A Tale of Two REITS (Guest Post)

A Tale of Two REITS (Guest Post)

There are investors who like to base their Reit selection on two criterias: Price to Book Value and Dividend yield.
real-estate-singaporeThis post was originally posted here. The writer, D Wong is a community member on InvestingNote, with username known as Pizzaprata.

M Reit: $Mapletree Ind Tr(ME8U.SI)
S Reit: $Sabana Reit(M1GU.SI)

Based on the latest quarter’s results and closing prices:
M Reit’s P/B is 1.41 and yield is 5.7%
S Reit’s P/B is 0.76 and yield is 6.9%

From the above M Reit looks overpriced and S Reit looks attractive. Both Reits had their IPOs just one month apart in Oct/Nov 2010 with similar IPO prices of 0.93 and 0.917 respectively. That’s where the similarity ends, from the price performance chart below you can see that M Reit has doubled it’s share price since IPO while the other has dropped to less than half.

The reason is simple, M Reit has consistently improved it’s DPU every year whereas S Reit had to cut it’s DPU over the years. Therefore a good management track record is a more important criteria. So quality reits don’t come cheap and if you are hung up about P/B ratios you would never have bought M Reit as it has never dropped below its book value since IPO. Including dividends, M Reit’s total return is more than 200% so you would have missed a 3 bagger.

However past performance is no guarantee for future performance. You need to look at the Reits results in detail to see if the distributions are sustainable and what projects they are doing to increase DPU. Tomorrow I will reveal the Reits and why I accumulated M Reit last week although seasoned investors would have guessed which Reits I am talking about.

 

You may have guessed which are the Reits but I think that the difference in performance may have surprised you. It is a fair comparison as they are both in the same sector and country although MIT have expanded to US in Dec 2017. MIT faced the same macro economic problems as Sabana, excessive supply of new Industrial Properties in SG. This brings me to the most important criteria for selection of Reits, a strong sponsor.
Sabana’s sponsor was Vibrant Group (formerly known as Freight Links Express), a logistic company that’s struggling to remain profitable. They are unable to help the Reit secure new leases and even have difficulty renewing their own master leases with the Reit. On the other hand, the sponsor of MIT, Mapletree Investments has 46.3b in assets under management which it can inject to the Reit. MIT is not immune to the problems facing the sector, it faced negative rental reversions and loss of big tenants like Johnson & Johnson. However with the sponsors help, it has been able to secure lucrative BTS projects from HP and Equinix with super long leases. It is also able to make accretive acquisitions like the 14 data centres in US and the recent 18 Tai Seng mixed use development.

However before making a decision to buy, we still need to deep dive into the Reit’s results to know what are problems and future developments of the Reit. I wouldn’t touch Sabana although it’s cheap as they are not only losing tenants but also selling their properties which means declining DPU although there is short term gain. In Jan’19, they sold 9 Tai Seng Dr for more than twice the valuation but will lose the rental income. The latest DPU of 0.75 cents which is 14.8% lower than last year includes 0.12 cents from capital gains from divestment of properties which is unsustainable. In sharp contrast MIT purchased 7 Tai seng Dr through the sponsor and is spending 27m to develop the property into a data centre for Equinix under a 25 year lease agreement with annual rent increase! Which is better for a long term investor?
Having said that, Sabana share price have increased this year due to a possible takeover by ESR as the sponsor of ESR Reit recently bought shares in Sabana from the troubled Vibrant. This is speculative and may not happen as ESR have looked into acquiring Sabana before. The good news for Sabana is they have a new CEO and they have received permission from URA to carry out AEI to their crown jewel New Tech Park which would add 43k sqft of space to the property.

MIT has grown it’s quarterly DPU by 60% in 8 years, is it still able to continue this growth? I think it can this year for the following reasons:
1. Increasing occupancy of 30A Kallang Place. This is a major AEI where MIT converted an old JTC flatted factory to a spanking new glass office building, see photo. When this building was completed in Feb 2018, they had only one tenant, a child care centre. However the management persevered and the occupancy increased from 38% in Dec’18 to 86% in Mar’19. This building now has committed occupancy of 93%. The rentals at this Hi-Tech building are high, around 3.50 per sqft which is in the Business Park rental range. In Singapore, for new tenants there is a one to two months rent free period for fitting out of the unit before occupation. So the rentals would be coming in from this quarter onwards.

2. Full rent for HP Phase 2 BTS. For HP, instead of rent free period for fitting out, they opted for a rental discount of 13.9% for 18 months. The full rent would start from this current quarter. Note: HP is their biggest tenant.

3. Completion of 7 Tai Seng Drive. This Data Centre for Equinix is scheduled to be completed in 2H2019.

4. More accretive acquisitions. MIT’s current gearing is only 33.8%. For the recent acquisition of 18 Tai Seng, the Reit had enough debt headroom. There was no need to make any share placement to raise funds but the Reit went ahead to raise 200m which would made this acquisition non accretive. This tells me that there are more acquisitions lined up. The management have also shared that they intend to expand their US Data centre portfolio, they are probably looking for good acquisitions now.

MIT has also performed better than the more popular Ascendas Reit. In the last 5 years, MIT price has risen by 45% versus around 20% for Ascendas Reit. As the supply of new Industrial properties will drop sharply from this year, things should be looking good for this Reit baring a full fledged recession. I have been invested in this Reit since IPO, my only regret is that I didn’t accumulate more as this share price is very resilient and does not correct by much. Vested 15k shares, please DYODD.

Thanks for reading.

Once again, this article is a guest post and was originally posted on D Wong profile on InvestingNote. 

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