Saturday, 11 March 2017

Ascott REIT Rights - Another capital-raising exercise by issuing new shares

Recently, Ascott REIT hogged the headlines in the substantial rights exercise it was offering. It was offering 29 new shares for every existing 100 shares held. The money raised would be used to fund the acquisition of 2 Germany properties with the similar name of Citadines as well as Singapore's Ascott Orchard.

The last time I was involved in this REIT was quite some time back when I was able to use Standard Chartered to "play" a few 100 shares at a time and trade on price movements. It was subsequently liquidated when Standard Chartered cut short the "no minimum commission" party. Pity, but based on management's effectiveness over the years, it was really poor as it showed that the interest of the management was not aligned to that of the shareholders. The intended target was clearly mentioned; they intend to raise the value of the Assets Under Management (AUM) to $6 billion by 2017. Even with the current acquisitions, they are short of $700 million. We would probably expect some more cash raising activities if they intend to achieve this target by end 2017.


What this is telling me is that they will probably go on a shopping spree to buy some property, whether or not it would be of interest of shareholders would be a question mark. Gearing would be reduced by this rights exercise, but it is still near to the uncomfortable 40% gearing.

Ok, so some readers must be at this point wondering why I am writing a post on this REIT, after a long hiatus from writing posts other stuff other that my monthly regular portfolio updates.

Now, fundamentally, I do not like the REIT. Or rather, I do not like how the management is running the REIT. They don't seem to have the shareholders in mind and it really shows in their actions of cash raising exercises over a short span of a few months. While they may have the giants Capitaland and Ascott backing, they seem to be a "dumping ground" for Ascott to divest their properties.


What really caught my eye was the substantial rights exercise. After the share prices reacted negatively to the announcement of the rights exercise, I bought some units during the consolidation phase at $1.115 each using the Standard Chartered Bank (SCB) platform. And then, when the units went XR yesterday, I sold all of them at a price of $1.095 each, which means I made a loss of around 2 cents excluding commissions.

From the rights exercise, I will be entitled to 29 shares for every 100 shares I hold, which means I will have to cough out more money, around 1/3 of my deployed capital to avoid the dilutive effects of the rights exercise. But that is set to change because I have already liquidated my position, albeit at a loss. But the good news is, I have the sale proceeds to apply for the rights, and it is enough for me to apply for further excess rights to up till 2 times of my entitled amount without requiring me to cough out any more capital.

So if I do my maths well, if I were to just collect my entitled rights, my average cost price would be just around the $1 region, even after accounting for the loss I made from the trade I made in the mother shares yesterday. Based on the closing price on Friday, I would be in the black of around 9 cents a piece. This is of course, assuming that the price maintains this price level until the new rights shares are issued in 31 March. However, we would have to expect some sort of "overhang" on the units, as how the analysts love to use, because of the substantial rights issue.


And if I were to apply for a further excess rights of a similar size to my entitled amount, and manage to get it, my average cost would slip to around $0.96. Because the rights issue price is $0.919, if I were to apply and get 2 times further excess rights shares equivalent to my entitled amount, the price would be further reduced to $0.94. So with every same injection of capital into the rights exercise, the cost price would decrease at a decreasing rate. But this all is based on the assumption that I get all the excess rights that I apply for, which is likely not the case.

Because I used the Standard Chartered account, the rights deadline would be shortened and I would need to inform that well in advance to ensure my instructions are executed as planned. I have experienced previous rights exercises with Standard Chartered and I have been pleased with their performance so far. Keppel DC REIT was the last one I did with SCB and I was pleased to know that I did not even have to pay for the $2 atm charge had I bought the shares into my CDP account.


This is simple to understand why. 

Standard Chartered is the designated nominee account holding all shares of parties like myself using the SCB account to buy shares. Because all the shares held by different parties using SCB is collated together in one SCB nominee account, they are able to make the rights application in a single name, which results of the $2 charge spread across the many parties using SCB, to the point that the charge is almost minimal, it is negligible! Please note that this is purely my understanding and I do not know what actually is the reason why. So I would be really grateful if there are readers who knows the inside workings of the bank to correct me if I am wrong.

Furthermore, I had used Standard Chartered because it is still the cheapest brokerage in town. This is because to minimise my average cost of each units, it is very crucial to keep fees to a minimum.

And that is it. I am now just waiting for the notice from SCB to arrive and I am probably just going to use all the sale proceeds to apply for as many rights shares as I can get.

Wish me luck!


Saturday, 4 March 2017

Portfolio Update - Febuary 2017

*As of 1 March 2017

Counter
Average Price
Yield on cost(%)
Weightage
Starhub
3.4700
4.60
9.28%
SIA
9.8600
2.00
8.79%
Singtel
3.6700
4.00
8.72%
Fraser Logistics & Industrial Trust
0.9267
7.50
7.43%
First REIT
1.2525
6.75
6.70%
ParkwayLife REIT
2.4000
5.10
6.42%
M1
2.3600
5.00
6.31%
SembCorp Industries
2.4500
3.00
5.82%
UOB Bank
18.2150
4.00
5.41%
Capitaland Mall Trust
1.9050
5.80
5.09%
CDL Hospitality Trust
1.3050
6.80
3.49%
Keppel Corp
5.3700
5.00
4.79%
SPH
3.7500
5.00
3.34%
Keppel DC REIT
1.0822
6.17
2.57%
Capitaland Commercial
1.3523
6.15
2.01%
SPHREIT
0.9293
5.80
1.93%
Ascendas Hospitality
0.6991
8.03
1.04%
Mapletree Logistics
0.9800
7.40
0.87%
STI ETF
2.8058
3.50
10.00%
Total
4.83
100.00%

Legend
CDP
SCB

Total Invested Capital = $33,666.87

Total Expected Dividends/month = $135.50

Average Dividend Yield = 4.83%

It is already going into the third month of 2017 and I am surprised I had been busy buying into a market which was flirting with its highest since 2015. This will be a short post to update some changes to the portfolio.

Some highlights of some recent transactions:

1) Closed out position in OCBC

OCBC had reported lacklustre results for the last quarter of 2016. In fact, on hindsight, it has performed the worst amongst the 3 biggest local banks in Singapore. The stock fell the hardest on the news, and I did initially have a TP of $10 to offload the rest of my OCBC stocks. But given the results, I reduced my TP to $9.50, which I eventually took profit at that price a few weeks back. The reason of selling is based on much higher PEs and that it has almost reached the highs attained in 2015. I would definitely be happy to pick up OCBC stocks should prices revert lower. As for my other bank stock, UOB, I had decided to keep the remaining stakes to wait and see if the slightly better results can take the stock higher to retest the previous highs of $24 back in 2015. If it doesn't, I am happy to hold the remaining local bank stock I have.



2) Initiated new position in SIA

The only airline stock listed in Singapore was the only stock I felt had some value in a rapidly rising market in Singapore. It had went the other way while share prices of oil rigs, banks other STI constituents were rising in tandem to the index. This, of course, should not be the only reason why one should invest in a particular stock. I had a positive feeling on the recent results of SIA, despite it still being lacklustre as expected. The management of SIA had a proven track record of well-executed navigation in a very challenging airline market. I don't expect the airline market to suddenly become lucrative, neither do I expect huge catalysts to lift this stock. Instead, I am looking to use the funds from taking profits on the bank stocks to put into a undervalued stock.



The share price of SIA technically almost reached the support of $9.60, but rebounded from $9.71 on expectation of poor results. I had been patiently waiting for a correction but it had successfully consolidated around the $9.80s region. Therefore, I initiated a position at an average price of $9.86 per share. I am an income investor, and SIA historically has never being regular or consistent with its dividends, so I had put in a conservative 2% yield on this stock. If the stock somehow manages to trade to the top of the trading band, I may look to exit this position, otherwise, I am content to sit on this and get paid while I wait.

3) Initiated position in Parkway Life REIT

This is definitely not a value play. At $2.40, it is trading at a high PB ratio of almost 1.5, it is definitely expensive as a REIT. Then why did I buy it? Well, it has very good fundamentals. Warren Buffet believed in buying a wonderful company at a fair price than a fair company at a wonderful price. What qualified as good fundamentals to me?

2017-01-25 Parkway Life REIT
Source: Parkway Life REIT’s earnings presentations


The tale above summaries all we need to know for Parkway Life REIT, need I say more?

Sure enough, the fundamentals have deteriorated year on year. But there should be no cause for concern. Its extremely defensive business puts it in good stead in many more years to come. We continue to expect the ageing population to persist in Japan and Singapore for the next few years. This is enough to sustain demand for its core business. We have rising interest rates to contend with in future, but the low cost of debt and high interest cover should be enough buffer for the next few years at least. It should be noted that 99% of its interest rates have been hedged, which is important in a climate of rising interest rates. Still, we need to keep track of the interest rates once the hedges are renewed.

4) Increased position on Fraser Logistics and Industrial Trust

Increased another tranche of FLT when prices started retracing, at $0.94 a piece. I am happy with the recent results, though boosted by the recent acquisitions from the sponsor pipeline. The reasons for investing remain the same. Should prices continue to trend lower amid talks on higher interest rates in the US, you can be pretty sure I would be waiting at the lower price levels.



Now, I will stay patient. My portfolio has definitely gotten bigger despite selling some core stocks. I think I am getting too greedy in a rising market, that does not sound good. Nevertheless, I am fairly confident in the prospects of the businesses I have invested in.

But it doesn't hurt to have a bit of luck isn't it? Lets hope for some good luck thrown inside too then. (:

Saturday, 4 February 2017

Portfolio Update - January 2017

*As of 31 January 2017

Counter Average Price Yield on cost(%) Weightage
Starhub
3.4700
4.60
10.61%
Singtel
3.6700
4.00
9.98%
First REIT
1.2525
6.75
7.66%
M1
2.3600
5.00
7.22%
SembCorp Industries
2.4500
3.00
6.66%
UOB Bank
17.5200
4.00
6.19%
OCBC Bank
8.6000
4.00
5.85%
Capitaland Mall Trust
1.9050
5.80
5.83%
Fraser Logistics & Industrial Trust
0.9200
7.00
5.63%
CDL Hospitality Trust
1.3050
6.80
3.99%
Keppel Corp
5.3700
5.00
5.48%
SPH
3.7500
5.00
3.82%
Keppel DC REIT
1.0822
6.17
2.94%
Capitaland Commercial
1.3523
6.15
2.30%
SPHREIT
0.9293
5.80
2.21%
Ascendas Hospitality
0.6991
8.03
1.19%
Mapletree Logistics
0.9800
7.40
1.00%
STI ETF
2.8058
3.50
11.44%
Total

4.94
100.00%

Legend
CDP
SCB

Total Invested Capital = $29,574.09

Total Expected Dividends/month = $121.12

Average Dividend Yield = 4.94%

At the close of 2016, analysts and many were predicting the poor economic climates impending for Singapore. In addition, as we look back to history, the stock market has more likely to do badly in the years ending with the number seven, remember Black Monday in 1987, the Asian Financial Crisis in 1997 and the great GFC in 2007? This all did not help the already gloomy forecasts set by economists for the year ahead in 2017. What do you guys think?

For me, one thing is for certain, if history were to repeat itself, I will be finding myself busy buying more stocks. However, it is going the opposite way right now, with STI flirting with the highest it had been in 2 years, and it was one of the best performing index in the first month of 2017. So I guess its always funny how being contrarian has been so fruitful for 2016 and possibly 2017.



And I thought I would not be doing anything for the few months to come and yet I have already started in the first month of 2017. 

The share prices of the banks had been chugging along higher ever since the surprise election of Donald Trump. The potential of easing policies for financial institutions as well as benefits from a more hawkish Fed had seen bank prices hitting the highest since 2015.



Seeing this, I have reduced my bank positions in OCBC and UOB by half, at $9.38 and $21.10 respectively. Don't get me wrong, I am not saying that banks are overvalued, but I felt that in the near term there is limited upside for banks given the still weak economic climates for businesses. PE ratios for the banks are still below 15, much better than the other blue chips which make up the rest of the STI. However, the rally in banks had been overdone, and most of the the counters are already in overbought region. I retained half of the bank shares because they had been the better performers of my portfolio, and I wanted at least half of my winners to continue, should they continue to do so.

As a result of this reduction, my portfolio value has shrunk to less than $30k. The largest position is now Starhub, which turns out to be one of the biggest laggards of my portfolio, along with M1.



Starhub had recently reported poorer results and EPS has fallen to almost 3 cents, which is almost similar to M1's EPS. The result was clearly poor in my view, and even though they had stated the dividends will be reduced to 4 cents from 2017 onwards, I think even 4 cents is not sustainable. We do not now what will happen should the 4th telco start competing full force, but it seems like it is already hitting this 2 telcos hard. In my view, I still think M1 offers better value than Starhub. However, the price of Starhub has been pretty weak lately, which I have failed to reduce my position in the small rebound it had in January. There is still 2 ways around this, they are already mentioned in my previous post:

1) Reduce positions in the telcos directly OR
2) Increase other positions to reduce the telcos exposure percentage in my portfolio.

Lets see how I eventually decide to handle this. Meanwhile, recently the Fed decided not to raise interest rates this time round, so the prices of REITs has moved somewhat upwards. However, many analysts and market watchers believe it is only just the beginning. With a saturated market in Singapore, Singapore REITs have been increasingly trying to increase their footprint overseas in a bid to boost the distributions it receives. However, increasing interest rates are likely to put a lid on the upside on REITs. The only way for REITs to continue outperforming is if the REIT has a larger pipeline of overseas properties to expand using debt, and the rate of increase in distributions must be greater than the increase in debt costs the REIT have to take into account. In an environment of rising interest rates, even having fixed rates is not going to prevent the REIT from having to pay for the higher rates as eventually they will have to pay them once the fixed rate period expires.



So do we or not still buy REITs?

Well it depends, of course. If you feel the specific REIT has growth potential to outdo the increased costs it has to bear in future, then yes please do. If not, save the money for a big BEAR market.

Don't know where to put the money?

Then just open the CIMB Fastsaver account, and that is provided if you have already maxed out the OCBC360 account, i.e. > 60k. For me, I am intending to open one for my excess funds to prepare an expansion of my warchest.



And then what?

Wait, of course. While you wait, make sure there are stocks paying you dividends while you wait. Don't just sit around doing nothing with money rotting in the bank. Basic risk allocation obviously applies to different individuals in all situations, so please plan wisely before going to do something rash.

Good Luck!