by: Tam Ging Wien
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Last weekend, ProButterfly co-founder Tam Ging Wien had the privilege of attending the 4th installment of the REITs Symposium which was held at Suntec Singapore, Hall 404 on the 19th of May (Sat). REITs Symposium 2018 is jointly organised by ShareInvestor and the REIT Association of Singapore (REITAS) and is the largest REIT event of its kind in Singapore.
This year, over 70% of the Singapore listed REITs will be represented. The guest-of-honour and keynote speaker is Member of Parliament and Chairman of OUE Hospitality REIT Management - Mr Lee Yi Shyan.
Beside the individual speakers representing the various REITs, the organisers have also prepared a very relevant line-up to topics in-line with the current economic climate as well as concerns of the investing public. Industry veterans and panel discussions shared their views on the following topics:
We were also fortunate enough to meet some of the key management and hear their insights. Some of what they shared are beyond what we would normally get from the regular announcements.
Here in this week’s story, we share some of our key takeaways from this year’s REIT Symposium 2018.
This year featured a panel discussion with Ms Nupur Joshi, CEO of REITAS; Mr Sanjeev Dasgupta, CEO of Ascendas India Trust; Mr Anthony Ang, CEO of Sasseur REIT; Mr Geoff Howie, Singapore Exchange market strategist, and Mr Goh Toh Sim, CEO of EC World REIT discussing the Investment Merits of REITs with Overseas Assets.
The panelist acknowledged that REITs with exposure to overseas assets poses additional risk to investors. We agreed with the panelist as investing in overseas assets would typically translate to foreign exchange and foreign interest rate risk. On top of that, it is also inconvenient for investors to travel out to inspect these overseas assets in person. Therefore it also comes with degree of uncertainty and unfamiliarity to an individual investor in terms of understanding the nature and characteristics of those assets.
Despite the additional risk investors may face, we should not simply just ignore REITs that have significant overseas assets. As pointed out by Mr Goh Toh Sim, CEO of EC World REIT, REITs in Singapore with a purely local portfolio are experiencing difficulties growing. Other countries such as China provides far more significant growth opportunities, therefore investing in such REITs provides unitholders vehicle to ride that overseas growth.
As a risk mitigation factor, investors can consider REITs with overseas assets but governed by a strong team of local veteran management. Singapore has got mature and strict REIT regulations to protect unitholders. This view was cited by Mr Goh Toh Sim, CEO of EC World REIT and Mr Anthony Ang, CEO of Sasseur REIT.
Another risk mitigating factor to observe is to look out REITs that show trends of earnings growth rates that are faster than the depreciation of their base currency against the Singapore Dollar. We note this point from Mr Sanjeev Dasgupta, CEO of Ascendas India Trust who shared that the trust he manages is exposed to the volatility of the Indian rupee.
Singapore Exchange market strategist Geoff Howie expects more REIT listing in the future with assets predominately overseas. Therefore this is a trend that we as investors cannot ignore.
Mr Tan Dehong, Senior Investment Analyst from Phillip Securities presented on the topic “Are S-REITs ready for the intensifying rate hike cycle?”.
During his sharing, Mr Tan Dehong pointed out that during the previous rate hike cycle from 2004-2006 (Figure 2), S-REITs saw a phenomenal gains of CAGR of 26.5% compared to the STI’s 15.9% (Figure 3).
This therefore demonstrates that REITs is able to perform well despite a rising interest rate environments as long as there is accompanying economic growth which results in higher rental income for the REITs in order to offset the increased borrowing costs.
Source: Phillip Securities Research
Source: Phillip Securities Research
Source: Phillip Securities Research
Going forward, Mr Tan Dehong shared that the current S-REIT yield spread is currently around ~2.9%. Since the end of the Global Financial Crisis (GFC), there were only 2 periods of time when the yield spreads compressed below current levels, once in 2010 (for a 2-month period) and 2013 (for an 8-month period) (Figure 11). This indicates that S-REITs could be leaning towards the more expensive side of the spectrum.
Source: Phillip Securities Research
Mr Tan Dehong also believes that the market has likely already priced in at least 3 future rate hikes for 2018, citing the FOMC dot plot in his presentation slides.
We had a short chat with the investor relations representatives from Mapletree Commercial Trust. While there were many topics discussed, we casually brought up the topic with regards to Mapletree Business City II and the probability that it would be acquired by the trust.
The reply, I quote was “it’s not a matter of if, but a matter of when as it is one of the right of first refusal pipeline assets”. During the elaboration, the IR representatives explained that the trust will assess the property when the sponsor is ready to divest. In addition, the economic and financial environment should be favourable for the trust to perform the necessary fund raising.
While there is certainly no commitment on the timeline of the acquisition, our conversation gives us a sense of confidence to know that the REIT does have a pipeline of a quality and complimentary assets for acquisition in the not too distant future. We will certainly factor this consideration with regards to Mapletree Commercial Trust’s potential growth from the acquisition of MBCII into our decision making.
During our interactions with the IR representatives from ESR-REIT, we discussed in depth about the recent joint announcement of the merger between ESR-REIT’s and Viva Industrial Trust. For those who are unfamiliar, just the day before the REIT Symposium 2018, both ESR-REIT (ESR) and Viva Industrial Trust (VIT) made a joint announcement on the details of the proposed merger of both trust.
Do read our previous post entitled “Did ESR Overpay To Acquire Viva?” for the full details of our interactions with the management of ESR-REIT and our thoughts on the merger.
According to the details of the merger, VIT unitholders will receive S$0.96 per Stapled Security. Therefore, for every 100 units of VIT Stapled Security, unitholders will receive:
From the perspective of the VIT unitholders who had gotten their units at a good price, the S$0.96 offer does certainly look enticing. It’s no doubt clear that VIT unitholders have much to benefit from this offer.
However from the perspective of the ESR unitholders, it will result in further dilution in their unitholdings. Notice that in terms of NAV per Unit, this merger will result in fall from 58.35c to 49.14c as the total NAV increase is only 68.11% while the unit increase was greater at 99.63%. To make matters worse, an earlier S$0.54 per unit preferential offering exercise was just conducted in February/March-2018 already diluting unitholders just months before.
We asked ESR-REIT management to share their thought process on the deal. Here are the key points that they have shared with regards to the benefits to ESR-REIT unitholders:
In summary, ESR’s vision is to merge 2 smaller industrial REITs to reap the benefits of an enlarged portfolio. Going forward with this strategy in place, ESR-REIT is more likely to be able to accretively grow their asset base at a faster pace.
This is a strategy that will reap benefits to ESR-REIT unitholders in the long term.
Be sure to read our details and thoughts of the merger in our previous post entitled “Did ESR Overpay To Acquire Viva?”.
Mapletree Industrial Trust (MIT) in Q4-2017, completed a JV acquisition of 40% of 14 Data Centres across 9 states in the US. The remaining 60% is held by the sponsor Mapletree. The sponsor granted MIT the right of first refusal to acquire the remaining 60% interest in the future.
We discussed the advantages of acquiring through a JV instead of the traditional method of acquiring the physical asset-by-asset method.
The IR representatives shared that by using a JV structure, the trust benefits by gaining the scale of the entire portfolio. Furthermore from a portfolio management perspective, the JV structure allows greater flexibility in managing the pool of assets and security financing. Having the first right of refusal to the remaining 60% of the JV provides the trust with a pipeline of data centre assets for future yield accretive growth.
The conversation also moved towards the quality and “stickiness” of the data centre tenants.
The IR representatives said that data centre tenants are far more “sticky” as they tend to sign longer lease terms and operationally much more difficult for them to migrate out of a data centre. In most cases, migrating out of a data centre entails setting up a hot standby in another location before shutting down and migrating the existing servers which is operationally risky and intensive in terms of effort.
We see that MIT is likely to gain by having a greater diversified portfolio. Prior to the acquisition, Flatted Factories used to form 41.2% of the portfolio (by valuation). As at 31 March 2018, Hi-Tech Buildings represented the largest property segment of the enlarged portfolio at 37.7%, while Flatted Factories accounted for 36.6% (by valuation). As a result of the acquisition, MIT reduces maximum risk exposure to any single tenant from 10.5% to 9.9% (by gross rental income) as at 31 March 2018.
Going forward, we also discussed if the management sees data centres as an integral part of industrial real estate. We also asked if they view data centres as a separate asset class within the industrial property segment and should be reported separately from the other asset classes now that it has become a more significant portion in their portfolio.
The IR representatives strongly view data centres as an integral part of the industrial assets. With regards to segmenting the reporting of data centres from the other asset classes, IR representatives shared that they are currently in discussions on how to better classify and report on the data centres segment in future results announcements.
Overall, we view MIT quite favourably with their data centre acquisition and are happy that going forward, we are likely to see better breakdowns and segmental reporting with data centres being classified in their own category.
Source: Mapletree Industrial Trust Data Centre Acquisition Announcement Presentation Slides
We can clearly say that we benefited in terms of our knowledge on specific REITs during the REIT Symposium 2018. We found that interacting with management to be the most beneficial to discuss aspects of their REIT which cannot be easily discovered or explained in their announcements and presentation slides.
We certainly encourage all readers to attend next year’s REIT Symposium event. This year unfortunately, the 1200 tickets sold out well ahead of the event. Perhaps next year, it would be best to purchase the tickets early.
ProButterfly is a proud to be a media partner for this year’s REIT Symposium 2018.
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