Bought CSE Global, Gazprom and a European Bank

Made three trades in the past month.

Bought CSE Global at 46c.  They are a technology company, primarily servicing the oil and gas sector and secondarily, government infrastructure.  Most of their work is project based - they talk about recurring income, but I'm not sure how 'recurring' it really is.  I bought because it was fairly cheap and it 5% yield is probably sustainable.  I can collect it while I wait for oil sentiment to improve.  Key numbers to watch are its order book, and receivables (they had a big problem with them in mid-2017).  Its 2% of my portfolio, due to its lumpy (project based) earnings.

Bought Gazprom at USD 6.91, a Russian gas giant supplying Europe and China.  It was cheap, paying a 7 percent yield (before 10% Russian withholding tax, plus ADR fees).  It should grow dividends to a 50% payout ratio, as their capex winds down and sales increase.  This idea is from Sven Carlin, here.   I'm not analysing it, as its a big company, not transparent, and theres no advantage to me doing so.  Its also 2% of my portfolio, with 2 big risks.  One, geopolitical risk (eg: wars) means gas to Europe may be disrupted, even if its cheap. And two: Putin decides this company should belong to the Russian people, once again.

Bought call options on a European bank.  This bank has gone through several rounds of capital raising and NPL disposal.  Its cheap, trading at half tangible book value, where similar banks from the same country are trading at 70+ percent.  It will probably pay a 5% yield (@ 50% payout ratio).  If it reaches 70% of tangible book by June 2022, my money gets multiplied 2 and a half times.  If not, then zero.  Its a 1% position.

[Edit 8-Nov: Bought more options, expiring in Dec 2021.  Another 1% of my portfolio].

Last month I finished buying Manulife US REIT, its now around 10% of my portfolio.

Manulife US Reit acquisition of 400 Capitol

The recent announcement seems OK.  Not good, not bad. just OK.

It is a Class A office building in Sacremto downtown (CBD), possibly a "trophy", being the "tallest building in Sacramento...forming an integral part of the city’s skyline. The Property is widely considered the premier building in the market and is downtown Sacramento’s address of choice for premier law, financial service, accounting, and professional service firms."

Average of 2.3% rental escalations per annum.

Committed occupancy is 94.9%, though the small print says that excludes one tenant that has exited since then.

Manulife says that rentals have space to move up:

The 2019 Q2 Cushmand and Wakefield report that I found gives Downtown Sacremto's asking rent as  $3.18 (p3), which would be $38.16 per year.  Maybe the newer report has higher rent.

One of their major tenants is a bit dodgy:

WeWork signed the lease in 2019 Q2 (See p3).  I do not know if the lease length is a long one, adding to the 5.9 year WALE.

The property had a lower occupancy rate of 84% in 2018 - this was before the WeWork lease.  Manulife gave a proforma calculation of how it this acquisition would have affected their results if it had been done in 2018:

Almost no change.  So if WeWork stopped paying rent tomorrow, it is likely that DPU after the acquisition would be unchanged from before it.

Longer term, I think its a good property and I'm surprised they were able to buy another CBD property, rather than suburban.  Shorter term, I don't think its as good as they make it out to be. Vacancies were higher last year, and with WeWork as a tennant, the numbers might not reflect reality.   Perhaps the seller leased to WeWork to increase the valuation before selling.  And perhaps Manulife rushed a bit in order to grow to be included in the Nareit:

Its a valid business strategy to grow bigger to be included in the Index.  Size matters for REITs, and inclusion in the index will boot their valuation, reduce their cost of capital, allowing them to acquire more.

I think Manulife REIT is still decent and, and one of the few SGX-listed REITS not overvalued.  I will be subscribing for the preferential shares, and will continue acquiring it.

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.

Dividend stocks: My first big bet

I bought a lot of Netlink Trust and a little Manulife US REIT in the last few weeks.  Enough to give me around SGD 6K of dividends a year.

Now I've got 70,000 shares of Netlink Trust at an average of 85.4c, and 26,800 shares of Manulife at an average USD 0.861c.

Why did I pick these stocks?

• Netlink Trust is a defensive counter, one of the few whose earnings would be unaffected by a recession. And still (barely) trading at a reasonable yield.  Long term, its residential revenue should follow the growth in Singapore household formation.  Its Non-Building Access Point's (NBAPs) should grow with internet-of-things/smart-city coming now, and 5G coming later.  I can't see any disrupting technology on the horizon, though I need to remind myself to keep a lookout.
• Manulife US Reit is developing a good track record after listing on SGX.  It is trading at a decent 6% yield with freehold buildings, unlike local REITs trading at a sub 5% yield with leasehold properties.  The risks are a recession (affects all stocks/REITs), and tax law changes (affecting any US-property REIT listed overseas).

Why did I buy now?

           Scared of missing out.

           Netlink Trust shot up on the day I placed my largest order, and I missed it.  Strong enough that my broker said it would unlikely come down that day.  After thinking about it: I am buying the income stream.  I'll still be happy if I buy at a higher price, and it comes down later, as long as I collect my dividend.  I'll be unhappy if I miss it now, and it never comes down again.  Which is unlikely, but possible - look at Vicom.  There's very few stocks giving a 5+ % yield that would also be unaffected by a recession.  The market was still offering me the chance, so I bought it.  Never regret.

The market narrative now is all sunshine and rainbows, especially for dividend stocks.  The Fed is expected to cut rates.  Worst case - for someone like me shopping for dividend stocks - is that this narrative goes on for another year.  Until the either the economy starts expanding, goosed by low rates, or we do finally get a real recession.

I am now 60% invested.  I don't feel the need to buy anything else this year, but can do so if the market drops.  December showed how quickly the narrative can change.  I am waiting.

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.