Panellists pick REITs and Lian Beng to ride out disruption

From a recent peak of $166 in 2013, revenue per available room dropped to $135 in 2017. However, RevPAR has started recovering and is seen to reach $143 by end-2018 and to further increase to $153 in 2020, says Chi. The recovery has come about because of the drop in the number of new rooms coming on stream. From 3,430 new rooms in 2013, the number will reach a low of 702 this year, and increase to 1,481 and 823 rooms in 2019 and 2020 respectively.

Chi acknowledges that while hotel revenue is well supported, the serviced apartment side of the business still faces some pressure because of weak corporate demand. “Whenever [FEHT’s unit price] comes down to 60 cents and below, we will [buy],” he says.

Chi believes FEHT will benefit from a growing preference for staycations among people living in Singapore. Instead of a short overseas trip, families might choose a weekend stay on Sentosa.

FEHT, which has a 30% stake in a joint venture with its sponsor Far East Organization to build three hotels on Sentosa, is poised to increase its exposure to this market. The three hotels, positioned at the mid to mid-high end, will be completed between 2Q2019 and 3Q2019, and offer a total of 830 rooms. “[Mid-end hotels are] what the market wants,” Chi says.

He estimates that FEHT, with its loan-to-value (LTV) ratio now at around 40% — just below the 45% mandatory cap — might need to raise around $110 million, which translates into between 5% and 10% of its current market capitalisation. This is a relatively small percentage compared with those of other real estate investment trusts, such as OUE Commercial REIT, when they did their fundraising.

Chi rules out a placement as FEHT now trades below book value. The family of the late Ng Teng Fong, which owns 60% of FEHT, is unlikely to dilute its own stake by selling units at a discount to other investors, he says. The more likely way to raise funds is via a preferential offering, or a rights issue, in which the family will take up its full share, Chi adds.

If and when a rights issue takes place, his recommendation is for investors to buy at the rights price, for a “sure bet” yield of around 8%, which is likely, given the current market volatility. “I think this is a very interesting sector,” says Chi.

AIMS AMP Capital Industrial REIT

Another REIT that Chi likes is AIMS AMP Capital Industrial REIT (AA REIT), which owns a portfolio of industrial and office buildings in Singapore and Australia. He acknowledges that the industrial space is “a bit crowded” and that rents are under pressure. However, there are signs of a trough and certain institutional investors are starting to load up. For example, in November, Warburg Pincus emerged as a substantial shareholder, with a stake of 5.1% acquired at an average price of $1.35 a unit.

AA REIT added a growth driver when it bought a 49% stake in Optus Centre in Sydney for A$184.4 million in 2013. The building now contributes around 15% of AA REIT’s income. Optus, the Australian subsidiary of Singtel, has three staggered leases on the property, with the latest expiring in 2023, thereby giving AA REIT a certain level of earnings visibility. “Optus is not going anywhere; if they want to go somewhere, they have to start building now,” says Chi.

At current levels, AA REIT gives a yield of 7.6%, which Chi believes is “quite secure”. Of course, some investors, noting the relatively big changes in the unit price, might prefer to wait for 8%. “I will never be able to catch the lowest point; so, a bit up from the lowest point, is an appropriate level to [buy more],” he says.

CapitaLand Retail China Trust

Chi calls CapitaLand Retail China Trust (CRCT), another of his picks, “CapitaLand Mall Trust with higher dividend and higher growth”. CMT is, of course, the largest retail trust listed in Singapore currently. Both REITs are part of property giant CapitaLand’s portfolio of subsidiaries and listed REITs.

Chi likes CRCT for its portfolio of 11 malls that are located in prime locations across several top-tier Chinese cities. For example, CapitaMall Xizhimen in Beijing is in the Xizhimen transportation hub, one of the busiest railway stations in China’s capital. Its catchment area includes the Zhongguancun District, Beijing’s hub for high-tech companies and start-ups. Chi cites two other Beijing malls: CapitaMall Grand Canyon and CapitaMall Wanjing. The REIT’s portfolio includes malls in other tier-one cities, such as Rock Square in Guangzhou. These malls are also located in high-traffic, high-density areas.

Chi acknowledges that the growing popularity of e-commerce in China is a threat to physical retail. However, although Chinese consumers can buy many things online, they still like to drop by at shops to pick up some items. Chi says people living near malls and train stations tend to make purchases before heading home for the day. “You don’t go to the malls to buy expensive goods, but you go there to eat, visit the supermarket, or get [overpriced bread],” he says.

CRCT’s LTV now, at just 32%, is still quite low, which means there is quite a bit of debt headroom to acquire more assets. “We think it can still push up dividend growth a bit every year,” says Chi.

Ascendas India Trust

Ascendas is one of the largest industrial landlords in Singapore. Its template of well-designed and self-contained industrial parks has been exported to countries in Southeast Asia, such as Vietnam, and India, where from the 1990s, it has built its Ascendas India Trust (a-iTrust) portfolio.

The industrial parks are pitched at MNCs that are eager to expand into India but held back because of the lack of proper infrastructure and amenities. What Ascendas did was to create a comfortable “bubble” in its industrial parks. “Basically, [the place] is in move-in condition for them,” observes Chi, referring to the water filtration and power generation systems and security services provided at the parks. Furthermore, companies operating in those industrial parks enjoy certain privileges and do not have to face the full suite of Indian bureaucracy. Local competitors tried to emulate Ascendas’ model, but it was able to hold on to the key MNC tenants, he says.

Chi acknowledges that there is a risk to a-iTrust’s earnings with the rupee depreciating. However, the tenancy agreements include built-in step-up rental rates.

On the other hand, a-iTrust is well placed to enjoy additional growth. There is ample land at its Bangalore park to build two new buildings, which, when completed, will provide significant additional rental income and increase the dividend yield come 2020. “We don’t really like REITs that have to buy properties; we like REITs that can build their own properties,” says Chi.

He says his fund has been accumulating a-iTrust at $1.05 a unit. The price, however, moved as high as $1.10 in October. “Suddenly, somebody spoiled the party,” he grumbles.

At this level that a-iTrust is trading, the yield is 7.6%. Chi thinks that when the yield reaches closer to 8%, that will be a better entry point. “Some are more risk-adverse, some have bigger risk appetite,” he says.

Lian Beng Group

Goh Tee Leng of Heritage Global Capital Fund likes leading construction player Lian Beng for its ability to ride the property market. In addition, he likes the company for its significant exposure to property investment and also development, via a separately-listed subsidiary, SLB Development.

Lian Beng’s construction order book is at a record $1.29 billion, which is likely to provide five years’ worth of revenue, if its FY2018 turnover is used as a gauge.

Goh acknowledges that competition in the construction sector is stiff and margins are compressed, owing to attractive pricing from mainland Chinese contractors.

Lian Beng, as both a contractor and developer, is set to ride out the storm with the wider margins it enjoys as a developer. Goh also likes Lian Beng for its strong and active partnership with another developer, Oxley Holdings. Many of Lian Beng’s recent projects were carried out jointly with Oxley. Meanwhile, through its investment properties, such as Wilkie Edge, Lian Beng enjoys a steady rental income, which adds to its recurring cash flow.

Goh acknowledges that Lian Beng has a significant gearing ratio of 81%. The debt load incurred interest costs of $14 million. However, the company has been quickly reducing the debt load. By contrast, the investment income alone, at $15 million, is more than enough to service the financing costs.

Lian Beng trades at around 0.62 times book value, which is below one standard deviation of the range of 0.46 to 0.79 times for its historical average. Goh started buying Lian Beng in 2018.

Goh also observes that Lian Beng’s controlling shareholders, the Ong family, have been buying its shares from the open market. Over the past two months or so, they have bought more than one million shares. “They are putting their own skin in the game, to show that they believe the company is cheap,” he says.

When asked to choose between Lian Beng and SLB, Goh prefers the former.

Lian Beng owns 70% of SLB, which trades at one times book value if one is to buy from the market. By contrast, if an investor buys Lian Beng at current levels, which is just 0.35 times book value, he gets the chance to own SLB, albeit indirectly, at a much cheaper valuation. “Should I buy stocks or should I buy the property? If I buy the property, I have to buy at book value; but if I buy the property developer, which built the property, there’s a discount to it already, and in that sense, I can buy property at a greater discount, without having to pay one times book value.”