Monday, January 30, 2023

Sold my last S-REIT

Sold my last holdings of Frasers Centerpoint Trust.  Small capital loss of less than 1K, offset by 12K dividends.

They announced they are buying a 25% stake in Serangoon Nex (85 years remaining lease), funded by debt.

Its not a bad deal, not like MapleTree Commercial Trust's disastrous merger a year ago.  But its not a great deal either.  Their pro-forma calculations show a negligible 0.5% increase in DPU if the transaction had been performed Oct 2021.  Leverageis expected to rise from 33% to 38.8% (Section 6.4).  

The negatives:

  • Serangoon Nex is already crowded with 99.9% occupancy, so I don't see how they can extract more value from it.
  • The company announced they are taking on a 410m revolving loan - they did not give the interest rate; revolving loans are usually variable.
  • Increasing Leverage from 33 to 38.5% for a mere 0.5% increase in DPU doesn't make sense.
  • Sibor has risen from 0.5% to 4% in the last year.  This has to affect Singapore property values, increasing FCT's leverage.  eg: A 10% decrease in property values would lead to Leverage increasing from 38.5% to 42%.  Now we are moving a bit close to MAS' 50% gearing limit.
  • How are they going to make future acquisitions, like Northpoint South Wing?  They're gonna have to fund it entirely by issuing new shares.

The positives:

  • Serangoon Nex is a good long-term asset.  Its a hub with 2 MRT lines and a bus interchange.  The mall is always crowded.
  • On OCBC report stated (p2) that the new debt is taken at an "interest cost of less than 4.3% locked in for three years."  I think they are talking about the pro-forma calculations, which would mean these calculations already take into account high interest rates, and the results may be better if the Fed pivots soon.
Overall, the numbers just aren't great.  Buying a property yielding high 4's percentage points (gross), while taking on debt in the low 4's percent is barely a win.  Increasing leverage raises their risk and reduces their ability to bargain hunt when opportunities arise.  Since they are paying all their distributable income as dividends, they'll never decrease their debt and future growth is limited.  Their dividend yield is sub-5%.  I won't get rich holding a stock like this.

Need to find another way to get rich, holding SGX Reits won't cut it.  They have too much interest rate risk, and too little growth potential since they payout all profits as dividends.  I think theres better risk/reward in holding dividend companies that have fixed their debt 10-30 years out (eg: WMB, KMI), or cash rich companies that are paying out some of their profits as dividends (eg: Delfi:SGX or United Plantations:KLSE).

I still think we are in a multi-year inflationary bear market, and there will be a chance for me to buy more later.  I would rather own a company yielding 3-4% with a 50-60% payout ratio, than one paying out everything while yielding 5-6%.

I've now finished spring cleaning my portfolio.

The stocks that I have left are ones I'm comfortable holding through the cycle.

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