Monday, May 20, 2019

Frasers Logistics and Industrial Trust (FLT)

The Properties

FLIT has 60 industrial properties.  By value:
  • 2/3rds are in Australia.   2/3rds of those are in Sydney & Melbourne.  Minimal exposure to Perth (1 property, or about 7% of the Australian properties' value).
  • 1/3 are in Germany and the Netherlands
The Australian buildings seem to be mostly small, generic light industrial buildings, with a few large warehouses (5-6 buildings).
The European buildings are large Logistics or Industrial buildings.
None of the buildings seem highly specialised.

70% of the properties by value are freehold, and another 21% have a lease of over 80 years.

The Australian Property Cycle

Varies by city and within parts of a city.
  • A 2019 Moodys Report expects Western Sydney Industrial property prices to rise, due to online shopping and new infrastructure.
  • A Centuria Industrial REIT (ASX:CIP) presentation shows available space declined up to Oct 2018.
To know about the cycles, you really have to be an expert on the land supply in different parts of the cities.  And predicting future demand is just guesswork.

Tenant Quality

Generally good.

FLIT lists all their tenants (how many REITs do this?).  I categorised each tenant, trying to guess their ability to pay rent in a recession:
  • Reliable: Is either part of an oligopoly (eg: Coles, Woolworths), government (eg: Australian Post), or listed (showing profits for the last 2 years and reasonable debt).  In essence, no way that they would not pay rent.
  • Unknown: Private companies (eg: BAM Wine LogisticsCapriceBroetje Automation).  Even though some of them sound interesting, there's no way of knowing how profitable they are.  Most companies in the world are going to be here.
  • Dodgy: Currently loss making.  So when times go bad, we can expect the company to go under.
Each category, by gross revenue (Sept 2018):


Overall, this is a pretty high level of 'reliable' companies.  If you pick a random street or industrial park to walk through, you are not going to see such a high proportion of 'reliable' companies.

The two dodgy companies are CEVA Logistics: a merger of two loss making companies which is still loss making, and Constellium: an aluminium product manufacturer with borderline profits/losses and large debt.

CEVA is a worry: they are one of FLIT's top 10 clients.  They are renting a massive warehouse in the middle of nowhere - this may be difficult to lease out again, and buildings like this are valued by their lease (...no lease, no value).


But overall, tenant quality seems quite high.

Management Quality

Sponsor Holdings: Frasers Property, holds 20% of the trust.  I haven't looked at enough REITs to see how this compares.

Management Fees (p146): 0.4% of property value as base fee, plus 5% of distributable income.
Seems reasonable.  Would be better if the fee was based on DPU.

Most management fees are paid in units: at least 85% in 2018 (note 5) and 91% in 1H19 (p10).

Trust expenses were very high in 2017, but lower in 2018 (p158).  They were 8.6% and 1% of distributable income, respectively.  I found no explanation on what these expenses were.



Pipeline: ROFR for 17 Australian properties and 29 European properties.

Past Acquisitions have been OK:

The numbers

Gearing Ratio is now at 35.1%.   No perpetual bonds.

Debt Expiry: They have a large chunk of debt due in 2021:

They did mention their intention to refinance the (grey) European debt (currently at 2% interest) with a lower rate later.  But I think they should space out their debt a bit more.

79% of their loans are fixed rate (p5), or protected by swaps for the lifetime of the loan.

Unencumbered buildings: (In Sept 2018 AR, footnote 10) The secured bank loans are secured over investment properties with a total carrying amount of A$969,554,000 (2017: A$Nil).  So out of AUD 3bn worth of property, 2bn is unencumbered.

They have always had 100% dividend payout ratio.

Valuation

Other Risks:
  • Kyith Ng highlighted that many of their Australian rents were above market rate during hte IPO (June 2016).  I am factoring in a AUD 3-4m income to be lost because of this.
  • AUD has dropped a lot recently, I am factoring in a rate of 1 SGD to 0.9 AUD.  Same as the global financial crisis.  Assume no change in EUR/SGD exchange rate.
For a target 6% yield, I would value the stock at SGD 1.10.

Saturday, May 18, 2019

Dividend Portfolio

Inspired by posts like this and this, I've decided to slowly start a dividend portfolio.  I'm looking for stocks with a 6% yield -  the hard part is to judge if its sustainable.

I aim to buy SGD 8K worth of stocks per month for the next 3 years.  Plus a little more when I get my bonus.   This should give me a 300K portfolio in 3 years, with an income of 18K per year.  I expect a serious downturn in the next few years, which would make me buy faster.

I've started with:

  • Cromwell Reit (10,000 shares) - not great, but had an 8% yield which is probably sustainable.
  • Netlink Trust (12,000 shares) - low yield, under 6%, but very stable.  I can't see any threat from 5G, and NBAP revenue may grow from IOT.
  • Manulife REIT (6,800 shares) - 6% yield, US economy still looks strong, the main risk is taxation (resolved for now, but always in the background).  Impressive Management.  [Update 21st May: Bought another 7000 shares]
Should give me enough dividends for kopi everyday.



Some REITS I've looked at but haven't bought:
  • IREIT Global main tenant seems to be in long term downsizing.  Too bad, its good otherwise.
  • CapitalMalls Malaysia Trust has reasonable 7% yield, as the Malaysian Retail market is currently oversupplied - could I buy for a cyclical upswing?  I decided not to as 1) The only players that seem to maintain their advantage are the 5 premier malls with 1m+ square feet.  Although CMMT's Penang's Gurney Plaza is good, it is not unbeatable.  2) Small, mixed use malls and individual strata malls are disadvantaged.  So why did CMMT buy Tropicana (mixed use) and Sungei Wang (strata)?  As mall operators they should know these problems, especially as they've seen it play out in SG before.  Why such stupid acquisitions?
  • Singapore Industrial REITS have high yields, but are paying out 100% of their distributable income, even as they have short leases.  So you need to deduct 1 to 3 percent from the yield to get the 'true' long term yield.

I'll look at Frasers Logistics and Industrial Trust next.  Maybe Malaysia later - there may be some lower priced REITS there, as their industrial, office and retail property sectors are in a property glut.

Tuesday, May 14, 2019

Systematic Trading: Week 11

Momentum (Clenow)

On Monday night:
  • Sold INSM at 27.7, GRA at 73.43, EOLS at 22.39, PYX at 16.79 and CPRX at 3.08.
  • Bought EIDX (Eidos Therapeutics Inc): 132 shares at 24.78, ADVM (Adverum Biotechnologies): 504 shares at 6.59, BOOM (Dmc Global Inc): 48 shares at 69.15, TGTX (TG Therapeutics Inc): 455 shares at 7.39, and LSCC (Lattics semicondictor Corp): 256 shares at 13.19

Tuesday, May 7, 2019

Systematic Trading: Week 10

Momentum (Clenow)

On Monday night:
  • Sold EHTH at 59..89.
  • Bought CVNA (Carvana Co): 54 shares at 69.6)

Wednesday, May 1, 2019

Systematic Trading: Week 9

Momentum (Clenow)

On Monday night:
  • Sold MRTX, XPER, LRN and CMG.
  • Bought CNST (Constellation Pharma: 317 shares at 12.41), YETI (Yeti Holdings: 112 shares at 34.41), VYGR (Voyager Therapeutics: 183 shares at 21.69),  and CPRX (Catalyst Pharma: 690 shares at 5.76), 

Saturday, April 27, 2019

Systematic Trading: Week 8

Although the market is up, my momentum portfolio is now down 1% from starting.  The TAM portfolio is down 5%.

Value (The Acquirer's Multiple)

No change.  Waiting to rebalance late next month.

Momentum (Clenow)

Sold LCI and NVCR.
Bought DBD (Diebold Nixdorf: 271 shares at 13.25) and TLRA (Telaria: 494 shares at 7.23).

Wednesday, April 17, 2019

Notes on Cromwell Reit

The European Industrial Property Market

Where are we in the property cycle?

We are late in the cycle.  The European Industrial and Logistics market has been recovering since 2013, and yields have been driven down by investment:

                Source: Cromwell 4Q18 Results Presentation, 27 Feb 2019

This doesn't mean we are at the top.  That will probably only happen now if there's a slowdown or recession.  This is the same risk for buying any stock.  Personally, I'm dealing with that risk by remaining half in cash.

The Properties

miscellaneous collection of light-industrial and office properties across Europe, with no underlying theme.

              Source: Cromwell Rights Issue Presentation, Oct 18.

Most properties are freehold, less than 10% leasehold:

               Source: Cromwell Rights Issue Presentation, Oct 18.

Most of their buildings are generic industrial, warehouse or office buildings:



Only 2 buildings, or less than 1% of their portfolio, are customised for the tenant.  Both are leased to the Italian Police.

The largest tenant is the Italian State Property Office (Agenzia Del Demanio), who manage real estate assets for the Italian Government, at 16% of revenue:


Since their property is freehold, it has redevelopment potential.  They mention Parc des Dock St Ouen in Paris (p16), with an estimated Euro 1bn (0.45 per share) redevelopment potential over 10-15 years.

Tenant Quality

Hard to tell, most buildings are multi-let.

I'm worried about their largest tenant - the Italian State Property Office - cutting their budget, as Italy's budget deficit is too high for its slow growth.

Management Quality

Hard to say, as they've only been listed for a year.  During that time they made a rights offering to acquire more properties.  This was accretive for those who subscriber, but dilutive for those that did not.

Kyith Ng from Investment Moats makes the point that the managers are the same people from the parent, and they previously did a bad job of timing their purchases, especially with Valad Property Group.

So neutral to slightly negative on Management Quality.  The stock might be re-rated if they can prove themselves over a few years.

[Edit May 2019: Cromwell Property Group owns 35% of the REIT, which aligns their interest somewhat.]

The Numbers

Borrowing

Gearing ratio is around 33.9% to 37% (p41).   No perpetual bonds.  Their preferred range is 35-38% (p205).

Debt expires in 2020/2021.  A bit lumpy for my liking, but they said they want to refinance to 2020 debt now:


Most debt is floating rate, or only hedged short term:
  • 18% of it is floating rate
  • 40% is hedged for 1 year or less
  • 15% for 2-3 years
  • 14% for 4 years or more.
  • 13% is fixed rate

Unencumbered Buildings: Around 20%, or 19 out of 92 buildings are unencumbered:
  • 14 out of 60 light industrial buildings (in either France, Germany or the Netherlands) are unencumbered.  We do not know which.  
  • Out of the 32 "Office & Other" buildings:
    • The Ivrea, Barea and Genova properties in Italy are unencumbered (p207).  These have a valuation of 121m.
    • 2 other of these buildings are encumbered, we do not know which.

Leases

WALE is 4.7 years, quite long for industrial property.
Lease expiry is around 10% per year until 2022:
I am guessing that they will not have more than 20% lease expiry an any single year from 2022 onwards.

Quality of Distributable Income

Income Support: No sign of income support in the Income or Cashflow statements.

Management fee is 4.9% of Distributable Income (p7).  Trust expenses are 6.1% - these seem to be recurring (eg: annual listing fees, legal/valuation/audit/accounting fees).  I have not looked at enough REITS to tell if these fees are high or low.

100% of management fees are paid as newly issued units.

Valuation

The trailing yield at a share price of Euro 0.51 is 7.5%.  This should increase next year as the newly acquired properties contribute.  Maybe 8%.

100% of distributable income is payed out as dividends (I would prefer 90%).

Summary

Risks are:
  • European slowdown or recession.  
  • Property market cycle: oversupply caused by low or negative interest rates
  • EU breakup.  Their properties and loans may end up being in different currencies.
  • Rising rates would cause problems, unless they hedge more.
  • They will have to issue more units if they want to expand.  Like they did previously.
  • Budget cuts from their largest tenant - the Italian Government
I think this is REIT is OK at the current price, the risks are priced in.  And I think the yield is sustainable.

I bought 10,000 shares at Euro 0.495.