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.