Sunday 30 January 2022

Keppel DC REIT Market Price Collapse Nightmare- Should One Start Dumping All Units?

Recently, S-REITs unit price collapsed along with most of the world wide stock-markets. The once rising star of data centres focused REITs, Keppel DC REIT, plunged to a record 52 weeks low of S$2.16 per unit as at 28 January 2022 (Friday) . The speed of the devastating plunge in the last 2 weeks shell-shocked many retail investors as just 12 months ago, the price of Keppel DC REIT was at its 52 week high of S$3.040 per unit in the midst of the COVID pandemic and its meteoric rise looked unstoppable. So what has happened to this infallible bright star, that some investors proclaim is a REIT with the potential of a growth stock with numerous upcoming M&A opportunities yearly, to cause it to fall into the abyss? Should investors start dumping all units in Keppel DC REIT in view that prices seems to be plunging dramatically every day?
1. Upcoming macro-economic background changes- sky high inflation in US. 
The Federal Reserve has left interest rates and a key bond-buying taper plan unchanged on Wednesday 26th Jan 2022 but nevertheless, it has given a clear signal that the period of easy-money policies is coming to an end as inflation soars to a 40-year high and joblessness comes close to a half-century low. The current Federal Reserve fund rate is at 0% to 0.25%. The forecast by Analysts projected a 3-4 impending hikes for the Federal Reserve Fund rate of approximately 0.75% to 1.00% for FY2022 and 1.75% to 2.00% for FY2023. This will in turn push up world-wide interest rates. 

The severe decline in prices of Keppel DC REIT as well as other S-REIT is thus attributable to not just expected higher cost of borrowings but most importantly, if risk-free bond rate starts to go up, the expected returns from holding REITs by all investors will need to increase on top of current yield. To find the short term equilibrium pricing, ceteris paribus, the price of a REIT thus has to drop in order to adequately compensate investors for holding on. I expect the pricing volatility and the declining trend to continue for the next 2-3 months at least. 

2. What is the impact on REIT pricing and when will the price collapse bottom out? 
Let's use Keppel DC REIT distribution per unit as an example. Recent distribution per unit for FY2021 is 9.851 cents. Its price on average over the last 6mths is around S$2.50 per unit. 

This gives rise to a distribution yield of 4.1%. From a high level perspective, if risk free interest rate is expected to increase by an additional +0.75% to +1.0 % in the near term, one would expect a yield of 4.85% to 5.1% after the adjusted new risk free treasury rate.

This will mean a pricing range of S$1.89 to S$2.04 per unit eventually.  

However, I think that such simplistic basis and current panic mode is way too pessimistic on fair value assessment. I will also use another full data Centre focused REIT, Digital Core as comparative benchmarking to project my own assessment of a fair market value for a sanity check. Please see Pt 3 below. 
3. Proxy bench marking to other Data Centre REIT- Digital Core REIT.
The IPO price of Digital Core REIT is US$0.88 per unit. Taking into account many investors expecting the yield of 5.26% from its 2nd year onwards and the strong performance post IPO price of US$1.15 per unit, this will imply an expected yield of 4.03% for data centre assets despite the proclamation by the US Federal Reserve to increase interest rates. 

Personally, I view Keppel DC REIT to be vastly better than Digital Core REIT given that the former has a geographically wider diversification of its data centres relative to the latter. In addition, the sponsor of Keppel DC REIT is Keppel Corp with a strong pipeline of data centre in developments as well as the financial might of Temasek rallying behind them. 

Using 4.03% yield as proxy, Keppel DC REIT's fair valuation pricing should be around S$2.44 per unit. As at 25 Jan 2022, it is interesting to note that CGS-CIMB analysts have a target price of S$2.70 for Keppel DC REIT. 

Parting thoughts
Given the strong demand for data centres worldwide and the potential for acquiring yield-accretive assets in the pipelines for Keppel DC REIT, I think that the current interest rate hike issue has been overblown and that many investors have been beating it down way below its fair value at the current low price of S$2.16 per unit. For me personally, I have taken the opportunity in this recent sell down to increase my holdings in Keppel DC REIT. It has climbed to the top 3 investment holdings in my overall portfolio. 

Sunday 9 January 2022

Don't Act Too Smart And Be Silly Instead- How To Survive In Workplace Full Of Office Politics.

Too busy to blog these days. I was busy chasing an interesting Chinese TV drama "Sword Snow Stride (雪中悍刀行)".  I like the story line a lot which reminds me of our workplace back at office. The story goes like this: Xu Feng Nian ( 徐凤年) is the son of the Great Grand Marshal General Xu of the Northern Army numbering 300,000 strong horsemen. Even the ruling emperor fear the Xu family due to their sheer military might.  As such, the emperor is constantly plotting against the Northern Army in a bit to weaken their leadership by all means which include assassination. The main lead, Xu Feng Nian, thus pretended to be a good for nothing since he was young who went around stirring trouble and womanizing in order to fool the imperial family into thinking that he is of no threat despite him being a genius. 
Similar to many workplaces, most people when joined a new company, tried hard to impress the boss or immediate superior by demonstrating their brilliance and capability in order to secure their confirmation and promotion. But sooner or later, one will come to a stage whereby one will realise such constant demonstration will only invite trouble. A sword that is constantly unveil tends to attract envy or hostility by colleagues or dumping of extra work by the boss or immediate superior and only marginal returns in terms of future staff remuneration. There are times when one will need to appear silly instead of striving to be in the limelight all the time which is akin to inviting one's own demise at the workplace.

As the saying goes, do things in moderation. Chasing after money and status are important but family relations and health are even more vital. Live long enough to enjoy life and be happy. Thanks for reading and have a great week ahead!

Sunday 2 January 2022

The Merger Into Mapletree Pan Asia Commercial Trust- What Should Existing Mapletree Trusts Investors Do?

The talk of the town this week is the proposed merger between Mapletree Commercial Trust ("MCT") and Mapletree North Asia Commercial Trust ("MNACT") into a combined behemoth known as the Mapletree Pan Asia Commercial Trust with S$17.1 billion worth of assets under management. Through the proposed merger, MCT will gain ready access to footholds in key gateway cities across Asia, tapping on the established network, strong local expertise and on-the ground presence of both MNACT and their Sponsor, Mapletree Investment Group. Wider geographical exposure will also provide the combined entity a new trajectory for overseas growth. While the marketing materials make it seems everything is perfect, I will try to elaborate more on the elephant in the room for the upcoming merger: Yes- my thoughts are that this deal unfortunately does not bode well for certain group of unit-holders.

1. Existing downside risk for unit-holders of MNACT being transferred to MCT
(i) The biggest headache here is that the China and Hong Kong are still pursuing a zero COVID tolerance approach while many other countries have already started opening up and adopting a live with COVID strategy. Furthermore, Sinovac vaccines has been found in a recent Hong Kong study that it does not provide sufficient anti-bodies to neutralise the Omicron variant. It will be some time before things get back to normal before the pre-covid days. We can already see many negative rental reversion in the crown jewel Festival Walk of MNACT. Most Hong Kong retailers have remained conservative and cautious on committing to long-term leases.
There were 35 leases at Festival Walk in 1st half of 2021 that were renewed at an average -30% rental rate

Gateway Plaza at Beijing also have 13 office leases being renewed at an average negative rental reversion of -24% during the most recent results announcement.
Beijing office also performed badly with -24% rental reversion

(ii) Let me explain further here on another blip on the radar. Eventually, China and Hong Kong will have to open up their borders fully. This will lead to a stage whereby their healthcare system will be initially overloaded with many COVID cases and death rate will go up. This is similar to European countries and Singapore which have already went through this initial stage. Hence, there will be enhanced control measures in place which is obviously bad for business. I expect the opening up to be somewhere end of 2022 or even in 2023 which means that MCT will be picking up the tab for this issue while paying NAV price for MNACT. 

2. MNACT properties are not in the same league as MCT's Vivocity and Mapletree Business Parks
Compare Festival Walk, the China and Japan commercial office properties to Vivocity and Mapletree Business City- I don't think we need to discuss this further to know that existing MCT unit-holders will be getting the shorter end of the stick here. 
3. Should Unit-holders of MNACT sell off their units upon resumption of trading?
Well, this is the fun part which needs some form of mental acrobatics given that once the trading halt is lifted, the market price will fluctuate. Due to point 1 and point 2 as aforesaid mentioned, there is a very high probability that MCT will dip below S$2 as MCT unit-holders will most likely be frowning at being given the shorter end of the stick. As such, MNACT trading price will be below S$1.19 along with the fact that this deal is not done yet.

In short, we can expect MNACT to be trading in the range between S$1.11 per unit (the last traded price) to S$1.19 per unit. My guess is that it will hover around S$1.15 per unit for now. Of course, if the price of MCT suddenly shot up instead to more than S$2.0039 per unit (the offered consideration to MNACT), then one can consider keeping it.

To sell or not for existing MNACT unit-holders will ultimately depend on your own entry price, concentration of your own portfolio and other investment criteria.  For me personally, I maybe looking at exiting my MNACT current holdings as my entry price was around S$1.00 per unit for an immediate realization of my profits and re-deploy them to other undervalued commercial REITs. 
4. Should Unit-holders of MCT sell off their units upon resumption of trading?
As alluded to the above points, there are some short term downside risks being transferred over to MCT from MNACT. This has no doubt some short term repercussion. But current medical advancements against COVID is picking up pace. The long term picture still bodes well for unit-holders of MCT in terms of assets and geographical diversification. 

I plan to carry on holding my units in MCT to maintain sufficient portfolio diversification in my margin investment account portfolio
Mapletree Business City
Parting thoughts:
There will certainly be some unhappy unit-holders who would have preferred their own plain vanilla REIT focusing entirely on either overseas or Singapore. Another point that I want to bring up to everyone is that from long term perspective, I believe that the merged entity of Mapletree Pan Asia Commercial Trust will have economies of scale and more diversity of assets. Last but not least and most importantly, the sponsor is Mapletree and behind it is the financial might of Temasek supporting it- this is a premium factor in itself.  

P.S: I am currently an unit-holder of both MCT and MNACT units.

Investment Portfolios Updates- S$643k (31 Dec'21)- Upcoming Merger Between Mapletree Office And Retail Trusts

It is certainly great news that the SGX ended the last week of December 2021 with a little bang which brings much needed reprieve from the Omicron variant shock just over a month ago. The performance of Singapore REITs has so far been extremely disappointing.  It has been a lagger in 2021 compared to other sectors and if 2022 is good, hopefully, we can see at least 10% increase in capital appreciation which will bring my overall investment gross portfolio to over the S$1Mil mark. Saying that, as an income focused investor, I am happy to see my projected dividend growing gradually rather than the wild fluctuation up and down in stock prices throughout the year. Mapletree has also announced the proposed merger of 2 of its REITs into a $17 billion asset new entity known as the Mapletree Pan Asia Commercial Trust.

1. Portfolio 1- Stocks held in SGX Central Depository

During the past month, I have been accumulating units in Capitaland Integrated Commercial Trust ("CICT"). Its unit has dropped significantly since an all time high of S$2.35 per unit earlier this year to around S$2 per unit recently and I bought an additional 5,000 units in mid-December period.

On 27th December 2021 (Monday), I certainly regretted not buying more units of Mapletree North Asia Commercial Trust ("MNAC").  At that juncture, I was planning to add on another S$10K of investment into either MNAC or CICT. Since the price of MNAC surge suddenly (on hindsight, this seems most likely due to leakage of the upcoming corporate action), I decided to invest the additional funds into CICT instead. There is also an upcoming downside risk holding MNAC which I will probably elaborate more in another blog posting. Basically, this downside risk will also materialise in the proposed new entity but in a somewhat subdued form with the new geographical diversified property portfolio. Nevertheless, there will still be some adverse impact.

2. Portfolio 2- Margin purchased securities

I did not make any additional investments in the month of December 2021 into this portfolio. The only thing I did was to continue using my dividends received to pay down the borrowings from the margin facility. 

3. Portfolio 3 (with Tiger Brokers)- Venture into higher risk as well as capital growth stocks here

No change here for the month. 

Alibaba continued its downward slide. In short, terrible share price performance so far. 

Dasin Retail Trust is having problem getting the bankers to continue lending it money and was on the verge of syndicated bank loans default. A trading halt was called and an announcement was made that the loan renewal is still in discussion stage due to last minute new requests by some of the lenders. However, the bankers extended the loans by another 3 months to give it some much needed breathing space.

Parting thoughts
The venture into my portfolio 3 for capital growth using higher risk stocks seems to be doing badly. Good thing here is that I have restricted the funds being deployed here to keep it small. The rest of the portfolio following the income investing approach is still holding up well.  My StocksCafe is showing me a total of S$43K of dividends received this year (2021). Not too bad, considering the impact of COVID on low distributions declared from late 2020 to 1st half of 2021.