The Circle of Life Would Not Be Complete Without Death- Treasure Your Loved Ones And Don't Overdo Your FIRE Planning

Recently, I was deeply affected by 2 separate incidents which lead me to ponder again whether I have been spending too much time trying to achieve financial independent instead of dedicating more time to my loved ones around me. It also lead me to appreciate having adequate and the right kind of insurance coverage.

Insurance coverage in financial planning is essential- Do not play with lady luck.

The first incident happened to a close friend who was an avid biker who enjoys riding his motorbike into Malaysia and from there into Thailand and back. My friend told me his love of sight-seeing while riding his bike with the wind rushing by pass his side. He also enjoys going to those motorbike obstacle dirt track to challenge himself and have fun. Throughout the many years, he has accumulated invaluable experience in handling his motorbike and is a well known safe rider. However, just recently, he got into a major accident when another motorbike enthusiast rode his bike into him while on an obstacle track. Both were admitted into hospital ICU with multiple serious injuries. 

Saving and investing non-stop to achieve financial independence and have sufficient resources by retirement age of 65- But what if one dies before age 65? 

Investment Portfolio Updates for December 2019 and Singapore Press Holdings Looks Attractive Again With New Growth Path

There is not much changes since my last update except for paring down of stakes in SingMedical Group and taking up positions over 3 tranches into Eagle Hospitality Trust. I have also moved part of my cash investments into my margin portfolio. My own goal for FY2020 will be to further reduce the volatility of my margin portfolio in order to enhance the resiliency of the dividend/interest income stream against market downturn for this new investment approach. My current overall projected annual recurring income has increased by around 52% using this newly created investment portfolio.

Singapore Press Holdings Looking Attractive Again with additional foray into Student Accomodation.

Currently, I am looking into some projection and stress testing of Singapore Press Holdings "SPH". The recent S$740 Mil investment into student accommodation brings SPH investments to over S$1 billion- this is a substantial foray into the new business. The student accommodation business investment will provide SPH with a new sustainable growth path. Nevertheless, the key risks for SPH are (i) its ever declining media segment that still has not shown signs of stabilising and (ii) poor sales of Woodleigh Residences (as at 30 Nov 2019, it only sold 183 units out of 667 units despite launching and relaunching it) which looks set for potential record of major impairment if SPH still cannot move more units. Will probably share some of my analysis on SPH in another blog posting later on.

Eagle Hospitality Trust Continues To Be Haunted By The Ghosts Of Queen Mary

Eagle Hospitality Trust (“EHT”) continues to face woes on many fronts. On 6^th December 2019, EHT announced the resignation of its Vice President of Finance, Mr Cheah Zhuo Ye. Mr Cheah apparently left for personal reasons. The thing that caught my eye was his date of appointment to EHT was 25 September 2018 while his date of effective cessation was 30 June 2019 hence he joined for less than 1 year. The other mind blogging issue was why EHT announced this only in December 2019 when the effective cessation was June 2019?

1. Implication of resignation of key finance personnel

In addition, the leaving of the key finance personnel (VP Finance) is closely watched by many stakeholders because besides “leaving for personal reasons”, I personally think that this may indicate other potential undercurrent such as disagreement over certain subjective accounting policies such as revenue recognition or not recognizing certain expenses or dispute within internal senior management team on operational issues. But good thing is that the CFO is still with EHT.

2. Queen Mary bites again- Long Beach City Auditor joins into the fray

The other headache is those of the ghosts of Queen Mary which just cannot be exorcised. They continued to plague EHT constantly. There is another view that Urban Commons, the sponsor, had not done much to improve the safety conditions of the ship hotel, Queen Mary. On 3^rd December 2019, Long Beach City Auditor, Laura Doud announced that it will set out to investigate the ship’s finances and the lease that governs its operator. The last audit was conducted in 2012 which began with a call to the city’s fraud hotline that alleged improper accounting or the possible diversion of revenue by “Save the Queen” campaign.

Since Urban Commons took over the 66 years lease in 2016, the ship continued to languish according to assertions by a third-party inspector.

According to the Long Beach Press Telegram on 19 October 2019, Long Beach City's third party inspector, Edward Pribonic asserted in a phone interview that he has seen little evidence of maintenance and repair work being carried out on the Queen Mary and that there is no enforcement on the City's side to get that done. US$23Mil that were already  allegedly spent appeared to have nothing much done on the ship.

In response, John Keisler, Long Beach Economic Development Director said in an interview that it is looking into the hiring of another 3rd party consultant, a larger engineering firm with operational capacity to do a deeper dive to look at the specifics issues raised by Edward Pribonic.

Worse still, aspersions over the financial strength of Urban Commons were being persistently casted and EHT has to come out with further announcements to clarify on those assertions.

3. But what if nothing is actually wrong and it turns out to be a false alarm?

If everything turns out well, shareholders who invested at US$0.55 of recent pricing will be looking at an annual reward of 11.67% dividend yield based on projected US$0.0642 per unit by EHT. The current entry price of US$0.55 is also close to a 30% discount off the IPO price. Even if Urban Commons turns out to be in financial distress and defaulted on its lease obligations, it does not mean that the hotel assets under EHT are worth zero in monetary value. EHT would always have the option to appoint other new hotel operators or sell off some of the current assets. 

The upcoming 2nd half year closing is coming to an end. The financial statements and dividend payout by March 2020 will reveal whether there are really hard cash on the balance sheet of EHT for distribution to shareholders.

Please see my other previous postings on EHT:

1. Price Meltdown For Eagle Hospitality Trust- The Curse Of Queen Mary

2. 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

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

Strange Encounter on Pricing of Kaya Toast Set at HDB Kopi Tiam

Apparently, the Kaya Toast set is quite unique in Singapore and Malaysia. It consists of (i) 1 coffee or tea, (ii) Kaya Toast and (iii) Eggs (half boil/hard boil). I have an interesting story from a colleague who went on board Cruise ship for a short holiday. While doing breakfast in bed, he requested the kitchen to bring him toast and also half boiled eggs. When the room service staff delivered the breakfast set, he took out a small knife and cut the hard boiled egg into half. Then he said to my colleague: "Sir, please enjoy your half boiled egg."  Needless to say, my colleague was flabbergasted. He took a long time to try to explain to the non-local room service staff but to no avail. Even the chef in the kitchen came to his room as he wanted to learn more about what is an actual "half boiled egg". My colleague had to ask for hot water and new eggs to demonstrate to the kitchen staff how to prepare "half boiled eggs".  

Every weekend, my kids will request Kaya Toast for breakfast. I have thus always been getting 2 sets of Kaya Toast from family cafes such as Ya Kun, Toast Box or Kaffe & Toast. Normally, I will upgrade the drinks to Milo by topping up 20 cents and also change the "half boiled egg" to "hard boiled egg". A typical breakfast set at these classier outlets will cost around S$4.80 to S$5.80 per set.

This morning, I jogged past my neighbourhood HDB Kopi Tiam and saw a banner outside proclaiming "Breakfast Kaya Toast set for only S$3". I decided to give it a try and start ordering from the Kopi Tiam Aunite.

Kopi Tiam Auntie: " What do you want?"

Me: "Auntie, can I have 2 sets of Kaya Toast? Dun wan Coffee or Tea. Please help me change to Milo. Also the eggs I would like hard boiled eggs."

Kopi Tiam Auntie: "Set only has coffee or tea. No Milo with the breakfast set. Also, the eggs are half boiled only. Take home and boil yourself if you want hard boiled egg."

Now, taking home and boil the half boiled eggs will defeat the purpose of ordering outside, right? Deep in my mind, I was wondering whether the Auntie is trying to be funny.

Me: "But Auntie, the cafe I went to can change to Milo by topping up money and also got hard boiled eggs."

Kopi Tiam Auntie: "Then you go back to your cafe to buy lor. Here cannot top up money to buy Milo de."

Sensing the Kopi Tiam Auntie getting pissed off, I decided to maintain my composure (good thing about getting older is one tends to have mellowed down compared to younger days when dealing with obnoxious and unreasonable people.) 

Me: "No worries Auntie, no need to be upset. I do not need the eggs then."

Kopi Tiam Auntie: " That will still be S$3 per set without eggs. Total S$6 for 2 sets."

Me:" Auntie, then I do not want set breakfast. Please do ala carte. Milo and Kaya Toast."

Kopi Tiam Auntie:" That will be S$2.70 per Milo and Kaya Toast. Total S$5.40 for 2 sets."

I was simply stunned when I heard that. Initially, the Kopi Tiam Auntie wanted to charge me S$6 for 2 sets even without the eggs and also cannot choose my Milo drink. But if I opted for ala carte instead of set, I got to upgrade to Milo and at an overall cheaper price of S$5.40, which is a 10% savings. I smiled back at the Auntie and paid her S$5.40 for 2 sets. Then I waved goodbye to her after collecting my toasts and Milo. The Kopi Tiam Auntie was surprised by the goodbye wave and smiled back at me and bid me goodbye too. It was a strange morning encounter indeed for both the kaya toast breakfast set seller and the buyer. 

Profiting from Pricing Abnormalities- Merger of Frasers Commercial Trust and Frasers Logistics & Industrial Trust

Ever since the announcement of the upcoming merger between Frasers Commercial Trust ("FCOT") and Frasers Logistics & Industrial Trust ("FLT"), it gave rise to the strange situation of an arbitrage forming due to wide pricing fluctuation between the 2 REITs. Arbitrage is the process of exploiting differences in the price of an asset by simultaneously buying and selling it and in the process, the arbitrageur pockets an almost risk free return. For example,  On 3rd December 2019, the price of FCOT suddenly shot up to S$1.72 when the offered price for the merger exercise valued it at S$1.68.

Extract of Merger Scheme for FCOT and FLIT

1. Market apparently is trying to price in who received the shorter end of the stick

Now, this is a matter of differences in perspectives that lead to the see-saw pricing of both FCOT and FLT ever since the merger announcement. Some view that FCOT got the shorter end of the stick as the deal did not take into account the improving signing rents at Alexandra Technopark post AEI. FCOT also have a much lower gearing relative to FLT. Valuing it at S$1.68 from the merger thus undervalued the fair pricing of as high as expected S$1.76 per unit.

As for FLT supporters, they view the earnings of the REIT as more resilient and have annual rental escalations in its leases as well as a steady proven organic growth profile. Pricing the exchange of shares at S$1.24 per unit to FCOT unit holders thus severely underpin the fair value of at least S$1.30 per unit.

2. The pricing offered in the exercise are actually quite fair

Frasers Property sweeten the deal by also throwing in the proposed acquisition of the remaining 50% of Farnborough Business Park based in UK conditional to the completion of the merger. This acquisition will be yield accretive and I reckon it is thrown in to incentivise the unitholders of both FCOT and FLT for them to support the merger deal. As such, personally, I would think that the pricing of S$1.68 per unit for FCOT and S$1.24 per unit for FLT are supported and fair.

3. Opportunity to make small profit out of the merger exercise

One good example as mentioned above is on 3rd December. The pricing of FCOT shot up to S$1.72 from S$1.68. Those who managed to get a unit at S$1.68 per unit can simply sell off at S$1.71 to S$1.72 per unit and then buy FLT which is being priced at S$1.24 per unit. Of course, one have to be careful on which price to enter into for FLT which is also similarly going up and down like a yoyo. 

Another example would be on 4th December, prices for FCOT at one point dropped to S$1.65 to $1.66 per unit range. One could purchase and then hold on till completion of the exercise. Alternatively, one can chose to just do a simple sell off of FCOT when it rebounded to S$1.68 per unit.

On 3rd December 2019, I have sold off all my FCOT positions at S$1.71 per unit and used it to buy up FLT at S$1.23 per unit during the pricing mismatch at different times of the day. In addition, as I was on annual leave for the past 2 days and have nothing much to do, I decided to monitor the daily fluctuation in price and do a quick buy and sell and lock in some small profits of a few hundred dollars. The downside is that this is not entirely risk free and you maybe forced to hold on to the units but I believe in the long term prospect of FLT and market pricing shall revert to its fair value eventually.

Parting Thoughts

The entire merger exercise will probably take another 3 to 4 months to complete. I do hope that the deal is completed as soon as possible as the new business entity will enjoy better diversification in terms of its property portfolio and also better leverage during negotiation with bankers on financing.

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. 

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.

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.

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 4^th 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 2^nd half final dividends to investors by March 2020.

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".

Summary
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. 

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 4^th 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 3^rd 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?

Sengkang Grand Residences Mixed Integrated Development at Buangkok MRT

Sengkang Grand Residences is one of the most anticipated new launch of the year. This development  is directly linked up with Buangkok MRT station and it has a hawker centre and retail mall inbuilt into it. Residents living in Sengkang Grand will enjoy convenient access to all these amenities right under their home. 

As this is a CDL and Capitaland joint development, one can be assured of the quality of luxury finishing of their purchased home. 

Prices are expected to start from S$1,600psf plus and estimated pricing as follow:
(i) 1 bedder + study: S$798K;
(ii) 2 bedder: S$998K;
(iii) 3 bedder: s$1,498K and
(iv) 4 bedder + flexi: S$2.1Mil

There are a few points here that prospective buyers need to be aware of:

1. Car parking might be an issue- Only 80% of parking lots provided for residents

Total residential units in this development is 680. However, parking lots available are only 544 on level 3, Mezzanine A and B. In other words, only 80% parking lots are provided. The property agents will tell you that many units to be purchased are for investors who will rent out to tenants. Hence these tenants of smaller units will not be driving and only taking MRT. 

I just think that this is very strange for a luxury development as if one can afford paying almost S$1Mil plus for a 2 bedder and above, the residents here will most likely also own a car. As a matter of fact, some may even own multiple cars.  Also, how about visitors of residents to the development?

This may lead to future animosity among residents in the 2nd year AGM after the MCST is formed. Have seen a few cases of such disagreements being surfaced even for 1 to 1 parking with regard to how parking lots are allocated.

Do bear in mind that property agents will not be living in this development after your TOP. So best to get some clarity on how the developer and their first year management plan to resolve this issue.

2. Lack of privacy- Some blocks have up to 10 units per floor.

As the number of floors is only around  8 to 10 levels, the developers have squeezed many units into the 9 blocks in order to get to the 682 units.  Some blocks will have up to 10 units on the same floor while most of the others will have 8 units. The ideal case for private exclusivity is 4 per floor. 

Potential buyers will have to assess whether they are fine living with so many neighbours living together on the same floor. It maybe best to avoid the block with 10 units per floor during selection. 

Potential buyers of Sengkang Grand residences will also need to see whether they are comfortable with the number of lifts serving all units in one block. This is especially so during the morning rush hours when parents are sending kids to school or going to work.

3. Unit Layout- 2 bedders and 4 bedders here are better than 3 bedders in terms of functional usage.

This point can be personal and depends on whether you are a balcony lover. For me, I do not like balcony in the Master bedroom as it is a waste of space. I would rather have this balcony space moved to the living room area to be combined into 1 bigger balcony space than having a space that is neither big nor small for usage. To me, balcony in a master bedroom is just a white space.

Hence I think that the 3 bedders layout is a no no to me. 

4. Facing of some blocks is East and West

In Singapore, I would suggest folks go by the general convention to go for North-South facing units and skip the blocks that have either morning or afternoon sun. If no choice and have to choose a East-West facing block, then go for the stack that only have morning sun (East facing) so that when you come back from work in the evening, your home does not feel too hot and warm which may agitate one especially after a hard and stressful day at work already.

Summary

Overall, Sengkang Grand Residences is a very good development. Since CDL and Capitaland have bid over S$1 billion for the site, their breakeven price is around S$1,500psf. Hence, selling at S$1,600psf plus as a starting base is considered a good price for a new integrated development. For me, at this price, my personal preference would be to buy a cheaper resales unit at Punggol Watertown which has the mega mall Punggol Waterway Point right at the doorstep and also comes with Shaw Cinema.

Price Meltdown For Eagle Hospitality Trust- The Curse Of Queen Mary

Eagle Hospitality Trust ("EHT") IPO debuted at a price of US$0.78 per unit back in May 2019 with lackluster response from retail investors which resulted in one of the worst ever under subscription record for the year. It eventually closed off at a disastrous pricing of US$0.73 per unit for the day which was a 6.9% decline. The nightmare does not end for shareholders of EHT as it continues to plunge in value into the USD$0.64 to USD$0.70 range over the next few months. Unfortunately, the bloodbath rages on with a price meltdown when the issue of lease default on one of its major property asset held in the form of the iconic Queen Mary cruise ship surfaced. This is shocking as the sponsor (Urban Commons) has just listed the trust on SGX. Queen Mary at Long Beach California was valued at US$159.4Mil and makes up 12.55% of the total valuation of the 18 hotel properties (US$1.27 Billion) which are being launched into the Trust. 

Valuation of the 18 hotel properties in Eagle Hospitality Trust

The Curse of Queen Mary

The Queen Mary is a hot tourism spot at Long Beach California which draws more than 1.5 million tourists annually to the site. The City of Long Beach had served a letter on the sponsor Urban Commons for potential default of lease due to essential repair works concerning structural integrity which were not carried out and may lead to the collapse of the ship and cause safety issues for its staff and tourists visiting or staying on board. Urban Commons is required to provide a response to the demand letter by the City of Long Beach. There is thus a perceived risk that Urban Commons may be found to be in default of the lease. If so, EHT will lose all rental income from the Master Lessee. 

An interesting point to note is that Queen Mary was voted one of the Top 10 most haunted places in America by Time magazine given its long and colorful history. The current meltdown in EHT market price makes me wonder whether the ghosts of Queen Mary are haunting it and causing the spate of bad luck?

Is Eagle Hospitality Trust currently oversold?

It is strange that after the suspension of trading halt was lifted and despite extensive clarification by EHT that its sponsor did not default on the lease, many investors simply panic (or maybe a lot of them lost hope) and keep unloading their stocks. As at 25 October 2019 (Friday), the price of EHT was at an astounding all time low of S$0.545 per unit which is a 31% plunge in price from IPO. This is an impressive dividend yield of 11.5% if there is no default and business goes on as usual for Queen Mary. 

In the event of default, distribution is expected to be reduced by around 20%. 

In terms of valuation of EHT, it will drop by 12.55% as per the aforesaid adopted valuation of key assets.

Compare the expected decline in yield or valuation relative to the current 31% decrease in price, there seems to be a  more than 10% margin of safety for current investors who took up position.

Risk of further selldown of EHT- Red flag indicators

The point here to note is that the above math is based on stripping out the financial contribution of Queen Mary to EHT. I can actually think of at least 3 scenarios that can worsen the entire situation and self implode EHT notwithstanding the Queen Mary problem. The key point to note here is that Urban Commons had claimed that all along, structural issues had been resolved. But it remains a fact that if so, why would the authorities of City of Long Beach issue out such a letter to Urban Commons and demanded a reply by 31 Oct 2019?

Other red flag questions investors need to ask here are:

(i) Is Urban Commons facing cashflow issue here such that only selective bare minimum key repair works can be performed?

(ii) The issue of default conditions are at dispute here. Urban Commons definition and the City of Long Beach definition are different. Why would the City of Long Beach send out the letter if Urban Commons had been diligently carrying all out repairs deemed necessary?

(iii) What are the values of the senior management and working culture at Urban Commons, the sponsor of EHT? The current incident whereby they served the letter by the City of Long Beach actually does say something about them. At the bare minimum, the communication standard is poor that lead to the breakdown in understanding on both sides.

(iv) Will there be a potential law suit in future by the City of Long Beach against Urban Commons?

(v) Is Queen Mary the only property affected? If the sponsor turns out to be under financial distress due to any of the above, EHT will be negatively affected not just by Queen Mary but in fact all the rental income from its lessee are at risk (please see below screenshot on Master Lease Agreements). Hence it is a fallacy to simply assume that segregating out the Queen Mary will derive the net value of the remaining hotels. All the Master Lessees are actually literally on the same boat.

Parting Thoughts

No one has a crystal ball to know exactly whether the current situation will deteriorate further or it is just simply an over-reaction by the market. Investment is based on one's assessment of the probability of good news or bad news to determine valuation. Risks are inherent in all businesses.

For myself, I have started picking up some stakes in EHT as I find the entry price very attractive to compensate for the potential downside risks. I would never imagine myself to be holding on to hospitality related businesses as I find them too cyclical in nature and bad for my heart. It is a taboo for me. For EHT, the current price meltdown as well as the attractive fixed rental income component of 66% relative to 34% variable component made me change my mind.

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

During my last posting on First REIT, I have mentioned the shocking analysis by Phillip Securities Research team that there is a potential 80% rental income gap once Lippo Karawaci exit itself from the upcoming lease renewal exercise of the first batch of expiring hospitals and leave negotiation to between First REIT and Siloam group. I have written an email to the Investor Relation team of First REIT to seek further clarifications on the assertions that were being made by the analyst. 

This morning, I received a return call from First REIT Investor Relation officer. I must say that they are very professional and prompt in their response. This actually speaks volume of the type of good management philosophy and values of the First REIT team lead by their CEO, Victor Tan.

The below are the key highlights of my discussion with the Investor Relation Officer of First REIT this morning:

·        Yes, it is true. There is an 80% rental income support by the sponsor Lippo Karawaci to Siloam. This is not a typo in Phillip Securities Research report. This issue was first raised up about a year ago by OCBC’s Research team.

·        Background was that Siloam used to be a business division under Lippo Karawaci. Hence master lease was signed between First REIT and Lippo Karawaci. After listing of Siloam Hospital Group in 2013 as a separate legal entity, new leases began to be negotiated directly between Lippo Karawaci and First REIT.

·        There are many investors who have been also asking this question at various investors road show.

·        There are a number of stakeholders involved in the negotiation, namely, Lippo OUE, Lippo Karawaci and Siloam Group. Many teams of lawyers representing the different stakeholders are trying to reach a draft agreement. The targeted date to present out a first cut for EGM to shareholders will be around December 2020 which is one year before the expiry of the master lease for the first batch of properties. However, First REIT is aware of the concern by many shareholders and is trying to present a proposal for shareholders’ approval way before the 1 year expiry target date. In the event that the proposed new lease agreement is rejected by shareholders (Lippo will abstain their votes for this EGM), they will go back to the drawing board. 

·         80% drop in rental in the worst case scenario is unlikely. According to the Investor Relation Officer, if the rental is so low, they might as well decide to let another healthcare group to come in to operate the hospital.

  

My Personal thoughts:

I can only conclude that there are various ticking time bombs inside First REIT that I was unaware of until the recent turn of events. The first one that is set to go off will be the first batch of expiring hospitals and hotel under Lippo Karawaci in December 2021.

I think that the probability the renewal will be done at a lower rate is almost 100% given that the financial statements of Siloam is clearly showing that its financial resources will not be able to cover the entire huge gap of 80% subsidy by Lippo Karawaci based on the detective work done by the analysts combing through the 2018 annual report of Siloam.

The only question is how much will be the drop in rental income? The first batch expiring is due only in December 2021 and make up only 22% revenue of total revenue. Hence assuming a 50% confirmed drop in rental income from Siloam during the lease renewal exercise, it will translate to only a 11% decline in overall property income of First REIT. Remaining lease only expire in year 2025 to 2032 which is still a long way to go.

Has this been priced into the current market price per unit of First REIT?

Before the issue of the credit crunch and lease renewal came up, First REIT units were trading at a range of of $1.30 to S$1.40 range in 2018. Its price dropped to almost S$0.90 during the credit default risk period but eventually recover to hold at around S$1.00 to S$1.10 after the rights issue by its sponsor, Lippo Karawaci. This is approximately a 25% to 30% correction in price by the market due to the uncertainty over the upcoming lease renewal exercise. It would appear that the market had already priced in most of the reduction from the original 6.5% yield as risk premiums. The yield has now shot up to 8.4% based on current market unit price of S$1.01 per unit.

The risk is price may drop by another 11% in line with the net decreased impact of the first batch of renewed properties by 50% or worse, investors may extrapolate and automatically price in expected future declines in all properties to derive a more sustainable property income and associated dividends. It will be hard to visualize the equilibrium point to be reached if investors views are so pessimistic.  

What if renewed lease is no longer in SGD but IDR denominated?

Also, on the issue of new lease contract being in IDR instead of SGD which gives rise to forex fluctuations, the CEO Victor Tan had mentioned previously that he can peg the rental adjustment to  higher inflation rates benchmark in Indonesia rather than Singapore in order to close up the exposure in forex risk.

Parting thoughts

First REIT remained a higher risk REIT relative to other REITS due to the many variables surrounding it. For me, I will gradually be doing a partial paring down of my stakes in First REIT over the next 1 year to reduce concentration risk in view of the latest information but I maintain an optimistic view that much of the negative information has already been priced into this REIT with a long WALE of 8 years in the medium term. Also, 8.4% yield up to Dec 2021 before the first batch of hospital properties reached expiry represented an almost 17% (2 years’ worth of dividends compensation) to cover any further downside. Part of my optimism comes in from the new CEO John Riady who confirmed that Healthcare will be one of Lippo’s key business unit (which is at lower risk of technological disruption). It also does not make sense for both Lippo Karawaci and Lippo OUE to dramatically destroy their own reputation by dropping the rental to the extreme scenario of 80% as they still need to tap capital from the market.