info might be difficult to get and the answer for this metric might be ambiguous. If in-place rents are much lower than market rate then higher income can be achieved by charging higher rents to future tenants.
3. Lease expiration schedule a.k.a rollover schedule: It is important to know how committed these tenants are when leasing the properties. Potential upsides of increasing rents can be obtained when a given lease expires at the right time such as when the economy and consumer sentiment is doing very well.
4. Leasing activity: As measured by number of leases signed, number of sq feet leased and average rental rates achieved. Again this might be hard to obtained.
5. Tenant financial strength and diversification: Which is the ability of a REIT's tenants to pay their financial obligations (I.E. mortgages, rents). Can get this easily via revenue contributions from top 10 tenants in the REIT company report.

Pipeline. Talking about the future of the portfolio. Reference to acquisitions, dispositions and new development that the REIT is expected to undertake for the future.

1. Development: Number of developments, total sq feet, the location, project costs and timing of launch.
2. Acquisitions & Dispositions: Absolute price in terms of price per sq feet and important to consider that in relation to comparable sales. Also the timing and size of the buy and sell of properties.

Growth strategy. Seek to understand how the company derives it earnings through growth. It is via acquisitions or developments? By raising rents? Upgrading the tenant base? Get to know the likelihood of success and failure is critical to unlock the hidden gems.


Most of the information above needed to analyze REIT can be found by reading through the company's report & dissecting them. First, you need to answer yourself on what kind of investment you are looking for (investment strategy of the REIT), what is your financial goal & the risks you are willing to take. Once answered, we then only look at the fundamentals of the company via operational performance; where the most of the fun & learning begins.

A little bit more advanced research starts here as we are dealing with financial ratios so I will try to slot in simple illustrations to make it easy for people to understand.
Analyzing REITs: Quantitative Factors
Funds from Operations
FFO is a key measure of bottom line financial performance of REIT excluding gains or losses from sales or property and depreciation of assets. We exclude those because we are looking to capture recurring performance. Real estate is different than other investments as property rarely loses value and often appreciates unless we go to war with Singapore or Indonesia and surrender.

1. FFO per Share (net income/number of share outstanding): just like EPS measure for other stocks, a measure of how much earnings you get per share that you own per one financial year usually.
2. FFO Yield (FFO per Share/REIT stock price): much like ROE, the per ringgit return of investment. A measure of if you pay RM1, how much you get in % returns for the next financial year. If 10%, you get RM1.10.
3. Price-FFO Multiple (inverse of FFO Yield calculation): similar to P/E ratio for normal stocks. It is used to tell how many years it will take to recoup your initial investment capital back 100%. Say Price-FFO is 6, it means you will take 6 years to get back exactly RM1 on top of your initial RM1 investment. In other words, takes you 6 years to double your investment.
4. AFFO (FFO minus recurring capital costs). I personally will use this for cash flow evaluation for a number of reasons:

• More precise measure of leftover cash as it deducts out capital expenditures needed to maintain existing portfolio of properties. You need money to maintain your house too from time2time, exactly the same picture here.
• Because it is more precise, it is a better predictor of REIT's future capacity and capability to pay dividends.
• The final financial ratio that is used for price evaluation of the REIT and also I will use it to look for growth.

Dividends
The dividend payout for a REIT must be high, higher than bonds or FD rate to make it as an appeal to investors. Does this mean REIT has higher risks? Not quite true in Malaysia as our properties remain relatively undervalued in comparison to other Asean regions, thus still room for growth.

1. Dividend per Share (dividends paid/number of shares outstanding): though past performance does not guarantee future returns, a consistent and growing dividend is always a good sign, ilham!
2. Dividend Yield (Dividend per Share/REIT stock price): div yield for REITs are generally higher than other stocks or bonds fyi. 6%-8% or 10% as an optimistic yield rate (excludes capital appreciation).
3. Payout Ratio (FFO per share/Dividend per share): a measure of how much earnings are distributed to shareholders. I.E. Sunway REIT has promised 100% for the first two years 2011-2012 and 90% for subsequent years.

Operating Leverage
An important notion to consider. This refers to the breakdown of variable expenses (costs that can be adjusted based on sales volume) and fixed expenses (costs that can't be adjusted in short-term). Let me give an example, a REIT company has to pay all its real estate taxes/mortgages/maintenance (fixed) even if it is not fully occupied, say 40% occupied. This means high fixed expenses, hence said to have high operating leverage. Revenue can be lost due to vacancy which is difficult to offset by cutting expenses since fixed costs are relatively high and hard to adjust. Vacancy rates have to be very closely watched if you are involved in real estate investment. A good measure that I could think of is using ROA (return on assets=net income/total assets), a measure of how much profit a company earns for every dollar of its assets which include cash in hand, accounts receivable, property, equipment, inventory and furniture.

Capitalization Rate
Another measure of yield on investment using the formula (AFFO/asset value). A high cap rate implies that buyers are demanding high yield on their investment, thus there is good investor sentiment. This is an important gauge to know the interest of the overall market towards a particular REIT or its investment strategy (investors buy the idea). You can compare this ratio to a REIT's FFO yield which should roughly be the same, if not further check is required to find the smoking gun (accounting tricks?).

Net Asset Value
Commonly known as NAV which is the theoretical value that would be received if all of a REIT's real estate assets were sold now at market price minus away all liabilities (debts and etc). So NAV per share is practically (total assets-total liabilities)/number of shares outstanding. Once evaluated a REIT's NAV can be compared to the current stock price as a valuation metric. Example needed I know :)

• NAV per share is RM10, stock price is RM12. This would mean a premium of 20% over NAV (RM12/RM10 - 1 = 0.2 or 20%). Measure of the degree of optimism about future growth of the REIT that has been incorporated into the stock price. So what you need to do is evaluate this optimism via qualitative & quantitative factors to answer "Does it makes sense or it is overvalued to buy now?"
• NAV per share is RM10, stock price is RM6. This would mean a discount to its NAV of 40%. It could mean two things, one a hidden gem OR worse investors thinking, questioning and sitting on the fence about the potential of the REIT. Again, evaluation of this pessimism via qualitative & quantitative factors to answer "Should I buy this opportunity or this opportunity does not look like it's going to fly?"

Leverage
One of the really most critical aspect of REIT is its leverage structure. What are the various financing methods they use to carry out their operations. Leverage means using resources in which others have in exchange for what you can give back. In REITs, they use other people's money in exchange for their expertise in managing properties and give 90% of the returns back. To answer this evaluation we need to ask a few simple questions:

1. How much leverage does the REIT uses? (total debt/total market capitalization) to indicate amount of borrowings outstanding.
2. How comfortably can the REIT afford its debt payment? EBITDA/(interest expense + dividend) a measure of breathing space it has when it comes to servicing its debt payments.
3. What is the REIT's liquidity position? careful alignment of cash flow via schedule of debt maturities. It is imperative to know how the REIT funds those debts. It could be:
• short-term using cash in hand, revolving credit facility like our credit cards; spend now pay later concept.
• long-term via sales of its assets, new equity value from public may be issued.

Indices
Pretty simple. A good way to know if your REIT is performing better than average is to compare it against specialized indices for benchmark. This is more of an informative scorecard than comparing it to a normal main board which has many hundreds of companies that are not related to real estate at all. BUT too bad, our Malaysian market does not have such index for REITs as this investment vehicle is still at its infant stages which just started in 2005. What to do? No choice la, compare against its peers then. I will use the Div Yield as a first cut comparison.

In a Nutshell
There you go, a comprehensive overview of how I would be analyzing and contemplating a REIT company, the same applies to how I checkout other types of stocks, just to give you a feel of it. There are 12 listed MREITs (Malaysian REITs) in our stock market now and soon to be 13 with Sunway (the largest in market cap) joining the boat in early July 2010. Risk level in investing in REITs would be from low to medium range. (low-FD, high-equities)

• Yes, I will be taking some time to drill each and every one of these companies. Be patient I will post them in time. Zui kelian me la.
• Yes, it may seem hard to understand all those crap I just mentioned above if not everyone would be wealthy. Learn and be rewarded.
• Yes, earning $$ from investment is way more rewarding than getting my paycheck because it is not hard work but smart work. No sweat needed.
• Yes, we can do it together just email me your interest at nick_allianz@hotmail.com.

When aboi becomes ah man perhaps then I would venture into direct buy/sell for the fun of it. For now MREIT would be a good choice as alternative asset class for investment in real estate. Remember it is never wise to borrow money to invest which is the same as when you spend using your credit card.