Random thoughts: looming US shutdown

Since US debt rating is downgraded by S&P, I never fail to marvel in the level of dysfunction at Washington. NO, this post is not about glazing into the crystal ball and how we should time the market, this post is about how I feel about governance at the highest level.

I used to appreciate US diversity and the respect for minority interest and rights. Then two things changed my view for good, and again, became an example of nothing is what it seems.

First, Congress hooligan tactics. I think that is worse than the ah Bengs in Singapore. I believed in detailed debates, and hard fought consensus so that no one get marginalized. But, I also believe in respecting the system. Obama has passed the healthcare law, too bad you don't have a majority in Congress then, fine, go to the supreme court, but the supreme court has already uphold that law.

Please do not take American citizens as fools, if the bill is really without any merits, you can change the law when you make a clean sweep of Congress, Senate, and the white house. If not, stop holding the whole country hostage.

I am fine with negotiating, given that I work in the service sector, I am most of the time obligating to requests. But take a good look at your own behavior. When I am ready to compromise, you push your luck, when I refused, you threatened me that you will burn my house. How to compromise? When Obama is willing to tackle the social security, the republicans refused to compromise, that is a chance lost. Now, they used the debt ceiling to force someone to the table.

I know no politics, I just understand that with the power of politics, one should share some common good with the common people. Forget about that, just be competent enough not to be a laughing stock to the world.



Next, lack of leadership to do the right thing.

The TEA caucus is not actually that big, law can be passed with bipartisan efforts, but it seems stretching over to the other party is a dirty word. The TEA caucus do not mind losing their electoral seat or do not have a good political career. But the leader is afraid of not being able to keep their speaker job? Might as well ask the pupils to teach the teachers, and children to work and parents to go to school. Leaders mean leading, not following.

Also look at how powerful NRA is? Nobody is talking about banning arms, just assault weapons. Who need assault weapons for self-defense? Fine, you need assault weapon, how about more checks? NOthing is passed... After so many children died... sickening

I am really glad I lived in Singapore, I do wish for more deliberation in policy making and consultation, but I for one never believed in ransom politics. If you need anything, ask properly, don't threaten to burn my house and ask me to work with you! I want leaders to work for their country first, then their parties. Just like teachers caring for their kids first before worrying about their colleagues and principal.

Things to note when investing in Reits

There are thousand and one things to note when investing in Reits, in fact, the most you know, the better it is, but I felt there are a few pointers that not really emphasized.

1) Fees structures

Reits earn three fees; base management fees, performance fees, and acquisition fees. Most reits have similar base management fees, but the performance benchmark and acquistion fees can be quite significantly different. CIT has a benchmark to beat, Soilbuild and Sabana pay performance fees when DPU is higher than preceding year, but Sabana has a additional requirement of 10% better DPU, before performance is given.

We need to understand that many companies spin off their assets into Reits for capital recycling or capital gains. No companies spin off the assets into Reits purely for unitholders. So there might be times when the parent companies' benefits are considered before unit holders. We are not asking parent company to inject assets are firesale price, but I think they should be fair to reits unitholders in terms of yield, and here we come to the second point.

2) Yield of acquisitions.

We always hear the term, yield accretive acquisition, but it is important to know about the actual yield of acquisition.  A 4% yield acquisition will increase DPU in a low-interest environment that we have now, but what happen when the "norm" of 3 percent interest returns? Of course, if the acquisition is financed not by loans but by placements and rights, maybe the drawback of  low yield acquisitions is not so significant, but you will suffer from dilution then.

Size of discounts for rights or placements 

Usually rights or placements are issued at a discount to prevailing price, that is acceptable, as long as the acquisition is yield accretive. But companies with weak sponsors might need a bigger discount, so the strength or the reputation of sponsor play a part too. 

3) Loans (Don't just look at effective interest rate)

Look at the prudence of capital management as a whole and not just effective interest rates, the interest rate just tell part of the story. e.g. The reason why a reits have a low cost of interest could be because the company had a lot of short term, secured, floating rates loans. Also, look at the spread of the loans and the years, usually the wider and more equal the spread over the longer period, the better. Look also at the type of the loans; fixed/floated, tenure, secured/unsecured. When you compare between reits, make sure you are comparing apples with apples.

4) Familiarity of Assets

There are countless reits with overseas assets, I think it is important to read up on the type of lease of assets eg. religare trust has hospital build on land with pending lawsuit. , and since we might not be able to pop by and see for ourselves how the assets are doing, make sure the returns are worth the risk you are taking.

5) rent psf, build-in rental revision 

We usually just look at Gross rent or NPI, but calculating a bit deeper can tell a lot about the pricing power of the properties, or the reit manager, and better for comparisons. If you also tell you about whether to be conservative or aggressive when rental is for for revision. 

Hope these help

Lippomalls reit update

LMIR announced that LMIRT Capital Pte. Ltd. (wholly-owned subsidiary of
Lippo Malls Indonesia Retail Trust) has priced its S$150,000,000 4.25% Notes due 2016 (the
“Notes”). 

http://infopub.sgx.com/FileOpen/Pricing_announcement_Series_4_MTN_Programme_25_Sep_2013_final.ashx?App=Announcement&FileID=257580

The notes should be used to refinanced the secured bank loans of $147.5 million that is due in 2014.

This new facility is attractive is a few areas.

1) Note rate is 4.25% compared to the interest of 4.29% incurred in 2012 and 4.5% in 2011

2) MTN note is an unsecured loans, usually secured loans fetch a slighly lower interest rate as properties are pledged as an collateral, so this deal is attractive as the free up properties to become unencumbered, and yet attract a lower rate

The tenure of the secured bank loan and the notes are both 3 years, so Lippomalls has gotten a better deal.

But there in insignificant savings in the reduced finance costs. But given the next refinacing will come in 2015, we should have more clarity, and operational numbers, aside, we can quite safetly assumed finace costs will not have a big impact for the next 3 years.

 

 

Will provide another update after their quarterly report

Holistic investing

I am not sure if there is such a term call holistic investing. I believe such a concept is not new, but can't remember the actual term. Anyway:

When we talk about investing, many would think about stock selection, diversification, asset allocation etc. I think to be even more holistic, one should look at the profile of oneself too.

for example, if I hold a stable job, and I know I can set aside money every month or year for investment. My approach will be different from that someone that has a fix amount of money, or that we know our future income is going to drop or be volatile.

For me, I would not touch my CPF money for investment unless we are in a ultra bear market( more than 50% drop), those money will be like bond investment and is suit for the purpose of accumulation of fund for retirement. So I will not invest in bonds for the same of diversifying.

given the stability of my job, I dun need a very hugh war best, as my income for investment will increase every year. This is not to say we should be trigger happy, but perhaps I don't need a warchest as big as perhaps 50% of my investment income.

also, I have already have my insurance needs covered for me and my family, so I can invest with  a peace of mind

Investing- A waiting game

Investing is very much a waiting game, perhaps one that required even more patience than fishing.

You wait for the right price to buy a counter, and the price might not come in weeks, months or even years.

You found a opportunity, a hidden Gem, you bought it. Again, you might need to wait for years for the market to realize its value. Of course, if you are doing penny trading, things could move a lot more faster.

So what can we do when we are waiting.

1) Expand your radar of companies, source for other potential companies.

2) Research into them, identify fair price with some margin of safety.

3) Read up on investment books.

4) Blog =p

There are many a times, when I felt a counter is cheap enough, then I went on to research further, and after some nights of digging up info, I realized a good price to pay will be $X, then when I look at the price chart and to my horror: Hey! It was trading at a price lower than X just months ago, or a year ago, why wasn't it on my radar then. You wait, and the boat never return, perhaps I have missed the cycle.

Get ready, you do not just need a warchest, you need targets too. And the best time to do reading and NOT be trigger happy is when the market is moving favorably.  So that you do not squander away your precious ammo, and when the tide goes out, you need actually which boat to ride on, that will get you furthest without any risk of capsizing. 

 

Random thoughts: Nothing is what it seems

I went to the clinic recently, and have this feeling: The doctor is running a business, the medicine are its products and we are his clients, he provide a service (consultation) followed by a selling of product (Medicine)

I used to have much more respect for doctors, but there are some doctors whom I visited that do not come across as caring.

I also used to think giving honest feedback and constructive comments should be welcomed, as long as we are not destructive or overly critical. well, I discovered lately, sometimes, we are required just to toe the line, opinion not needed.

Maybe many more things are there for a altruistic reason, but I discovered more and more lip services than genuine services in my line of work, and sometimes, it sickened me. Our job scope may not be what it seems.

Hence, sometimes we may dream about financial freedom, that it would solve most of our problems, but again, that might not be what it seems. Don't get me wrong, we should have a goal in life, and we should work towards that, otherwise, we will be zombies. But when we do attain financial freedom, I believe we will then have another set of problems.

Be thankful for whatever we have, enjoy the present. Nothing is what it seems, picture perfect world do more harm than good, since it doesn't exists...

Take research report with a pinch of salt - Case study: Suntec Reit

I used to own Suntec Reit, I would still like to own it if the price is right.

But I saw from a investment website that a certain research company has a price target of $2.01 using a DDM (dividend discount method).

I do not know the metrics used in this DDM calculation, but  I think the research is just too optimistic in its assessment. I think investors should take a conservative target price and not a highly aggressive target price.

First, lets do some reverse engineering.

Assume you think 6% yield for Suntec is cool (After all growth are factored in), given its "blue-chip" status. So you need 12 cent DPU, or 3 cents per quarter. So I would need distribution of about 67 million per quarter. Can Suntec achieve that?

http://www.suntecreit.com/admin/dir/2011103107102531Oct11%20Suntec%20REIT%20Announces%20Remaking%20of%20Suntec%20City-%20Presentation%20Slides.pdf

Above is the upgrading plan, they expect NLA to increase by 25% and net net get a 33% increase in gross monthly rent. Lets give the retail revenue a 35% boost.

Let assume also 10% positive rental revision to its Suntec office, MBFC and other Jointly-controlled entities.

At such, the contribution from various units for DISTRIBUTION

SUNTEC retail = 18.75 million per Quarter

SUNTEC office = 19.5 million  per Quarter

Jointly-owned entities = 29 million per Quater

Parklane = 3  million

That is about 70 million, giving you a slightly above 6% yield, after 35% boost in retail contribution and 10% positive rental revision in office for all units.

If such liberal/optimistic assumptions do not pan out, you should be looking at 5-6% yield instead.

Do note, I did not take into account:

1) increase in finance costs with increase in interest rate

2) The increase in increase rate will lead to higher yielding bonds, and if the spread of about 4% is maintained, a 5% yield for a Reit instrument is hardly a sound and prudent proposition.

3) That the phase 4 AEI will complete only in 2015, so the full positive impact of retail reversion should come at 2015 earliest.

If you are happy with 5% yield, and is willing to hold it through thick and think, Suntec does look like a decent buy now, but if you are buying now hoping it will hit $2 in the next 12 months, I think the odds are not in your favor. (But you can be a lucky star and win against all odds)

Also, the research report talk about discount to NAV, I wish to highlight Suntec Cap rate is quite aggressive, and at $2, the discount will disappear.