REITs Trading Below NAV (Net Asset Value)

Net Asset Value or NAV is one of the factors to consider when investing in REITs.  The NAV is basically the sum of all the REITs' assets (usually property and cash) minus away its liabilities (e.g. bank loans).  Investors often look at the price of the REIT and its NAV to see whether a bargain exists when a REIT is trading at significant discount to its NAV.

Should a REIT trade above NAV or below NAV?

A common argument is that REITs should actually trade above their NAV.  Why so?   There are a few reasons given:

• A REIT is more liquid that a property itself.  As such, a "premium" or value should be placed on this added liquidity as compared to a real property.  An investor in a REIT can basically liquidate his holdings in the stock market as compared to holding a real property which requires time and effort to get rid of.  
• Smaller upfront capital required as compared to a real property.  
• Professional management without hassle of being a landlord yourself
• Divesification into various properties
• NAV was determined sometime back and it is likely that today's NAV of the property is higher

However, it is not uncommon to find certain REITs that actually trade at a discount to their NAV.  Many reasons are given for this discount.  The most common answer that links the reason for this discount is that of RISK.  This could be due to:

• Foreign Exchange risk
• Drop in property value 
• Potential drop in distributions
• Country Risk
• Uncertainty about the future outlook of the REIT
• NAV was determined sometime back and it is likely that today's NAV of the property is lower

Just a few years back, when the market sentiment was weaker, most Singapore REITs were trading at significant discount to their NAV.  At the end of 2012,  REITs that are trading at discount to their NAV are much fewer. These include Fortune REIT, Suntec REIT, Frasers Commerical Trust, Saizen, LippoMalls Indonesia Retail Trust, Ascott and Starhill Global.

Singapore REITs - History and Regulations

Singapore has probably done more than any other Asian country to grow and foster its Real Estate Investment Trust (REIT) market.  Since the first REIT was listed till now in 2012, the number of listed REITs in Singapore has grown and looks set to surpass Japan for the top spot in terms of market capitalisation in the next 5 years.  Its foundation was not without trouble though.

In the beginning....

The first REIT to be listed in Singapore did not take off.  Its public offering took place in November 2001.  The developer was Capitaland and the REIT was SingMall Property Trust.  Offered at S$1.00 each with a forecasted earnings yield of 5.75% for 2002 and 6.05% for 2003, it was scrapped when the issue was only 80% subscribed.  The cause for the weak market sentiment was probably due to the aftermath of Sept 2011  and the uncertainty that was around.  Poor understanding of what a REIT was could also be a contributing factor.

A year later (July 2002), the original three major shopping centres/malls of Junction 8, Tampines Mall and Funan the IT Mall were repackaged into CapitaMall Trust.  The yield offered was 7.1% this time and investors were hooked.  This ushered in the start of the REIT market in Singapore.

The next few REITs to be listed on the Singapore stock exchange (SGX) were Ascendas REIT ( November 2002) and Fortune REIT (October 2003).

Today, there are around 20 REITs listed in Singapore covering various property types like commercial, residential, hospitality, hospitals, industrial, and retails.  Many of these are also cross-border REITs and own properties outside of Singapore.  These include CapitaRetail China Trust, First REIT, Frasers Commerical Trust (previously known as Allco REIT), Ascott REIT, LippoMall Indonesia Retail Trust, etc.

With many sponsors being developers too, it is highly likely that these sponsors will also inject future properties into the trusts already established.

Friendly Regulations played a part

Regulatory changes probably played an important role in fuelling investors' enthusiasm for REITs.  Withholding tax was set at 10% while there was full tax exemption for local and foreign individual investors.

The gearing limit (i.e. amount of debt the REIT could raise), was also increase from 25% to 35% and went up to 60% (on the condition that the trust received a rating from a credit rating agency).  Of course, some analysts have commented that the 60% gearing is not conditional on any rating the trust receives as long as a rating is obtained.  Through borrowing, a trust could potentially fund new purchases using cheap debt while increasing the amount of distributions to unit holders.  And that probably explains the acquisitions that followed for SREITs after the gearing level was increased.

REITs listed on SGX

Do note that some trusts are listed on the SGX too and these are not to be confused with REITs.  REITs are required to pay out 90% of their profit as distribution to enjoy tax incentives. Trusts do not have to do that.  So there is certainly less certainty on the distributions that one obtains from trusts as compared to a REIT.

Most of the REITs (if not all of them) are equity REITs in the sense that they hold real immovable properties unlike some of the mortgage REITs listed in the US stock exchange.

Here is the list of REITs listed on SGX:

1. CapitaMall Trust
2. MapleTree Industrial 
3. Ascendas REIT
4. CapitaCommerical 
5. Suntec REIT
6. Mapletree Logistics
7. Mapletree Commercial
8. Saizen
9. First REIT
10. Cambridge REIT
11. LippoMalls Indonesian Retail Trust
12. Cache
13. Starhill Global
14. CapitaRetail China
15. Sabana
16. Ascott
17. Fortune REIT (HK$)
18. Frasers Centrepoint Trust
19. Frasers Commercial Trust 
20. Keppel REIT

Dividends for November 2012

I have been doing a really bad job keeping records of dividends that I receive.  Every month, I will receive 2 cheques from two of my monthly dividend paying stocks.  And I have not developed the habit of banking those cheques in immediately.  Sometimes, the cheques sit on my desk for days or weeks before they are dropped in at the bank.

The amount I get from those two cheques are aroudn $90 to $100.

During the month of November, I also got dividends from Thakral ($50) and Sabana ($46.80).

CPF Board's Are You Ready? Instagram Contest

CPF Board started the Are You Ready? Initiative to get Singaporeans thinking about these important decisions in their lives. They are

-          Manage your cash flow;

-          Buy a house within your means;

-          Take charge of your healthcare costs; and

-          Secure your retirement.

The AYR concept revolves around using four simple checklists to measure your financial readiness. This year, CPF improved the checklists to include more resources.

In addition, CPF is running an Are You Ready? Instagram contest with an iPhone 5 and more than $2,000 shopping vouchers up for grabs.

It’s simple to join. Simply take photos of what best relates to ‘Cash Flow’, ‘Housing’, ‘Healthcare’ and ‘Retirement’, and tag them with your caption! The hashtags are

-           #AYRcash

-           #AYRhouse

-          #AYRhealth

-          #AYRretire  

Click here to go to the campaign

Armour Residential REIT (ARR) dividends

Received a cheque for November's dividends from Armour Residential REIT (ARR).  Total dividends was  S$45.89 after accounting for 30% withholding tax as well as handling and GST charges. ARR has been paying me monthly dividends ever since I bought it.  However, the stock has been quite volatile at times.

Lippo Malls Indonesia Retail Trust (LMIR Trust) to Acquire Pejaten Village and Binjai Supermall

Just received a circular dated 26 Nov 2012 from Lippo Malls Indonesia Retail Trust (or LMIR Trust) that states : "This circular is important and requires your immediate attention".  Okay.  All circulars come with that label but even though it requires my immediate attention, I am way to busy to flip through a thick circular at the end of a typical work day.

Well, I finally got some time to flip through the circular and realised that it was in relation to the following 3 items:

• Proposed acquisition of Pejaten Village from an Interested Person;
• Proposed acquisition of Binjai Supermall from an Interested Person; and
• The Whitewash Resolution

Just by reading the title, a few questions started popping in my head.  They are basically:

• Who is this Interested Person?
• How much do these acquisitions cost and are they yield accretive?
• What is the Whitewash Resolution?  (it almost sounds like some top secret codename for something).

A quick flip through the circular has given me the answers.

Who is this Interested Person?

Firstly, an "Interested Person Transaction" is defined in the footnotes as "a transaction between an entity at risk and an Interested Person". The properties are owned by Lippo Karawachi's subsidiaries (?).  Actually, after flipping through the document and taking a quick glance, I am not certain whether this is explicitly stated inside the document or that as an investor, I am supposed to derive that companies like Sea Pejaten Pte. Ltd is a subsidiary of LMIR's sponsor.  Or perhaps, I am just not familiar enough with legal terms like "Interested Person".  Does "Interested Person" in LMIR Trust's case specifically only referring to one single entity (i.e. Lippo Karawachi) ?

How much do these acquisitions cost and are they yield accretive?

Pejaten Village = S$95.1 million

Binjai Supermall = S$30.2 million

The average of independent valuations for Pejaten Village and Binjai Supermall are S$108.8 million and S$31.8million respectively.  So LMIR Trust is buying these two properties at a discount.  The occupancy rates of both the malls look strong at 96.3% and 91.2% respectively.

I was looking for the word "yield accretive" in the document but could not find it.  It does however state that it expects a 16.3% increase in LMIR Trust's Net Property Income.  Also, based on the pro-forma DPU and financial effects, it seems that the distribution yield will actually go down.  So these acquisitions are probably not yield accretive.  Hopefully, LMIR Trust will be able to carry out some asset enhancement initiatives to improve the yield of these properties.

On the plus side, the acquisitions are at a discount, will help enhance the earnings of LMIR Trust, are at locations with sustainable retail traffic, will increase economies of scale, and also diversify the portfolio to minimise concentration risks.

What is the Whitewash Resolution? 

The Whitewash Resolution is perhaps the most important resolution to be passed at the EGM since the purchase of the properties are conditional on this Whitewash Resolution. 

Basically, the manager is seeking approval from Independent Unitholders for a waiver their rights to receive a Mandatory Offer from the Sponsor and parties.  This is simply because the acquisition fees to be paid out the manager could possibly result in the number units held by the Sponsor and parties acting in concert with it to be above 30%.

What this means is that the Sponsor and the parties are not interested in taking over LMIR and thus do not want to make a mandatory offer as required under regulation

Cross Timbers Royalty Trust

I had read about Cross Timbers Royalty Trust (listed on the US stock exchange) many years ago and had placed it in my stock watchlist but never got the chance to look at it.  All along, I thought this monthly dividend paying stock was involved in timbers or harvesting of logs.  And so I was a little hesitant to invest in it.

To my surprise, Cross Timbers Royalty Trust (or CRT as per its ticker symbol on NYSE) has nothing to do with timbers.  One wonders why they give such a name to this trust anyway. As I speak, it is currently trading at US$26.37 and pays out a regular monthly dividend.  The last dividend paid out was in October at around 18.62 cents per share.  Of course, as a foreigner, one will probably incur some kind of withholding tax.

A little about CRT.  It is an express trust and the principal asset of the trust is the net profit interests.  I guess this means it does not hold any physical assets and that the only thing it has is derived from the interests in profits it obtains from various royalty interest properties (oil and gas) located in Texas, Oklahoma and New Mexico.  Its website is also pretty simple and sparse with little information.  All the properties are owned by XTO Energy Inc. Bank of America, N.A. is the trustee.

This monthly dividend paying stock is trading near its  52 week low probably because of a steady decline in its dividends.  DPU for the 3rd Quarter of 2012 was $0.544601 as compared to 3Q2011 of  $0.860987.  The lower distributions have been attributed to lower gas prices, decreased oil/gas production and increased development costs.

Not yet vested but watching it closely.