Sunday, December 8, 2019

The Fraser REITs Merger

By now there were a few blog posts written about this merger, so I will give my perspective as a Frasers Commercial Trust unitholder.

Overview

On 2 Dec 2019, Frasers Logistics & Industrial Trust (FLIT) had announced that it would merge with Frasers Commercial Trust (FCOT), with the new REIT to be subsumed under the FLIT banner. In this merger deal, FCOT holders will get 1.233 FLIT units plus SGD 0.151 in cash for each FCOT unit, which meant that for every 1,000 FCOT units, one would expect to have 1,233 FLIT units and SGD 151.00 in cash. The pricing was based on FLIT’s price of SGD 1.24 per unit and FCOT’s price of SGD 1.68 per unit, which were at or around the prices prior to their trading halt.

In addition, FLIT would be acquiring a 50% stake of Farnborough Business Park in the United Kingdom from its sponsor, Frasers Property Limited. The remaining 50% belonged to FCOT, so the whole property would eventually become 100% owned by FLIT.

The Bedokian’s Take

In a way, this merger had somewhat blurred the lines of REIT sectoral divisions. With this “enlarged REIT” (the actual term used in the announcements), we will have office, retail, business parks, logistics and industrial, a very diverse mix. In fact, some of the reasons provided for the merger included: to enhance diversification and resilience of the property portfolio, and to have a broadened investment mandate to invest in a wider spectrum of REITs sectors.

But first, let us look at the numbers.

Post-merger and proposed asset acquisition, the net asset value (NAV) of FLIT will be SGD 1.04 on a pro forma basis, gearing of 37% and a distribution-per-unit (DPU) accretive of +4.2% on a pro forma basis (from FCOT unitholder’s point of view). This meant that FCOT unitholders would get FLIT at a price-to-book (P/B) ratio of 1.19 (1.24/1.04), with a higher gearing (enlarged REIT of 37% > FCOT’s 28.6%) and almost the same dividend yield between 5.6% and 5.8% (assuming the pro forma figures stand and the prices remain as at the offer).

In return, FCOT unitholders will have additional logistics and industrial properties in Australia, plus exposure to Germany and Netherlands (from FCOT’s 6 to the enlarged REIT’s total of 98). Also, the weighted average lease expiry and occupancy will increase to 5.8 years (from 4.9 years) and 99.5% (from 95%) respectively.

So now begs the question: is it a good deal for FCOT unitholders, like me?

The answer is: it depends on how you view it.

In my opinion, this is a good starting or refresh point for FCOT unitholders to have a different perspective of their holdings. With the size of the enlarged REIT and given the number of properties the sponsor has around the world that could possibly be injected, the potential for growth and diversification (sectoral and geographical) is there. This I felt could be a justifying factor for getting FLIT at a higher P/B. 

The big gripe that I have is the eventuality of getting odd lots (number of units/shares not rounded up to 100), though this is more of an administrative issue. With a ratio of 1:1.233, the minimum number of FCOT units to have in order to get the nearest 100 FLIT units would be 100,000 (100,000 x 1.233 = 123,300). Fortunately, you can transact units (or shares) of less than the lot size of 100, but it is advisable to contact your brokerage(s) about unit share or odd-lot market.

The merger is still subject to the approval of the unitholders of both FCOT and FLIT, which is expected to be in February or March 2020, so there is still time to ponder over it.

Disclosure

Bought FCOT at:

Bedokian’s Portfolio:
SGD 0.165, Aug 2009 (before 5 to 1 consolidation)
SGD 0.165, Sep 2009 (before 5 to 1 consolidation)
SGD 1.51, Apr 2015
SGD 1.255, May 2016
SGD 1.24, June 2016
SGD 1.26, Mar 2017
SGD 1.47, Mar 2019

Bedokian’s CPF Portfolio:
SGD 1.39, Feb 2018 (sold SGD 1.72, Dec 2019)
SGD 1.37, Jun 2018 (sold SGD 1.72, Dec 2019)


References

Frasers Logistics and Industrial Trust. Proposed Merger with Frasers Commercial Trust and Proposed Acquisition of the Remaining 50% Interest in Farnborough Business Park. 2 Dec 2019. https://flt.frasersproperty.com/newsroom/20191202_073027_NULL_PONX74KUPADGK387.4.pdf (accessed 6 Dec 2019)

Frasers Commercial Trust. Proposed Merger with Frasers Logistics & Industrial Trust. 2 Dec 2019. https://fcot.frasersproperty.com/newsroom/20191202_073544_ND8U_RIRP7SYNJ4WUH2WN.3.pdf (accessed 6 Dec 2019)

Saturday, November 30, 2019

What If The Two Frasers REITs Merge?

The Business Times reported on 29 Nov 2019 that two of Fraser’s REITs, Frasers Commercial Trust (FCOT) and Frasers Logistics & Industrial Trust (FLIT), are making plans to merge, according to sources familiar with the matter1. With both counters halted for trading since the morning of 28 Nov 2019, and not much news forthcoming, the merger issue at this point would be at best, a conjecture.

However, with the slew of trust mergers such as the Viva and ESR one last year and the combination of the OUE hospitality and commercial trusts just a few months ago, the possibility of a merger involving these two seems plausible. FCOT and FLIT are two out of the four trusts in the Frasers family listed in the local Singapore Exchange (SGX).

If (and a very big IF) it is a merger, let us take a look at the numbers before and an implied after:

Trust
FCOT
FLIT
Combined
Total Asset Value
SGD 2,226.9 mil2
AUD 3,554.1 mil3
SGD 5,514.4 mil (AUDSGD 0.925 as at 30 Nov 2019)
Net Asset Value Per Unit
SGD 1.612
SGD 0.953
SGD 2.56
Price-To-Book
(as at 29 Nov 2019)
1.044
1.314
1.18 (averaged)
Gearing/Leverage
28.6%2
33.4%3
31% (averaged)
Dividend Yield (trailing, as at 30 Nov 2019)
5.75%5
5.65%5
5.7% (averaged)
No. of Properties
62
913
97
Occupancy
95% (committed)2
99.6%3
97.3% (averaged)
Weighted Average Lease Expiry (by gross rental income)
4.9 years (committed)2
6.31 years3
5.61 years (averaged)

Note: The above figures may be asynchronous due to the different “as at” information being presented from the reference sources. It also provides a very simplistic and assumptive point of view should the merger event occur, which may or may not materialize in the future.

At a combined asset value of SGD 5.5 billion, it sits between the current ESR REIT (SGD 3.3 billion as at 30 September 20196) and OUE Commercial REIT (SGD 6.8 billion as at 30 September 20197). Therefore, the asset value is comparable to the two mentioned post-merger REITs.

According to SGX rules, a trading halt cannot exceed three market days8, hence we may know the actual news earliest this coming Monday.

Disclosure: 

The Bedokian’s portfolio contains FCOT.


1 – Frasers Logistics, Frasers Commercial Trust make plans to merge: sources. The Business Times. 29 Nov 2019. https://www.businesstimes.com.sg/companies-markets/frasers-logistics-frasers-commercial-trust-make-plans-to-merge-sources (accessed 30 Nov 2019)

2 – Frasers Commercial Trust. 4QFY19 and FY19 Financial Results. 22 October 2019. https://fcot.frasersproperty.com/newsroom/20191105_201648_ND8U_LOTB79B842SXVZX5.2.pdf (accessed 30 Nov 2019)

3 – Frasers Logistics & Industrial Trust. 4QFY19 Results Presentation. 6 November 2019. https://flt.frasersproperty.com/newsroom/20191106_063827_NULL_OFF7JENV0BVJIHYI.3.pdf (accessed 30 Nov 2019)

4 – Based on last closing price on 29 Nov 2019.

5 – Based on data from Reit Oracle. https://www.reitoracle.com (accessed 30 Nov 2019)

6 – ESR REIT Financial Results Presentation. 3Q19. 25 Oct 2019. https://esr-reit.listedcompany.com/newsroom/20191025_062614_J91U_AUTIU22SVU0IE6H4.2.pdf (accessed 30 Nov 2019)

7 – OUE Commercial REIT. Financial Results for 3rd Quarter 2019. 13 November 2019. https://investor.ouect.com/newsroom/20191113_194311_TS0U_V36L8QUSDHME2BXH.1.pdf (accessed 30 Nov 2019)

8 – SGX Rulebook. Mainboard Rules > Chapter 13 Trading Halt, Suspension and Delisting > Part II Trading Halt and Voluntary Suspension > 1302. http://rulebook.sgx.com/en/display/display_main.html?rbid=3271&element_id=5338(accessed 30 Nov 2019)

Wednesday, November 20, 2019

The Bedokian Review Of Mapletree North Asia Commercial Trust And Some Takeaways

Back in June this year, I had written a post on Mapletree North Asia Commercial Trust (MNACT) in my “Inside The Bedokian’s Portfolio” series (see here). In it, I had mentioned about the crown jewel Festival Walk, a large retail and office property situated in Hong Kong, and itself was a prime concern due to the huge concentration in MNACT’s book value and revenue, which both stood at about 60-plus percent.

Last week, Festival Walk had sustained internal damages that warranted a full closure, after it was being targeted by protestor groups in the current unrest. With reopening, we are not very sure whether it may be subjected to further damages. This definitely has a huge impact in retail revenue from shoppers, which in turn rental revenue from Festival Walk tenants and eventually dividends to MNACT unitholders.

I had made an extensive analysis and prognosis of the Hong Kong situation, given the social, geo-political and economy factors, the whole thing may not end quick, and even so, there may still be underlying tensions simmering for another one. Hence, in view of my conclusion above (I could be wrong, though, so please do your own due diligence), I had fully divested MNACT.

It is not really a loss as I had entered at SGD 0.91 back in August 2014 and there were still some capital gains despite my second tranche (which was two-thirds number of units of the first one) of SGD 1.41 added in July 2019. Adding in dividends, it was about 9.8% annualized.

Every moment is a learning opportunity, so using this real-life situation, let me provide some pointers to you as takeaways.

Takeaway #1: Rebalancing The Portfolio, The “Wishlist” And Averaging Strategies

As of 15 November 2019, MNACT stood at about 4.8% of our Bedokian Portfolio in value. The divestment meant an addition of 4.8% to the cash portion and a drop of the same percentage points from our REITs asset class, which is a substantial deviation from the strategic allocation. Therefore, rebalancing has to be done on our Bedokian Portfolio and I would redeploy this capital as soon as possible. This is where the “wishlist” comes in useful.

As mentioned in my ebook, the “wishlist” is a shortlist of financial instruments and investment vehicles (of the various asset classes) that you came up with on a cursory basis1. It also serves as a “what’s next to enter?” guide. Besides the “wishlist”, you could also employ averaging strategies (up or down) on your existing holdings (see here on my post on averaging). 

Takeaway #2 – What Price To Reenter?

MNACT, in my opinion, still has potential, but not at this moment. Besides Festival Walk, it has eight other properties; two in mainland China and six in Japan. The next question would be: What price to reenter?

The most simplistic (and worst-case scenario) to determine the price would be to discount the entire net asset value (NAV) of Festival Walk, which is 66% based on the latest property valuation as at 31 March 20192. With MNACT’s NAV of SGD 1.43 as at 30 Sep 20193, it means the price would be around SGD 0.48. The chance of the price going down that low is remote, though it is not impossible.

There are other valuation methods for REITs, such as funds from operations, dividend yield, etc. As I had stated here, pricing and valuation is very subjective depending on the methodologies used, so stick to a method that works best for you.

Takeaway #3 – Looking Beyond

True that at this price, MNACT’s yield stood at about 6.7%, but all dimensions must be factored in before a sound transaction decision is made. The Bedokian Portfolio’s three-tier fundamental analysis model4 (financial statements, environmental factors and economic conditions) covered most aspects and angles required while looking at a REIT (or company) as it looks beyond just the usual ratios and numbers.

On top of economics, we need to consider also the social, political and even natural variables, for these do really play a part on how and where your investments are heading. Therefore, it is important to look beyond.


1 – The Bedokian Portfolio, p94-95

2, 3 – Mapletree North Asia Commercial Trust, Financial Results for the Period from 1 April 2019 to 30 September 2019. https://www.mapletreenorthasiacommercialtrust.com/~/media/MNACT/Newsroom/Announcements/2019/Oct/MNACT_PresentationSlides__2QFY1920.pdf (accessed 20 Nov 2019)

4 – The Bedokian Portfolio, p84-85

Sunday, October 27, 2019

Tired From Looking For New Companies To Invest? Read This (Very) Short Post.

After investing for a few years, and if you are an active investor, you will have a number of different securities and counters in your investment portfolio. While continually doing research and prospecting for potential companies is one way, it could be exhausting for one if there are other commitments and/or if you still are holding a very busy day job.

If your mind is willing but your physical body is not, then maybe you can consider two other alternatives to manage your portfolio: looking at your current holdings and going the ETF way.

Looking At Your Current Holdings

It is still worth a look at what you have in your portfolio, otherwise you would have sold them off long ago (or maybe still get stuck with them). Some of your counters may still have growth potential, or may have a healthy, increasing dividend yield (i.e. increasing yield along with increasing share price). If you have these, then you can use the “averaging up smartly” mentioned here to purchase them. Fundamental analysis is still required but at least you do not need to start it from the ground up, since you are likely familiar with these companies and treat the analysis as a refresher.

Going The ETF Way

ETFs is another go-to if you want to stay invested but want a lesser amount of fundamental analysis homework. ETFs are good for getting exposed to a particular region/country/industry/sector, or a combination of any of those. In fact, if your portfolio is consisted of just separate companies and bonds, you can jumpstart it into a core-satellite model with ETFs.

My (very) short post ends here. Hope the above provide some jolt in your thoughts.

Saturday, October 19, 2019

Some Considerations When Investing In Technology

Image by Pete Linforth/Pixabay.com

Technology, or tech for short, is one of the most oft-quoted buzzwords among investors and traders. The technology sector, defined by Investopedia, contains “businesses revolving around the manufacturing of electronics, creation of software, computers or products and services relating to information technology”1. This sector had caused a bubble back in the late 1990s and early 2000s, and it is also leading the charge in changing or disrupting almost all aspects of our work and leisure lives.

The tech sector has various sub-sectors within, such as software and services, hardware, etc. Recent developments have seen it moving into or collaborating with other sectors (or other asset classes), from financial technology (fintech) with the banks to driverless vehicles in transportation. All these upstream, downstream and sidestream linkages are made possible with this thing called the internet, which by now had permeated into our everyday lifestyle.

With the sector being likened to a huge buffet spread, it is difficult to pinpoint where to start investing. In this article, I had cobbled up some considerations for you, hopefully they could provide the right guidance and set the correct direction to explore. 

Consideration #1: The Infrastructure

Although the internet is a vast, virtual place with unlimited boundaries, it still resides in physical objects called servers. Even the cloud services, like online emails and storage spaces, needed servers to house them. With this, we can look at the two areas in this consideration: servers and data centres (specialized buildings housing servers, which are mostly in the REITs asset class).

And it doesn’t just stop there. Besides servers, you can look at the peripheral equipment such as routers and switches, operating systems and specialized server software. You can use the concept of associative investing mentioned here previously in my blog to help you.

Consideration #2: Protection And Security

As long as anything is connected to the internet, there is the high possibility of a compromise to a computer system or network, be it a virus attack, a hacking incident or something else. It is precisely these vulnerabilities that cybersecurity is important and has a high potential. In monetary terms, the size of the worldwide cybersecurity market is forecasted to grow to about USD 248 billion by 20232.

We have heard of reports and incidents where databases have been hacked into, malware attacks causing networks to go down, cryptocurrencies being stolen, etc. As long as the internet is around, and the presence of people wanting to exploit it for their illegal gains, cybersecurity is here to stay.

Consideration #3: Electronic Payments

This one need no introduction as I believe most of us have utilised electronic payments (e-payments) in one form or another. Using physical cash or other types of payment documentation (e.g. cheques) are getting passé; in fact, the worldwide adoption of e-payments and its various forms e.g. mobile payments, are gaining traction. In 2019, China led the way in mobile point-of-sale (POS) segment, with a penetration rate of 35% and an annual average transaction of around USD 1,100 per user3.

The e-payment segment itself is very broad, covering hardware (e.g. terminals), software (e.g. POS systems), platforms (e.g. app portals), etc. With money involved, there is definitely overlapping with the financial sector, so this is another area to look into.

Consideration #4: What Other People Are Having And Using

This one is simple: see what most other people are having or using. Next is the hard part: knowing whether it is sustainable in the long run. The technology sector is full of fads, and identifying the long-term trend from the flash-in-the-pan fad is a big challenge (see here for my article and fads and trends). A good illustration was the quick rise and fall of netbooks back in the late 2000s due to the rise (and still rising) of tablets.

If you are still unsure on how to tell between fads and trends, you may want to look at the current market leaders instead, especially those that had at least withstood the test of time.

So How To Invest In Technology?

A point I would like to highlight is that for the tech sector and the companies in it, from a book valuation point of view most of them are overpriced, so a conservative value-based fundamental analysis (FA) with strict criteria may not yield a lot of counters to go into. Therefore, we have to view this sector from a growth perspective.

The simplest, cover-all way will be to invest in a technology ETF. There are also ETFs that cover considerations #2 and #3. However, these ETFs are not available locally, and you have to find them at the U.S. markets. If you are savvy enough, you can look at individual tech or tech-related companies, conduct FA and see which one has good potential to grow.

As mentioned earlier, there are other sectors and asset classes related to tech. For data centres in consideration #1, there are REITs available, and locally there is one pure data centre REIT listed. Some financial institutions are implementing fintech as part of their core structure, so that is another place to visit. Remember, FA and due diligence are required before making that investment decision.


1 – Frankenfield, Jake. Technology Sector. Investopedia. 13 July 2019. https://www.investopedia.com/terms/t/technology_sector.asp (accessed 18 Oct 2019)

2 – Shanhong, Liu. Size of the cybersecurity market worldwide, from 2017 to 2023 (in billion U.S. dollars). Statista. 16 Oct 2019. https://www.statista.com/statistics/595182/worldwide-security-as-a-service-market-size/ (accessed 18 Oct 2019)

3 – Buchholz, Katharina. China’s Mobile Payment Adoption Beats All Others. Statista. 7 May 2019. https://www.statista.com/chart/17909/pos-mobile-payment-user-penetration-rates/ (accessed 18 Oct 2019)

Sunday, September 29, 2019

Inside The Bedokian’s Portfolio: SPDR S&P 500 ETF & Berkshire Hathaway Class B

Inside The Bedokian’s Portfolio is an intermittent series where I will reveal what we have in our investment portfolio, one company/bond/REIT/ETF at a time. In each post I will briefly give an overview of the counter, why I had selected it and what possibly lies ahead in its future.

For this issue, I will introduce two securities from the United States (US) market: the SPDR S&P 500 ETF (ticker: SPY) and the Berkshire Hathaway Class B shares (ticker: BRK.B).

Overview

During my “transition period” between 2013 and 2014 when I switched from trading to investing, I had done some research into the US markets. The US economy then was, and still is, the largest economy in the world by Gross Domestic Product (GDP). I had identified four securities that were relatively basic for a beginning investor to enter the US, and two of them were SPY and BRK.B.

About SPY & BRK.B

SPY tracks the S&P 500, one of the major US indices used by traders and investors all over the world. I did not choose the other two popular ones, namely the Dow Jones and the Nasdaq, because the former has too little companies (only 30) while the latter is too heavily based on technology.

Although there are a number of ETFs tracking the S&P 500, SPY (by SPDR) has the largest total market capitalization (US$241.61 bn as at 20 Dec 20181) and a high trading volume, meaning it is liquid and easily tradable. While dividends from SPY are subjected to a 30% withholding tax by the US tax authorities, there is another London-listed S&P 500 ETF by Vanguard called VUSD, which the withholding tax is only 15% due to the US-Irish tax treaty. Either way, it’s your call on which to select.

Berkshire Hathaway, where the famous value investors Warren Buffett and Charlie Munger are at, has shareholdings in a number of listed companies, like Coca Cola, Apple, American Airlines and General Motors, to name a few. It also has subsidiaries in non-listed businesses such as food & beverage company Dairy Queen, insurance firm GEICO and chemicals provider Lubrizol.

Notice Berkshire Hathaway has two share classes, A (BRK.A) and B (BRK.B). As of market close on 27 Sep 2019, BRK.A was at US$311,450, while BRK.B was US$207.45, so the latter is (very) affordable for us retail investors.

Why SPY & BRK.B?

Simple, these two counters are, in my opinion, the representatives of the US equity markets. Both SPY and BRK.B contain individual counters such as Coca Cola, Apple and Wells Fargo, and SPY itself contains BRK.B as well. Though having similar holdings, their sector and company weightages are very different, and along with it their performances. Using the period 1997 – 2018 (BRK.B was created in June 1996) and comparing the two, BRK.B returned with a compound annual growth rate (CAGR) of 10.60% (before inflation) vis-a-vis SPY’s 7.61% (before inflation). Figure 1 below shows the comparison graphically.




Fig.1: Performance of SPY (blue) vs BRK.B (red) for the period 1997 – 2018. Inflation not factored in. For full data set click here.

And there is another glaring difference between the two; BRK.B does not distribute dividends, while SPY does. As a dividend investor, you may think that I would probably not consider BRK.B, but since I also advocate a little bit of growth, getting it fulfills that portion of our portfolio.

To sum it all up, I view both as major indicators of US equities, with BRK.B sitting as my growth counter, and SPY for dividends (though small) and also growth.

The Future

The US economy has been volatile for the past few years due to trade tensions, geo-political issues and that deemed incoming (but don’t know when) recession. Still, a lot of observers and analysts had said the S&P500 is currently overvalued (P/E ratio of 19.48 and P/B ratio of 3.3853 as at 27 Sep 20192) and it is not the right time to enter. All I can say is that we just chug along this journey and probably practice periodic purchases of SPY.

As for Berkshire Hathaway in general, both stalwarts Buffett and Munger are advanced in their ages, but there is no sign of them stepping down. The company was built based on their investment philosophies and strategies, so there will be some keyman risk should either one or both vacates. There is news that a couple of senior executives are taking over some of the business operations, and if they take over fully, expect some slight variations in their investment approaches from their predecessors. 

As these counters in the portfolio were bought at below current prices, I may consider averaging them up in future.

Disclosure

Bought SPY at: 

USD 207.00, Aug 2015
USD 203.85, Mar 2016
USD 205.40, May 2016
USD 255.50, Oct 2017

Bought BRK.B at:

USD 111.70 & USD 113.15, Feb 2014
USD 119.50, Mar 2014
USD 126.00, Aug 2014
USD 148.30, USD 147.50 & USD 145.28, Jan 2015
USD 147.30, Feb 2015
USD 164.00, Apr 2017



1 – Hernandez, Ben. 10 Biggest ETFs of 2018 By Total Market Capitalization. ETF Trends. 20 Dec 2018. https://www.etftrends.com/10-biggest-etfs-of-2018-by-total-aum/ (accessed 27 Sep 2019)

2 – Bloomberg. S&P500 Index. As at 27 Sep 2019. https://www.bloomberg.com/quote/SPX:IND (accessed 27 Sep 2019)

Sunday, September 22, 2019

Lendlease Global Commercial REIT: The Bedokian’s Take



Lendlease Corporation, part of the Australian-based Lendlease Group, is spinning off a REIT with two of its properties. Called the Lendlease Global Commercial REIT (the REIT), it will start off with 313@Somerset in Singapore and Sky Complex in Milan, Italy.

So let us take a rough look.

Quick numbers from the prospectus (with page number in brackets for reference):

  • Initial public offering (IPO) price: S$0.88 (p46)
  • Net Asset Value (NAV): S$0.8134 (p55)
  • Aggregate Leverage: 36.4% (p97-98)
  • Projected dividend yield: 5.8% (annualized) for 2020, 6.01% for 2021 (p57-58)
  • Weighted Average Lease Expiry (WALE): 4.9 years by Gross Rental Income (GRI), 10.4 years by leased Net Lettable Area (NLA) as at June 2019 (p8)
  • Committed Occupancy Rate: 99.9% as at 30 June 2019 (p8)


The Properties, Tenants And Rentals

The REIT will have two properties, namely the leasehold retail 313@Somerset which almost all of us are familiar with, and the freehold office Sky Complex situated 5km from the Milan city centre in a new district called Santa Giulia. As at 31 July 2019, 313@Somerset stood at 71.5% of the REIT portfolio’s appraised value, while Sky Complex took up the remaining 28.5%.

313@Somerset sits on top of Somerset MRT station in the Orchard Road shopping belt and has a mixed bag of retail shops and food & beverage outlets, with brands like Zara, Cotton On, Marche and Food Republic among them. As at 30 June 2019, 58.9% of the leases by NLA have an average rental escalation of 3% for FY2020 due to the rental step-up structures in place.

The entire Sky Complex is currently leased to Sky Italia, an Italian satellite TV platform and subsidiary of broadcaster Sky Limited, which in turn is under the Comcast Corporation. Sky Italia accounts for 28.9% of the REIT’s GRI, and the rental will increase annually based on the official Italian Consumer Price Index (CPI, a measure of inflation). The lease will be until 2032, with Sky Italia having the option to terminate it in 2026.

Some Highlighted Reviews

As a proponent of diversification, the concentration of a single tenant, albeit it is a reputable company, in the Italian property is a bit unsettling for me. Should Sky Italia exercises its option to terminate the lease in 2026, then it will be a headache to fill that void. However, Sky Italia also has the option to purchase the property should the REIT wants to sell (prospectus p69), so this may somewhat mitigates the risk mentioned if they decided to buy. Also, the sponsor by then would have purchased additional properties to reduce the concentration.

Speaking of the sponsor, its parent Lendlease Group is no stranger to huge construction projects and properties around the world. In Singapore, it has Paya Lebar Quarter, JEM and Parkway Parade under its belt. Globally, it has a foothold in various gateway cities such as New York, London and Beijing. So there is potential of quality property injections in the days to come.

And there is another piece of good news: The rental proceeds from Sky Complex are (so far) exempted from the Italian withholding tax and Singaporean income tax, according to this excerpt from the prospectus (p51):

In respect of the Milan Property:

(a) a ruling has been obtained from the Italian tax authority which confirms that distributions derived by Lendlease Global Commercial (IT) Pte. Ltd. (“IT SingCo”) from the Italy AIF qualify for withholding tax exemption in Italy; and

(b) IT SingCo has obtained a tax exemption from the Ministry of Finance (“MOF”) in respect of foreign distribution income derived from Italy AIF (“Specified Exempt Income”) (the “Tax Exemption”). Pursuant to the Tax Exemption, IT SingCo will be exempt from Singapore income tax on the Specified Exempt Income.

This means we should be getting the dividends from the Italy portion as "it is", though there may be some regulatory risks if rules change. Furthermore, if the sponsor decides to inject more properties from other countries, we may have to content with different sets of tax laws respectively.

The Bedokian’s Take

At S$0.88, it is about 8.2% above the initial book value of the properties, but I would view it as a premium for future expandability. Starting off small, investing in this REIT is like watching a plant grow and over time gaining more leaves and branches (assets) from the nutrients in the soil (sponsor).

With an aggregate leverage of 36.4% (which is a rough gearing gauge to me), there is still some headroom to go to the current 45%, more so if the allowable gearing limit goes up. Even then, we should expect the high possibility of rights issue, which is not necessarily a bad thing to go for if an investor feels the incoming assets are yield accretive.

The REIT’s yield is around five-plus to six percent for the next two years, and based on data from the Reitoracle (www.reitoracle.com) and Reitdata (www.reitdata.com) sites as at 21 Sep 2019, it belongs to the median range in yield amongst the S-REITs. Comparing to the REIT’s commercial peers (office and retail combo REITs) of similar balance and make-up, the yield is around that of currently Mapletree North Asia Commercial Trust’s and Starhill Global’s.

And finally my take for this REIT is (and as usual anti-climatic): it depends. This REIT has the potential of having a global (and geographically diversified) exposure, but along with it comes risks such as geographical (think recession in a country), regulatory (think taxes and land laws), tenant and of course the unescapable market. This is part and parcel of being an investor, so we have to live with and manage the risks in order to get returns.

The IPO is open for application on 25 Sep 2019 and closes on 30 Sep 2019, and the REIT will be listed on 2 Oct 2019, subject to changes if any.


Reference

Lendlease Global Commercial REIT Prospectus, lodged 16 Sep 2019, Monetary Authority of Singapore OPERA site – https://eservices.mas.gov.sg/opera/Public/CIS/ViewProsDetail.aspx?prosID=514fd34d0f3047ed8dea69cbe0e05a33