Friday 29 November 2019

Surprising Upcoming Merger between Frasers Commercial Trust and Frasers Logistics & Industrial Trust

In a surprising twist of fate, both Frasers Commercial Trust ("FCT") and Frasers Logistics & Industrial Trust ("FLIT") announced a trading halt. According to the Business Times, their ''secret sources" revealed that both REITs will be joined in holy matrimony and merged into one entity. The "secret sources" identity also cannot be revealed as the information is still private. As always, news seems to have leaked ahead of the trading suspension and the unit price of both REITs increased suddenly above their normal trading range for no apparent reason over the past few days. FCT and FLIT seems to have jumped onto the bandwagon of Capitaland and OUE Group by suddenly deciding to just merge the 2 REITs. 

I am currently holding on to both FCT and FLIT with almost similar weightage in terms of quantum in my margin portfolio. So the question of whether one particular REIT's shareholders will benefit more from any bias or favorable pricing over the other REIT in the new entity will appear to be non-relevant to me. As I intend to hold on to Frasers REITs for the long term for their dividends, the post merger will not increase the distributions automatically. It does make it more financially stable and probably be able to obtain cheaper re-financing by virtue of its mammoth size. If these are the good points, then Frasers Property can probably do a merger every year by injecting its other REIT and business trust, that is, retail and hospitality arms into one super giant stapled Business Trust. But then, it will make it murkier than mud and take away one's freedom to choose the business that one specifically wanted to invest. 

The only other benefit in my view will be the reduction of statutory compliance cost from one listed entity instead of the current two entities. Will await further details from Frasers Group regarding their upcoming plans for these 2 REITS. 

Wednesday 20 November 2019

US Senate Unanimously Passes Hong Kong Human Rights And Democracy Bill- More Harm Than Good To Hong Kong

I was flabbergasted by some folks from Hong Kong who seem extremely pleased with the passing of the Hong Kong human rights bill by the US Senate. The bill if executed will be mostly detrimental to Hong Kong’s economy. It will lead to economic slowdown and also job losses for the Hong Kong people. Under this weird bill, the US Secretary of State would have to certify at least once a year that Hong Kong retains enough autonomy to qualify for special US trading consideration that bolsters the status of Hong Kong as a world financial centre. Losing the privileges of being treated as a separate trading entity from China will lead to many unfavorable restrictions and disadvantages being imposed on Hong Kong.  

Also, I find it ironic that the US Senate is criticizing China and Hong Kong governments for being brutal and violent to the Hong Kong people when the US government did nothing much to implement gun control measures to curb domestic gun violence from killing innocent US citizens. Nothing was ever done despite frequent mass shootings in US shopping malls and schools. Apparently, the US has an extremely high tolerance for violence.

Now if the US has such a penchant for violence, then do they have other ulterior motive in passing the bill?

If the Hong Kong people have no jobs, will the US government be giving them monthly allowances to help them buy house, food and medicine?

If the Hong Kong protesters got jailed and blacklisted such that their future are ruin, will the US government undertake to take in all of them into the US without cherry picking?

Instead of encouraging dialogue and communication between the Hong Kong government and protesters, the US government simply passes some weird bill that is designed to stir up more domestic unrest in Hong Kong. While it is perfectly fine to fight for liberty and freedom, destroying MTR stations, shopping malls and other properties are just simply senseless violence that achieves nothing. Surely, such drastic moves are similar to employing the nuclear option where people are misguided that to win liberty, one should destroy everything including the economy and one’s own livelihood. I hope that common sense will prevail and order restored as soon as possible in Hong Kong so that it will continue to prosper and be business as usual.

Saturday 16 November 2019

Singtel Share Price Resilient In the Face of Billion Dollar Impairment and 2nd Quarter Losses of S$668Mil

Singtel is a very weird stock. In late December 2018 to early Jan 2019, the share price dropped below S$3 per share when it was making quarterly profits of over S$680Mil. However, when it was announced recently that Singtel had made a huge loss of <S$668Mil> for its second quarter results, its share price dropped only slightly from S$3.30 to S$3.18 which is a mere decline of only <3.64%>.  I am not sure whether shareholders of Singtel recalled that in March 2019, Singtel had just subscribed to a rights issue of S$730Mil  worth of additional shares for Bharti Airtel for working capital purpose to assist the Indian Telco to fight a bruising price war with Reliance Jio.

The current losses was due to the adverse ruling by Supreme Court of India over the government's computation of "Adjusted Gross Revenue (AGR)" whereby license fees and spectrum usage charges are payable. The result of the ruling was a US$ 4.3 billion due within 3 months. So, it may mean another rights issue coming of over S$1 billion for Singtel. In such  a terrible scenario, shareholders should ask themselves whether Singtel can afford to sustain the current dividends payout to them. Of course, most of the stakeholders (from Singtel's CFO to retail investors) seems very confident that despite the adverse court ruling, the India government will come out to save the telcos by either waiving off the amount payable or giving a huge discount to it. 

As for me, I do not share such bright optimism that Singtel will remain totally unscathed from this adverse court ruling.

Thursday 14 November 2019

Eagle Hospitality Trust Q3 FY2019 Performance- Is Hurricane Dorian the only main reason for the underperformance against IPO forecast?

The release of the Q3 FY2019 financial results for Eagle Hospitality Trust (“EHT”) turns out to be neither reassuring nor promising. EHT missed forecast by <10.6%> and <2.7%> for revenue and net property income respectively. Since EHT did not display a convincing set of superb performance, it will lead to persistent lingering doubts over the quality as well as fair valuation of the hotel assets being injected into the Trust. Without a strong performance to quell the rumors, the share price will probably languish on for the next 3-6 months albeit some short term upside.

Q3 FY2019 financial performance- Is Hurricane the main reason for poor performance relative to IPO forecast?
During the previous Q2 FY2019 results announcement, the performance had already missed forecast and the reason given were that some of the hotels are just coming off the asset enhancement completion and thus will take time now to ramp up bookings.

For Q3 FY2019, the press release seems to give more emphasize with regard to disruption of demand at one of its main asset, that is, EHT suffered “unforeseen demand dislocation” at its largest asset, the Holiday Inn Resort Orlando Suites (“OHIR”)- Waterpark driven by a category 5 Hurricane Dorian which threatened the South Atlantic. As a result, Q3 rental from OHIR was down approximately US$0.6Mil from forecast. It is interesting to note that Mr Howard Wu, Founder of Urban Commons commented that “Eagle soared through the storm and delivered DPU amidst a Category 5 hurricane impacting its largest asset”.

However, a closer look at the released financial analysis revealed that “macroeconomic headwind” is the main cause of the under performance. From the total drop of <US$2.5Mil> in Q3 revenue against forecast whereby US$0.6Mil as aforesaid mentioned was attributed to Hurricane Dorian, it seems to suggest that the larger remaining US$1.9Mil decline was due to worsening macroeconomic factor. Hence the entire hotel industry may be headed into a downward economic cycle with weakening demand and overcapacity. That maybe why some substantial shareholders of EHT who are themselves specialist in the US hotel business have been busy unloading millions and millions of their units into the open market.

Other highlights for Q3 FY2019 results and silver lining
Overall, EHT benefitted from a less than proportionate decline of <2.7%> in net property income against the <10.6%> drop in revenue mainly due to savings from property tax and lower professional fees than forecasted.

As of July 2019, interest rate swap was concluded and effected thus locking in US$1.36 Million of savings per annum (this seems already built into the IPO forecast hence no material upsides from financing costs). The swap also means that 93% of borrowings of EHT are now fixed interest and with a 3.9 years average debt to maturity.

In addition, potential upsides from 5 hotel assets that just completed asset enhancements are expected to drive up future operating results in Q4 FY2019. Please see attached main Operational Performance KPIs of W-I-P assets vs Upgraded assets.

I am wary of the assertion by the management of EHT of “upsides from ramping up of the hotel assets that have just been renovated” being used so many times to give hope to investors. If the Q4 FY2019 result announcement is again an under performance with this being recycled as a future beacon of hope, then most likely, it means that there are truly some grave fundamental issues. This is similar to Asian Pay TV Trust which keep repeating stabilization in its average revenue per user (ARPU) key metric but then we know what happened after that fateful day where its unit price melted down to the abysmal level of S$0.127 per unit.

Lack of market confidence in Sponsor, Urban Commons, is a major crisis for EHT
The main challenge faced by EHT is the lack of confidence in its sponsor, Urban Commons, with regard to the injection of assets during IPO process and also the financial strength of Urban Commons to weather any major economic downturn. In other words, many investors are viewing EHT as mere financial engineering tool by Urban Commons to make it look good for IPO only and are pricing in a probability that it will meta-morph into a going concern disaster with either sub-par revenue generating performances or in a worst case scenario, breakout of further bad news which will confirm that the assets valuation and projection are grossly inflated.

The good news here is that Urban Commons has undertaken not to sell off their shares in EHT even after the expiry of their lock in period from IPO. This should provide much needed support on the unit price which has been heavily sold off by the other substantial shareholders in particularly, the Yuan Family members, which own ASAP Holdings that was involved in the enigmatic sales of hotels assets to Urban Commons and subsequently marked up in price and sold to EHT eventually, just 2 mths to 3mths before the IPO in May 2019.

Parting Thoughts
The trending of missed forecast for 2 consecutive quarters is worrying and may point to an incoming downturn in the US hospitality industry. But then, the unit price has slumped by 40% from IPO. Notwithstanding the Queen Mary issue, the significant decline in unit price relative to the slight decrease in financial performance seems overdone. However, it would be best to further observe the 4th quarter performance and of course, most importantly, whether there are actual physical cash on hand from the said net property income earned by EHT for paying out the 2nd half final dividends to investors by March 2020.

Sunday 10 November 2019

Singapore Press Holdings and SPH REIT Review- Media Segment Continues to Worsen But Bright Spot From Property Segment

Singapore Press Holdings ("SPH") continues to face headwind in its Media Segment. The media  business faces decline in print advertisement and circulation revenue. Worse still, the bloodletting from technological disruption has not reached the trough and its operating results is expected to deteriorate. Media revenue dropped from S$ 656Mil in FY2018 to S$ 577Mil in FY2019 which is a 12% decline. Media profit plunged from S$98.7Mil in FY2018 to S$54.7Mil which is a shocking 44.6% decline. At one point in time, its share price dipped below S$2 per share. Another round of retrenchment exercise has been announced by SPH to shave off 5% of staff in its Media Group. It has since recovered to S$2.34 as at 8 November 2019.
Extract of Business Segment Performance-Profits before taxation
Despite the pessimistic outlook for its Media Segment, there is a bright spot in SPH, that is, their Property business segment which continued to grow from strength to strength,. As overall outlook of SPH is not stable and no one knows exactly when the bottoming out of the Media business will occur, my preference is to invest only in SPH REIT until there is more clarity to SPH future projections. 

A delightful piece of good news was announced by SPH this week. 

SPH REIT Revealed Another Major Surprise- Acquisition of New Australian Super Regional Shopping Mall in Adelaide
SPH REIT announced on 7 November 2019 that it has acquired a joint venture stake from Lendlease Real Estate Investments Limited Group in Westfield Marion Shopping Centre, Adelaide, South Australia for S$637Mil. This was a major surprise to many investors and myself who thought that the recent fund raising via S$300Mil of perpetual securities was to fund the purchase of Seletar Mall from SPH. While I have previously posted  that the last December 2018 acquisition of Figtree Grove Shopping Mall would give SPH REIT management team invaluable management exposure and networking into the Australian market, I never expect that the next Australian retail acquisition to come so quickly in less than a year. 
Extract of Westfield Marion Shopping Centre Details
SPH REIT still no fate to be with Seletar Mall
I can't help but feel a tinge of sadness as Seletar Mall once again escaped from the clutch of SPH REIT, notwithstanding the surprise acquisition of a good quality Australian freehold asset. But the good news is that Seletar Mall is still in the future pipeline of SPH REIT. So too is the Woodleigh shopping mall which is under construction which bodes well for the future growth of SPH REIT.
The Seletar Mall
Parting Thoughts
SPH has been building up its Property division for a number of years to diversify away from its traditional media business and this strategy is bearing fruits. Besides the property development and retail REIT portions, another superb sub-segment is its student accommodation business which is widely viewed as extremely defensive with strong resilient earnings even in economic downturn. Unfortunately, to get a piece of student accommodation action, one would need to invest in SPH as this is not available on SPH REIT. Perhaps SPH may start another REIT in future that focuses on student accommodation. 

First REIT Q3 FY2019 Performance Review- Does The Decline In Property Income Signal Trend Of Worsening Performance Of Siloam Hospitals?

It is interesting to see the financial announcement from First REIT shouting out "First REIT achieves stable DPU of 2.15 cents for Q3 2019". As with all marketing techniques, highlight the good extensively but downplay the bad news.  Despite maintaining the quarter DPU to 2.15 cents, rental and other income for the quarter dipped 1.5% YoY to S$28.8Mil as a result of lower variable rental component for the Indonesian hospitals. In addition, net property income dipped 2.5% YoY to S$28.3Mil due to higher property expenses for its South Korea and Indonesia properties.
Does the decline in property income signal trend of worsening performance of Indonesian Hospitals?
Results released does not seemed to be too well in terms of organic growth and maybe the start of a worsening trend. This will greatly affect what the expiring lease for 5 hospitals and hotel/Country Club can offer for upcoming rental renewal exercise. While CEO Victor Tan has mentioned that First REIT has a low gearing ratio of 34.5% as at 30 September 2019 and are reviewing options to make further yield-accretive acquistions to boost their portfolio, I have serious doubt on how they plan to achieve that given the current high dividend yield at the weakened share price. Also, the signal given off by the sponsor and manager of First REIT seems to be hinting at letting First REIT take on forex exposure in future by denoting the rental income of Master Lease Agreements in Indonesian Rupiah instead of Singdollars.

Lease renewal of 5 properties due at end of 2021- Bad vibes on the eventual release of results of negotiation in 2020.
The risk of First REIT renewing the upcoming expiring lease of the first batch of proprieties at 80% plunge in rental rates in the worse case scenario cannot be ignored. Till  now, I cannot comprehend why the Sponsor Lippo Karawaci would have agreed to lease from First REIT and then charge a heavily discounted 80% rental rate to its subsidiary Siloam Hospitals and Healthcare Group for the initial properties injected into First REIT. It just does not make commercial sense to me and is clearly unsustainable. I have a very bad vibe on how the negotiation will unfold. It is certainly not inconceivable that the results will definitely be an unfavorable decrease in rental rates. The only question is how massive is the discount which First REIT has to give to Siloam in order to renew the Master Lease Agreement.

Please see my previous post on this topic here: "First REIT Review PART 2- Super High Yield of Over 8% And Possibility of 80% Drop in Rental Income For Upcoming Renewal Of Expiring Hospitals".

Organic growth seems to be tapering off for First REIT. The unknown results of the negotiation of the expiring 5 properties have pushed up the risk premium and yield required by investors to 8.3% based on an annualised DPU of 8.6 cents per unit and pricing of S$1.03 per unit as at 8 November 2019 (Friday). I think that it will be hard to proceed with other potential M&A opportunities without a quick settlement of the expiring lease agreements issues.  The next quarter results are important to see whether the negative growth continues from Siloam hospitals. 

Monday 4 November 2019

Eagle Hospitality Trust Imploded From Within On Valuation Concerns Of Other Hotel Assets In Portfolio-Down 40% To All Time Low From IPO Debut In May’19

During my last post, I have pointed out that besides the “Curse of the Queen Mary”, there are at least a few scenarios that can happen to cause further downsides. Unfortunately, a new issue did indeed surfaced besides the "Queen Mary potential lease default rumor”. Based on the recent announcement by Eagle Hospitality Trust (“EHT”), SGX had raised several queries with regard to the other hotels in the stable of portfolio of EHT. Investors panic and it seems that they do not buy the reply by EHT management and became even more skeptical on the valuation of the other hotels held in the Trust.

The first day debut of the IPO already took into account the forex risk and other business risk. The “Curse of Queen Mary” issue shaved off around another 20% off that recently. However, prices still continue to dip which means that the recent announcement concerning the major shareholders disposing hotels to EHT prior to the IPO is making existing shareholders very uncomfortable with the valuation of the other hotel assets.

From the range of S$0.545 to S$0.585 per unit since the lifting of the trading halt, it plummeted to an all day low of S$0.470 per unit on 4th November 2019 (Monday). This is another 20% plunge in value which indicated that investors were extremely worried that there is something wrong with the entire Trust and whether most of the hotel assets can indeed generate the required lease income to sustain the projected distribution.

SGX Query on 1 November 2019 and reply from EHT:
Extract of the latest round of query from SGX on the 6 hotels from ASAP Holdings sold to the Sponsor
What are the other concern here besides the notorious “Curse of the Queen Mary” that causes the price to plunge further to S$0.470 per unit (40% price collapse)?
SGX Query on 1 November 2019 and reply from EHT:
To summarise the above reply to SGX, this would mean that ASAP Holdings sold the 6 hotels to Urban Commons (Sponsor). EHT in turn buys from Urban Commons the 6 hotels at a higher price than what the sponsor had paid originally to ASAP Holdings due to the differences as mentioned in the SGX reply by EHT. As to exactly how much more EHT had paid relative to the prior 3 months acquisition price between Urban Commons and ASAP Holdings, it was not disclosed. So it may appear that EHT is getting the shorter end of the stick by a mere 3 months differences. Many existing investors may now have concern over the suddenly inflated valuation in just 3 short months of clever financial engineering. There will also be lingering doubts on the income generating abilities of not just the said 6 hotel assets but also the entire other hotel assets placed in the Trust. Why not just sell the 6 hotels directly to EHT instead of to Sponsor and then Sponsor sell to EHT?

Also most importantly, some investors may probably begin to wonder whether there are some hidden agenda or internal rebate programme between Urban Commons (Sponsor) and ASAP Holdings. This gives rise to the next set of questions from SGX as discussed in the next section below. Are they related parties? 

Who are the actual owners of ASAP Holdings which sold 6 hotels to Urban Commons which in turn injected these assets into EHT for IPO? Are they related to Urban Commons (Sponsor)?
ASAP Holdings are held by Frank Yuan, Norbert Yuan and Jerome Yuan. ASAP Holdings is a California-based acquisition advisory and asset management firm specializing in hotel assets which has had known business dealings with the Sponsor in the past. However, they are unrelated to the Sponsor or key management of EHT and are 3rd parties.

How did they end up also as shareholders in EHT IPO? Also what are relationships between the Yuans?
Frank Yuan, Norbert Yuan and Jerome Yuan were introduced by the Sponsor to the EHT IPO placement agents. They took up private placement tranche making up 33.4% of the total number of stapled securities on the listing date.
SGX Query on 1 November 2019 and reply from EHT:

Are these substantial shareholders still holding on to their shares/units in EHT?
Yes. BUT unfortunately, the Yuans have begun paring down their interest in EHT and selling their units in millions for the past few weeks. This maybe perceived as a signal or proxy with regard to their views and outlook on EHT future. 

Norbert Yuan started with 120Mil of stapled securities. As at 30 Oct 2019, his stakes via Compass Cove Assets Limited had dropped to 94.2Mil units only. Read the other numerous announcements on "Change of interest of substantial shareholders" to find out how many shares were being dumped by the other members of the Yuan family.

Parting Thoughts
The substantial shareholders (Yuan family) who held 33% stakes in EHT during listing are hotel business specialists. The fact that they began dumping millions of shares in the market not only created tremendous selling pressure but also signal a possible negative outlook on EHT businesses. Coupled with the fact that many investors are extremely concerned with the valuation of the hotel assets acquired from ASAP Holdings and then injected into EHT by Urban Commons, the red flag on whether the entire hotel assets can indeed generate the necessary rental income as originally projected were now being raised. 

Going concern of the entire Trust maybe another major issue that investors are worried due to not just the Queen Mary default rumour but also the manner of the financial engineering of the 6 hotels acquired from ASAP Holdings which were eventually injected into EHT by the Sponsor. Skeptical investors may perceive such a move to insinuate ulterior motive by the Sponsor to make easy money by dumping poor quality assets into EHT.

I hope that the release of the 3rd quarter results by next week (13th Nov 2019) will reassure all investors. The current challenge seems to be mainly the lack of confidence in the Sponsor which resulted in a dividend yield of 13.5% based on current unit price of S$0.475. But then again, what if the sixth sense of many investors are correct and it turns out that the Trust have lots of fundamental issues as evident from the various strange things that keep popping up at EHT?