REITs and NPI

Date: May-20-2019
Source:
https://www.fool.sg/2019/05/18/eagle-hospitality-business-trust-ipo-8-things-investors-should-know/
https://www.dbs.com/livemore/getting-singapores-first-reit-on-the-market-we-felt-we-needed-to-do-this-for-singapore.html


Shareinvestor's annual REITs Symposium was held on 18 May, 2019. It is the fifth of such annual symposiums by shareinvestor, and the first time held at MBS. Being a member, I happily attended the whole day event with my complimentary ticket.

According to the co-organizer REITAS, who boasts 75%(per market cap angle) of SGX listed REITs as its members, the annualized return of REITs in Singapore has at least double that rate of STI index in the past couple of years(citation sources??).

Real estate investment trusts (REITs), usually offers investors a yield of 5-8 per cent, as one of the speakers, Kenny Loh put it:
- Distribution Yields
- P/NAV
- Gearing ratio (<45% SGX regulation, Debt/Total Asset)
are the three key factors to consider when invest into REITs.

Reits were introduced in Singapore in 2002, CapitaMall Turst. REITs business model is based on distribution of rental income from the underlining real estate(property concerned). REITs have at least 90% of the coming distributed to unit holders, under such circumstances, such investors will not be taxed on the distribution income thus obtained.

Logically, given there are fees charged by trust manger who manages REITs on behalf of trust investors, distribution amount should be less than the NPI(Net Property Income) . For instance:
- Eagle Hospitality Trust, based on Motley Fool's article,
 "3. Net property income (NPI) was US$47.4 million for 2018 but is projected to rise to US$51.1 million this year. For 2020, NPI is projected to hit US$81.3 million. US$174 million had been spent on capital expenditure since 2013, and the REIT has earmarked a further US$18.6 million for more asset enhancement initiatives (AEIs)."

 while after all cost and tax deduction, the income available for distribution is 37.229mUSD, or 4.27 cents per Stapled security, thus it is only an annualized 8.2% on 0.78(USD) IPO price.
* Annualized by extrapolating the forecast figures over a full financial year

Ascott Reit(A68U): Issues with Rights Issue

Draft: 3/7/2017, Price: 1.13, Market cap: 1.9b.

Source: Rights issue announcement.

Ascott REIT dropped 0.04 or 3+% today on its planned rights issue.

Rights ratio	29%
Reference of market price date	6-Mar-17
CR date	9-Mar-17
XR date	10-Mar-17
Commencement of Rights unit	11-Apr-17

==================================
Crunch Numbers

	No. of Units	Asset Base(S$b)	Gearing %
Before	1,660,990,000	4.8	39.80%
Addition of money/units	481,688,010	0.4427
Aggregate commission/fees		1.30%
After	2,142,678,010	5.3	37.00%

Assume a unitholder owns 10000 units on Monday(Mar 6th, 2017)
Recent dividend history

31-Jan-17	0.044
26-Jul-16	0.023
18-Mar-16	0.016
1-Feb-16	0.041

Right issue scenario

	Unit	Price	Total
Before	10000	$                         1.17	$   11,700.00
	Rights	Price	Total
	2900	$                       0.919	$     2,665.10
After	12900	$                         1.11	$   14,365.10

Collected dividend(for the most recent year): S$830.
The same unitholder has to fork out S$2665.10 in order not to be diluted. 3 years dividend spent in one shot.

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ISSUES with REIT
When leverage is high, REITs manger could always resort to right issuance, since sponsor usually is the major unit holder and is aligned with manager, to pass such resolution is easy. But the diligent dividend collector ends up taking out more money from one's pocket.

This is a fundamental flaw in all REITs.

==================================
 Attack Plan
How to deal with such scenario?

Frasers Logistics & Industrial Trust(BUOU)

Draft: 2/4/2017 (Market size: 1.355b, PB: 1.124; 1.43b units)

Updated:2/13/2017

While reading some online blog's recent article, I notice this post from ASSI, one of the well-known financially independent bloggers, on Frasers Logistics & Industrial Trust(FLT). His entry price is 92.5c.

I decided to take a look myself.

FLT IPO in Jun 2016, 850-page prospectus can be found here. Invest mainly in industrial properties in Australia. IPO price 0.89/unit. (1A$=1.01S$), market cap of S$1.27b at IPO list price.
Listing expense S$29m.

================
AU GDP expected grow 4.9% from 2014 to 2016(2.7% p.a till 2020),with AU$50b commitment on "Infrastructure Growth Pkg". AU Interest rate 1.75% in 05/2016.

Sponsor: FCL.
51 properties(and another 3 call-option properties), S$1.6billion, 1.16m sqm under mgmt. 98.3% occupancy, 68 tenants(profile, consumer companies and e-comm biz). 60% freehold, 30.2% for at least 80y leases. (=>A$1400/sqm)
WALE: weighted average lease expiry. (6.9years)
NPI: Net Property Income(A$107.9m)
GLA: gross lettable area.
ROFR: right of first refusal
FPA: Frasers Property Australia. (90years in Australia), offers free rental and fit out allowances to tenants in 14 properties.
AEI: Asset Enhancement Initiative.
HAUT: head Australian trust(FLT Australia Trust)
MIT: managed investment trust
Considered as ALT(Australia Land Trust)

Demand & Supply:
Pg 47/850 states: approx. 1.3m sqm of new supply completed in 2015, more than 20% below the 10-y annual average of 1.7m... occupier take-up 2.3m sqm in 2015, above 10-y average at 2m sqm.
<details on Pg 236/Pg 727>

Competition:
Pg 237: Goodman group, Charter Hall, Dexus, 360 Capital <FLT ranks 4th>
SREITs: Ascendas REIT(yield 6.02%), Mapletree logistics trust, AIMS AMP Capital Ind. REIT, Cache logistics trust.

Typical lease term in AU:

	Existing buildings	Development lease	Speculative construction
Typical lease term (years)	3 to 5 years	10 to 20 years	5 to 10 years
Typical rental escalation p.a.	3.0% to 3.5%	2.75% to 3.5%	3.0% to 3.5%
Typical incentive (new lease)	5% up to 30%	10% up to 30%	10% up to 35%

Growth potential: organic growth 3.2%(2.5~3.75%) annual rental increments; inorganic: ROFR assets(147k sqm) from Sponsor.

47.3% of rental income from top 10 tenants, largest being with Coles(supermarket),15.6%.
<Risk factor: subject to the risk of loss of anchor tenants, non-renewal, non-replacement or early termination of leases>
Pg 699: Closure of Ford, Toyota and GM plants in 2017 will have negative impact (1m sqm) to AU L&I rental market (Melbourne and Adelaide), impacting 8.2% of FLT's portfolio income, if counting other tyre, parts companies' usage. (Risk of significant vacancy with car manufacturing closure)

Distribution policy: 100% attributable income for 2016, 2017; 90% thereafter.
================
REIT mgr fee: 0.4% per annum of deposited property value (S$6m+)
Performance fee: 5% per annum of distributable income of FLT. (S$4m+)
REIT trustee(Perpetual (Asia) Ltd) 's fee: 0.015% per annum of deposited property value
Property mgmt fee and Lease mgmt fee: 1.2% per annum of NPI

(from pg 76, complicated reason is explained on Pg 77 of formation of HAUT)

================

Pro Forma P/L

	FY2013(A$'000)		FY2014(A$'000)		FY2015(A$'000)
Gross revenue	100,726		100,992		111,023
Property Op Ex	-15,584		-17,534		-18,721
Net Property Income	85,142	84.5%	83,458	82.6%	92,302	83.1%
REIT Mgr's mgt fee	-7,788	7.7%	-7,966	7.9%	-8,736	7.9%
Trustees’ fees	-161	0.2%	-171	0.2%	-181	0.2%
Other trust expense	-12,864	12.8%	-2,400	2.4%	-3,716	3.3%
Finance cost	–		–		-4,050
Fair value adj to investment property	-36,167		-10,883		-14,275
Total return for the period bef tax	28,162	28.0%	62,038	61.4%	61,344	55.3%
Tax	-9,658	34.3%	-9,586	15.5%	-10,830	17.7%
Total return after Tax	18,504	18.4%	52,452	51.9%	50,514	45.5%
Other adjustments	50,660		15,836		21,381
Income available to Unitholders	69,164	68.7%	68,288	67.6%	71,895	64.8%

(AU tax rate: company 30%, trust 47%)
<due to straightline account, rental income adjustment will cause gross rental incoming reported in FR to be reduced each year? only if can be offset by addition of new tenancy>

B/S

	As Dec 2015(A$'000)
Investment properties	1,604,039
Other non-current assets	7,650
Total non-current assets	1,611,689	97.3%
Cash/equivalents	36,879
Other current assets	7,319
Total current assets	44,198	2.7%
Total	1,655,887	100.0%
Total Current liabilities	6,757	0.4%
Other non-current payables	7,650
Borrowings	418,200
Total non-current liabilities	425,850	25.7%
Total liabilities	432,607	26.1%
Net assets to Unitholders	1,223,280	73.9%

 (other non-current assets, other current assets are from FPA under incentive reimbursement arrangement)

CFO(2015), 73.9m A$. Net cash generated from op(after tax): 67m A$.

IPO proceeds used for:

• consideration for the purchase of the IPO properties
• payment for related acquisition cost, issuance cost
• working capital

 (2.7% premium over NAV when listed)

Pg 200 (projected 2017 income, I don't understand why add back fair value, mgmt fee, deferred tax)

Auditor: Ernst & Young LLP.
Valuers: Savills Valuations Pty Ltd, Urbis Valuations Pty Ltd.
<in the valuation reports annex-E, pg 515/Savills: Discount rate 8.25% is used, with majority of properties valued having an IRR of 8.xx%; pg 637/Urbis: DR 7.75%, with IRR of 7.xx%>

================
S-REITs regulation: 45% aggregate leverage. = total borrowings (including deferred payments for assets) to the value of the Deposited Property.

================
Frasers is controlled by TCC group, whose chairman is Charoen Sirivadhanabhakdi who owns ThaiBev.

================
Throughout the reading of prospectus, I notice a lot of acronyms, is that fashionable for Investment banker to draft their docs in mountains of acronyms? It is just such a headache for readers.

A lot of duplicated info in the prospectus, does IB feel guilty of getting paid way too much that is why the doc is stuffed with unnecessary duplication?

After reading the prospectus, I have the impression that Trust of such(in that matter any S-REITs) has to pay various fees to so called "manager" or mgmt for the formation of such Trust. Even for divestment of property, quote a hypothetical case, if FLT sells a property due to poor performance because of its initial wrong judgement, REIT mgr still collects money for such buy and sell 'round-trip' transaction, whereas unit holders suffer economically due to "internal transaction(friction) cost" after as-if-non-existent transaction.

================
 Quoted from prospectus:
"As an investment in a REIT is meant to produce returns over the long-term, investors should not
expect to obtain short-term gains. " 

================
Valuation
Based on Trust Deed, unit holder cannot demand transfer of Deposited Properties from REIT mgr, meaning the underlying assets value has no direct impact to secondary market investor, the pecuniary gain can only be from, other than the usual unit price fluctuation, the distributable rental income. This is illustrated by JLL's top10 competition analysis table, too.

FLT has only BS(rental income) as investment vehicle.  (Pg 777/778)

Two questions:
- Is the current yield attractive to the investor?
- Is the current rental income sustainable and expected growth attractive to the investor?

The beauty is in the eyes of byholder. I decided to buy and hold a small position, not so much of the answers to the above, but I'd like to initial some AU exposure at an acceptable price.

Anyway, go with GIC should not be too wrong.


Australia.

FirstREIT(AW9U)

Draft: 2/1/2017 (Market value: 977.3m, PB:1.2, Yield 6.67%, PE: 8)
Update: 2/2/2017

Based on 2016 Report.

Asset under mgmt. 1.27b (CAGR: 16.4%); 18 hospitals,  majority in Indonesia; 3 in SG, 1 in KR. 314k sqm. 4700 beds.
Total debt: 417m,
Gearing: 31.1%

Gross revenue: 107m;
Net property income: 105.8m;
Distributable income: 65.2m;
Sponsor: Lippo Karawaci (LK)

Distribution Reinvestment Plan(DRP) in lieu of  dividend payout, DRP @S$1.2559 per Unit.
=================
Biz outlook
Annual base rental escalation (2x percentage increase of  SG CPI, capped at 2%)

(Does that imply the growth strategy can only be more acquisition of hospitals from LK group, 43 in the pipeline?)
=================
Questions:
1. How to subscribe to "S$60 million subordinated perpetual securities" with coupon rate of 5.68% for first 5 years?
2. My impression of FirstREIT: it is an investment vehicle of LK group to monetize the family wealth.