Netlink Trust AGM

I attended the AGM today, there was some Q&A on 5G, the competitive landscape, and capex. 

Here are the points I took.  Things I am not sure, or did not hear well, have a question mark (?):

• Revenue/profit review.  Monthly recurring revenue per-user for Residential is $13.80, and Business is $25 (?).  Installation and Diversions are the only non-recurring revenue streams.  Diversions is from having to divert underground cables due to construction work.
• Netlink currently has an 88% share of the residential market.
• Regulatory profit targets.  Their profit is regulated and reviewed every 5 years (next review in 3.5 years).  A 7% rate of return is targeted - the target profit number will also depend on other factors such as interest rates, debt and capex.  From the target profit/revenue, the regulator determines fees per user, as the number of uses is known.  In the long run, more capex means they will be allowed more profits.
• They see a lot of potential in Smart Nation.  Have received requests from govt agencies to wire up cameras.  Most current cameras are on 4G platform, which affects picture quality.
• Competition in Business Segment.  There were several questions on SP Telecom as a new competitor.  The answers: 1) SP Telecom only competes in the Business connection area.  2) SP Telecom is both their competitor and customer.  Netlink lays cables for them in some areas.  3) The business connection segment is already competitive, with the three telcos already competing with Netlink.  Netlink has around a 1/3rd market share, Singtel is slightly above that.  4) SP Telecom is a small player in this market  5) The telcos have fibre in some areas, but not others.  M1 does not have any fibre (?)
• There were many questions on if the dividend was sustainable.  The answers: 1) Management took pains to state that dividends were only paid out of Cashflow from Operations, not from Capital.  2) In the 2018 results, the 221m dividends is for FY2018 (126m) as well as FY2019 (95m), that is why it is bigger than the FY2019 FCF (158m).  3) They have a 100% payout ratio, no plans to reduce it to 90%.
• There were many questions on 5G.  They answered may times that 1) 5G requires micro base stations 2) These are expected to increase revenue for Netlink  3) Regarding specifically if the last-mile connection can be serviced by a single access point (servicing 5-6 homes with wireless), thus cannibalising Netlink's Residential revenue, they answered they do not forsee this, as they expect home data usage to keep increasing - so it would make no sense to serve the home with (lower/shared) bandwidth connections.
• Capex.  1) Capex was 212m in FY2018, 71m in FY2019.  Expect FY2020 to be more than FY2019.   2) Generally, most of their capex is for expansion.  Sustaining capex is for their central offices' maintenance and equipment (eg: chillers, vehicles); this varies so they can't give a percentage.
• One question on why Trustee fees are paid in cash, not units like other REITS.  Netlink trust owns the trustee.  The money paid is mostly directors fees.   The trustee does not generate a profit, unlike other REITS.
• A throwaway comment that struck me is that Singtel actually has the technical capacity to service Residential, but they do not do so (or not allowed to do do?)

Non-investment things:

• Most questions and answers were worthwhile, for a beginner to understand the business and competitive landscape.  There were only a few stupid questions ("What is the purpose of this meeting?")
• Only tea and coffee after the meeting, no food.

I found it worthwhile to attend, may attend next year.

US Prime REIT

Kyith at investmentmoats has already covered this IPO's buildings and basic metrics.  No need to repeat it here.  They seem decent, except for the leverage.

But he thought they may need to raise money for expansion after listing.  I want to look further at their growth potential.

Growth Potential

Their leverage upon listing will be 37%, limiting their ability to borrow more money.

Is there scope to grow by increasing occupancy?  Not much.  In their 2020 projections that the 7.4% yield (@ 100% payout) are based on, they already assume a high occupancy rate:

Is there scope for rent increases?  Summarising the Property Market Report (Section F) of the prospectus:

Not much here either.  Note that this 3% increase is in gross rent, the percent increase in Net Property Income may be different.  In absolute terms, either all of most of the gross rent increase will be passed through to NPI.  In percentage terms, NPI may increase by more or less than 3%.

Are their buildings' markets expected to improve long term?  From the Property Market Report, we can derive an estimate for how vacancy rates will change in each building's submarket.  We only have the projected change for all of A/B/C class buildings, they did not give the projected change for A-class alone.

Some submarkets are projected to have higher vacancies (bad - red), some lower (good - blue).  The two largest buildings (by value) are red.  It's a little disappointing that the building with the longest lease is in the bluest market. On average, there is a slight increase in vacancy, more so if you weight by the buildings' values.  So generally OK, with a slight negative bias.

My take on these 5 year projections is that future supply is well known, but future demand is pure guesswork.

Conclusion

Its decent, but I can't see much scope for Prime REIT to grow beyond its average 2.1% rental escalations.

I'd like to compare it with Manulife US REIT next.