Sunday 27 February 2022

United Hampshire US REIT Super Attractive 10% Distribution Yield Per Annum- Cash Cow Too Good To Be True?

With the invasion of Ukraine by Russia, United Hampshire US REIT ("UH REIT") was not spared the carnage on world-wide stock markets with the already low trading price being further hammered till US$0.61 per unit as at 25 February 2022 (Friday) closing despite the relatively good results just being announced. Given the total DPU for the full FY2021 is US$0.061, this means an extremely attractive distribution yield of exactly +10.0% per annum, not withstanding the fact that the latest acquired properties contribution only came into effect on 14th October 2021. This also means that for FY2022, UH REIT stands to enjoy another upside of 9.5 months of additional rental contribution coming from Penrose Plaza Philadelphia and Colonial Square Shopping Centre Virginia. I will also attempt to elaborate a bit later on why the current ongoing war in Ukraine actually benefits REITs based in US. 

1. 2nd half 2021 results highlight
Financial highlights comparison to forecast and historical results

Operating metrics appear healthy

As we can see, UH REIT financial results remain well within expectation. Its performance has also improved a lot if compared to historical 2nd half numbers. Operating metrics such as leases expiring in 2022 has been reduced from 9.2% (as at 31 Dec 2020 )t o only 1.5% (as at 31 Dec 2021) with good work by their business development team on renewal. In addition, its WALE is relatively high at 7.9 years which gives much stability to recurring rental income. 

2. Sales of self storage facilities and income support complaint by retail investors
I am glad that UH REIT has entered into a conditional sales of their self storage properties Elizabeth and Perth Amboy for a sales consideration of US$49 Mil (before transaction costs). Taking into account the purchase price of US$43.4Mil inclusive of income top-ups, this represented a +12.9% sales premium. 

Whenever UHREIT is mentioned, there will be retail investors bringing up the topic of income support of these facilities and associated grievances about the "artificial" rental income. It is thus good to realise the associated profits with these self-storage to lock the profits and then recycle the capital. 

3. Effect of ongoing war in Ukraine by Russia on US.
The ultimate winner of the current Ukraine war will be USA. US will be selling more weapons to its European allies in view of the "belligerent" Russia Federation. The shale oil industry in US will also benefit from the upcoming sharp increase in oil & gas prices not to mention the possibility of exporting oil to European allies should Russia stop the shipment of oil & gas to Europe in view of the SWIFT ban being imposed on Russian banks. 

During world war 1, the US economy was in recession. But a 44 month economic boom ensued from 1914 to 1918 as Europeans begin purchasing US goods for the war. Such is the economic reality of war. So, I expect the economy of US to be doing very well in the near future albeit the ongoing smaller scale war. This should continue to support grocery and necessity properties from the trickle down effect. 

4. Main key risks for investors of UH REIT
Retail investors need to also consider risk factors associated with holding on to UH REIT and not get overly excited with the incredulous 10% distribution yield annually.

a. Rental rates cannot catch up with the rapid inflation. 
While there are rental escalation clauses, the rate of inflation spike may be a lot higher and faster than the allowed rental escalation.

b. US withholding tax changes.
We need to be careful of US tax authority IRS changes in tax rules. Currently, the US REITs listed on SGX are using special vehicles in US and sending back dividends to Singapore via a capital distribution model in order to get past the withholding tax requirement (tax shield). Note that US authorities may pass legislation to change this and having withholding tax being levied will reduce a substantial part of the dividends derived from US properties. 

For those interested on the technicality of the US tax shield employed by US REITs listed on SGX, I have previously done up a short write-up on the background and origin of "capital distribution" of US REITs in my Manulife US REIT posting here.

c. Low trading volume on SGX.
Personally, I find the daily trading volume of UH REIT to be on the low side. It is not very liquid. If one is in urgent need of cash and needs to sell, you may have to drop the price a lot in order to liquidate your holdings fast.

d. Loss of economic moat due to e-commerce
What if online fulfilment became cheap and efficient enough to deliver groceries directly from vendor's warehouse to the consumer at their own home? Will renting physical property still be necessary? Retail investors will need to keep a close watch on the market trend and sell immediately if this model of ownership is no longer relevant. The issue of being geographically far from the actual location of the properties to have adequate and timely visibility is another physical challenge in monitoring. 
Parting thoughts on UH REIT being a cash cow with super attractive yield of 10%
Notwithstanding the key risks as discussed above, FY2022 looks set to be another good year for UH REIT with the upcoming sales of the self-storage properties at a premium of 12.9% to cost as well as the additional rental contribution from Penrose Plaza and Colonial Square Shopping Centre. If UH REIT can re-deploy the sales proceeds fast enough for additional yield accretive acquisition towards the end of FY2022, this could be another price catalyst. I do hope that the sales of the self-storage properties would at least unlock part of the hidden value trapped within the current US$0.61 per unit which is grossly undervaluing the REIT from its IPO price of US$0.80 per unit in March 2020. UH REIT has so far produced a good track record of its resilient earnings throughout this COVID pandemic since IPO.  

Friday 25 February 2022

War in Eastern Europe- Time to Sell Off All Stock Investments or Investment Opportunities Arise Again?

I will start off this blog post with some personal updates about myself. The past 2 weeks has been a real struggle for me. Last Monday, while preparing to go back to office, I performed my ART routine as usual and this time round, I was shocked to see a double line. I did not feel unwell except for feeling a bit of itchiness in my throat at that time only. I also became the pioneer employee who became the first staff to contract COVID in my company. Thereafter, all hell broke lose and COVID became rampant in Singapore with daily cases over 15K to 16K. Good news is that it feels like getting the normal flu with a bit of blocked nose and sore throat similar to what the MOH website published 99.7% statistics of people who got COVID will experience mild symptoms. But well, you never know whether you will end up as the 0.3% statistics of severe case that need hospitalization treatment for oxygen or other medical treatments if we take this too lightly.
1. War in Eastern Europe by Russia against Ukraine- Time to sell off investments or Investment Opportunities?
Just coming off the worldwide interest rate hike crisis which hits stocks badly, we now have another crisis coming out of Eastern Europe. Russia has decided to invade Ukraine. The Singapore Stock market plunged on 24 February 2022 (Thursday) with the short announcement by Putin (who increasingly seems to be behaving a lot like the previous dictator Joseph Stalin of the Soviet Union) that Russia will be launching a "military operations" against Ukraine. I think that this is just playing with words. An invasion and war is what it is. Let's call a spade a spade. 

It is interesting to see their ally China being placed in an awkward position with their foreign affairs ministry also trying to label this invasion as a "military operations" instead of an ongoing war in order to show solidarity behind Russia.

So is it now the time to sell off all stocks to avert the current market instability and further downsides?

2. Time to sell off all stock investments?
My usual thoughts are that it is very difficult to time the market. While the initial shock will typically cause the stock markets to sink into the red, the stock markets will eventually recover. I only did some minor sell off during the past few days to capitalize on stocks which have dropped significantly. No point trying to do mass selling and then trying time a market low to re-enter as one may miss out on the recovery surge. Anyone who tells you that they can accurately predict high point to sell and low point to re-enter the market from their crystal ball is just nonsense.

My own personal thoughts are that the end game is near. Without US and NATO support, Ukraine is doomed from the start against a more advanced and bigger armed forces of Russia. It also does not help that by end of Day 1 of the invasion, Russia has won air supremacy over the whole of Ukraine. 

I do not think that this will be a long drawn out war that will affect oil and gas supplies for too long.  While Ukraine history with Russia is complicated and both of its people are vastly different, there are many with families with ties in both countries. Hence I do not think Putin is out to totally destroy the people of Ukraine. Rather, Russia is trying to control the government of Ukraine to turn it into a puppet state in order to secure its own dominance in Eastern Europe.

3. Investment opportunities and my watchlist
There are many good bargains from the recent decline in stock prices on SGX. USA stock market still appear very high to me. China stock market is worrying due to the near collapse of their property sector which made up a huge proportion of GDP. As alluded to point 2 above, I do not think the current fear of sanctions and oil supplies disruption will spill over excessively on a long term basis to cause irreparable damages to global economies.
OCBC is interesting. Despite missing their Q4 2021 results against expectations of market analysts, it is still at an overall improvement of 35% net profit for FY2021 relative to FY2020. What's more, the reason for missing target is due more to conservative allowances being made. Personally, I felt that the market seems to have overreacted with a 5.8% drop in OCBC from S$13.16 to S$12.40 on 23 February 2022. Then as at 25 Feburary 2022, it further slumped to S$11.85 per share following Russia's invasion of Ukraine. I have started accumulating additional OCBC shares during this period. 
Another fascinating one would be United Hamsphire US REIT. It has consistently performed well with an extremely attractive distribution yield of 10.0%. United Hamsphire has delivered resilient results throughout this COVID crisis. However, its unit price is currently at a miserable US$0.610 as at 25 February 2022. 

Parting thoughts:
For every crisis, there will also be an opportunity. 2022 seems to have kicked off with a big bang.  I look forward to deploying my upcoming dividends receipt of S$12K in March 2022 back into the market. 

Last but not least, I wish everyone good health and all the best to you folks in your 2022 investment!

Sunday 6 February 2022

Dividend Growth Investing Approach Actually Do More Harm Than Good?

Investing in dividend stocks can actually do more harm than good? I was looking at this local You-Tuber channel and his proclamation and nearly fainted. First and foremost, I think it is strange that someone can actually brand a particular type of investor as "growth investor" or "dividend investor". I am not sure whether such a simplistic view holds true given that most investors actually invest in a number of assets and stocks. Anyone, for me, I guess i am mostly a "dividend investor" mentioned by the You-Tuber so I will proceed to examine some of the interesting points raised by the You-Tuber below:

1. One should not invest just based on dividend criteria alone
Of course. I thought every investors know this. The high dividend yield trap is a well known phenomenon. We need to look at many aspects of the business and also macro-economic situation. 

If we look at dividend alone, then all investors would have invested 100% of their portfolio in Dasin Retail Trust for a 15% dividend distribution yield. But obviously, no one does that right- in view of the significant risk of default of bank loans. 

2. Dividend does not matter at all
According to this You-Tuber, whenever a company pays dividends, the stock price will drop by the same amount. Hence dividend does not matter at all and it is just a "forced withdrawal".  Yes or No? Yes according to Accounting Theory. But "No" based on imperfect market. For example, on 3rd January 2022, Keppel DC REIT was trading at S$2.47 per unit. Then on 31st Jan 2021 Ex-Dividend date, its price was only S$2.14 per unit which is a drop of S$0.33 per unit despite dividend declared of only S$0.04927 per unit for 2nd half of 2021. What I am trying to say is that real-life situation are complicated. 

3. Hard to compound/reinvest dividends that has been paid out.
The You-Tuber mentioned that if you get say S$40 dividends from your stock investments, it is hard to reinvest this back as the standard board lot size is 100 units. One would have to wait till the dividends grew to a significant amount to reach at least 100 units (the standard board lot size on SGX) to re-invest the dividends proceeds. I have to say that this is one of the weirdest point I ever heard. SGX took the effort to reduced the standard board size from 1,000 units to 100 units already since January 2015 for the benefit of all investors. 

Let's use Mapletree Industrial Trust as an example which cost S$2.52 per unit. 100 units will be S$252.  Assume one has S$40 of dividends, one just need to top up S$220 and above to participate in the reinvestment. This is actually quite easy to reinvest back the dividends. The only show stopper will be the high traditional brokerage fees which has a minimum charge of around S$30 per trade. However, since online brokerages like Tiger Brokers ramped up their businesses, they have been offering very attractive commission of 0.03% or minimum S$0.99 per order.

Parting Thoughts
A dividend strategy actually matters a lot to me personally. The "forced withdrawal" allows one to keep or re-deploy the cash generated from the business at regular intervals during the year. If anyone told you that they consistently know the exact exit time in the market to sell off their growth stocks, chances are that these are fake experts. Hence the dividend strategy instead provides much flexibility in terms of the options available on how to re-allocate resources for one's overall investment portfolios.