REITs Winter (Again), So What Am I Looking At?

The Singapore REITs (S-REITs) seems to be heading for a winter. I had written a piece “Are REITs Doomed?” here back on 23 October 2022. Coincidentally, based on the iEdge S-REIT Leaders Index¹, it had bottomed out just two days before the above post was published, before starting its recovery to the next one-year high at around early February 2023 (see Figure 1). Now, looking at Figure 1, you could see that the index is heading downwards again, sparking an early winter in 2023.

Fig. 1: iEdge S-REIT Leaders Index SGD, 1 year chart (as of 20 Aug 2023)

 

For myself, these down periods constituted a sales period when you could get counters at a discount. However, due to the economic situation of high interest rates, and properties are not doing well in most countries, we need to be selective on getting good, discounted REITs.

 

The following are what I am looking at. Do note that we have these counters in our portfolio and we are looking at averaging up/down on these counters.

 

REIT #1: Frasers Centrepoint Trust

 

Frasers Centrepoint Trust (FCT) has in its portfolio 9 suburban malls concentrated in the northern, northeastern and eastern part of Singapore, where there are a good proportion of residential towns (Hougang, Tampines, Punggol, etc.). We had seen the resiliency of suburban malls as gathering points for residents, and during the COVID-19 pandemic restrictions.

 

Though the gearing as of May 2023² stood at 39.6%, 76.4% of the debt was hedged to fixed interest rate, and that meant there is a higher stability of interest payments. Net property income had seen a 5.7% rise year-on-year between 1H2023 and 1H2022, and at its current price of SGD 2.19 as of 20 Aug 2023 represented 0.94% of its net asset value (NAV) of SGD 2.33³.

 

As FCT is currently close to 11% of our portfolio holdings, we would still add but not many of this counter.

 

REIT #2: Paragon REIT

 

Singapore properties made up about 80% of Paragon REIT by valuation, and the crown jewel is the Paragon located in the heart of Orchard Road, which is both a luxury shopping mall and a hub of medical offices. With the return of tourism and increasing number of family offices with affluent clients, I foresee Paragon would be one of the important stops for these groups. In addition, suburban Clementi Mall’s location next to a MRT station and its near-monopolistic catchment area is attractive.

 

Having a gearing of 29.8%, it is one of the lowest geared S-REIT around, and 85% of the debt is on a fixed rate. Trading at SGD 0.905, it is slightly above the NAV of SGD 0.90⁴. The only gripe we had would be a lowering of income from the Australian properties due to the strengthening of SGD against the Australian dollar, but going forward these may be compensated with higher income from the three Singapore properties.

 

REIT #3: Frasers Logistics & Commercial Trust

 

Unlike the previous two, Frasers Logistics & Commercial Trust (FLCT) is made up of 99 logistics and 8 commercial properties spread across Australia, Singapore, Germany, the United Kingdom and the Netherlands. FLCT’s logistics and industrial/commercial ratio by portfolio value is around 68/32, and the logistics and industrial component enjoyed a 100% occupancy rate, with the commercial side at 90.6%, bringing to the average across the REIT at 96.2%⁵.

 

The main advantage of logistics and industrial sectors is that work from home does not really work since the goods and/or processes are to be housed in a physical property. The resumption of the global supply chain after the COVID-19 slowdown bode well for FLCT, too. The occupancy rate for the commercial portion, however, especially the United Kingdom properties, were not faring well (due to the work from home phenomenon). This is one point which I would revisit in the future, as well as their net property income which declined due to the strong SGD against the countries’ currencies where the properties are located.

 

At a gearing of 28.6% (lower than Paragon’s), with 75.4% debt at fixed rates, a high interest coverage ratio of 8x, and trading at 92% of its NAV (NAV of SGD 1.27⁶ vs current market price of SGD 1.17), FLCT would be in our watchlist.

 

Disclaimer

 

Disclosure

 

The Bedokian is vested in all the abovementioned REITs.

 

1 – iREIT S-REIT Leaders Index SGD. SGX. https://www.sgx.com/indices/products/sreitlsp (accessed 20 Aug 2023).

 

2 – Frasers Centrepoint Trust Investor Presentation. May 2023. https://fct.frasersproperty.com/newsroom/20230509_073050_J69U_2IOJH8M54D407LB0.1.pdf (accessed 20 Aug 2023)

 

3 – Frasers Centrepoint Trust Annual Report 2022, p5 & p38. https://fct.frasersproperty.com/misc/ar2022.pdf(accessed 20 Aug 2023)

 

4 – Paragon REIT 1H FY2023 Financial Results. 7 Aug 2023. https://paragonreit.listedcompany.com/newsroom/20230807_193701_SK6U_C6Z3UOZ9XDMFOJO8.3.pdf(accessed 20 Aug 2023)

5 – Frasers Logistics & Commercial Trust 3QFY23 Business Update. 1 Aug 2023. https://flct.frasersproperty.com/newsroom/20230801_182514_BUOU_JZOH13NA5MBT4DKV.1.pdf (accessed 20 Aug 2023)

 

6 – Frasers Logistics & Commercial Trust 1HFY23 Results Presentation, p7. 4 May 2023. https://flct.frasersproperty.com/newsroom/20230504_070810_BUOU_BDL2BIU72TTDX75W.3.pdf (accessed 20 Aug 2023)

 

Apple Is Down…Buy More?

The recent earnings report for Apple did not bode well for its share price; from its recent highs at the beginning of August of USD 196-ish, it went down to USD 177-ish at the close of the market on Friday, that was almost a 9.7% drop.

Let us find out from the Apple press release for the summary of their 2023 third quarter results¹:

• Quarterly revenue of USD 81.8 billion (bn), down 1% year-on-year (YoY).=
• Quarterly earnings per diluted share of USD 1.26, up 5% YoY.
• Generated operating cashflow of USD 26 bn.

Consolidated Financial Statements

 

If one wants to pinpoint the big fall, the consolidated financial statements attached in the same page as the press release may provide some insights. Under the statement of operations (or revenue statement), the quarterly YoY results for the main Apple hardware (iPhone, iPad and Mac) were around -5.4% across, with the nine-month YoY down about -6.2%. The category under Wearables, Home and Accessories posted a mixed result of around +2.5% and -3.4% for the three and nine-month YoY, respectively. These numbers, to a layman, could possibly mean a downtrend, at least short term wise.

 

However, the last category that carried the quarterly revenue reduction of up till -1%, was Services. Quarterly and nine-month YoY, it increased by +8.2% and +6.7%, respectively. Looking broadly over the long term, since the first quarter of 2013 right till the most recent, it had grown close to +475%². And stating the obvious, it is the second highest revenue segment right after iPhone.

 

For growth counters like Apple, one of my guidelines is to see the amount of gearing either consistent or reducing at least for the past three years. Overall, since 2020, Apple’s total liabilities were increasing³, but it is fine with me as they were within my limits of “consistency”. Under the balance sheet, the total liabilities between September 2022 and July 2023 have reduced, and that is acceptable to me, at first glance. Moving on to cash flow, though undulating, it has been positive for at least the past three years⁴, another guideline of mine for growth counters.

 

So…Buy More?

 

I had mentioned in my post here that Apple would be relevant for at least another decade (discounting that the post was written back in 2020, maybe now for another seven years more? *chuckle*). Considering the financial strength, the large user base (2 billion active installed devices as of February this year⁵) and the all-encompassing ecosystem of Apple, the recent drop represented an opportunity to average down.

 

The next glaring question would be: at what price? Going by my 10-30 metrics⁶, using the period of one year between 1 August 2022 and 31 July 2023, the entry price would be around USD 161 ([196.45 + 161.51]/2 * 0.9), but instead I had nibbled at USD 184.50 on 4 Aug 2023 and then USD 177.50 on 11 Aug 2023, which I saw myself jumping the gun a bit. If it did not go down to USD 161 and went up instead, well, consider me lucky getting some. If it does go to USD 161, I would employ a much larger capital in entering. But, if you ask me what the bottom price will be before it goes up, I would also love to know the answer, too.

 

As the adage goes about prices, low can still go lower. Going by past statistics and future probabilities (my so-called guesstimate), unless a very major event happens (yes, I am thinking of an alien invasion), the trajectory of Apple would still be up. Not up in an astronomical sense like its early days, but it is still up, gradually.

 

And yes, dividends, Apple has been slowly increasing its dividends since it reinstated its dividend payment in 2013⁷.

 

In conclusion, I will still declare that Apple is relevant, for another decade at least. Looking at the rising revenue of Services, the installed user base, and the Apple ecosystem…you get the drift.

 

Anecdotal Story

 

During our recent trip to Tokyo, Japan, from our observations of passengers in the subways and patrons in cafes and restaurants, the prevalent mobile phone brand is…Apple. During our flight on board Japan Airlines, most cabin crew were wearing Apple Watches (maybe as part of their work communications? *shrug*). It was glad to see many iPhone and Apple Watch users around (and contributing to our dividends). However, based on statistics, Apple held a roughly 49% share of the Japanese smartphone market in unit terms in 2022⁸, so it is not really a majority as seen. From here, a lesson learnt is that we can combine statistics and observations as part of our fundamental analysis, and draw our own conclusions.

 

Disclaimer

 

Disclosure

 

The Bedokian is vested in Apple, and iPhone's rival mobile OS Android’s originator, Alphabet.

 

1 – Apple reports third quarter results. Apple. 3 Aug 2023. https://www.apple.com/newsroom/2023/08/apple-reports-third-quarter-results/ (accessed 12 Aug 2023)

 

2 – Laricchia, Federica. Revenue of Apple from services segment 2013-2023. Statista. 7 Aug 2023. https://www.statista.com/statistics/250918/apples-revenue-from-itunes-software-and-services/#:~:text=Revenue%20of%20Apple%20from%20services%20segment%202013%2D2023&text=In%20the%20third%20quarter%20of,%2C%20Apple%20Pay%2C%20and%20licensing. (accessed 12 Aug 2023)

 

3 – Apple Total Liabilities 2010-2013. Macrotrends. https://www.macrotrends.net/stocks/charts/AAPL/apple/total-liabilities (accessed 12 Aug 2023)

 

4 – Apple Inc (AAPL). Ycharts. https://ycharts.com/companies/AAPL/free_cash_flow (accessed 12 Aug 2023) 

 

5 – Shakir, Umar. Apple surpasses 2 billion active devices. The Verge. 3 Feb 2023. https://www.theverge.com/2023/2/2/23583501/apple-iphone-ipad-active-2-billion-devices-q1-2023 (accessed 12 Aug 2023)

 

6 – The Bedokian Portfolio (2^nd Ed) p131-133.

 

7 – AAPL Dividend History. Nasdaq. https://www.nasdaq.com/market-activity/stocks/aapl/dividend-history(accessed 12 Aug 2023)

 

8 – Kaur, Dashveenjit. Four decades and billions of dollars in sales later, what’s next for Apple in Japan? Techwire Asia. 9 Aug 2023. https://techwireasia.com/2023/08/apple-remains-strong-in-japan/ (accessed 12 Aug 2023)

When Guideline Becomes Dogma

A relative of mine had an interesting quirk with regards to his type of carb intake for lunch and dinner, which goes like this: if I had rice for lunch, I would have noodles for dinner, and vice versa. At first look, it is a simple guideline to live by, until one day when we went for an overseas trip, and that was when we realised the guideline was more than that.

Long story short, he had noodles for lunch, hence when dinner time came, the location at where we were happened to be dominated by noodle shops. My relative insisted on having a rice meal for dinner, but we could not find any, at least at our immediate location. After walking for a couple of streets, we chanced upon a place selling baked rice and he finally ate at it, after a round of raving and ranting of not able to find a rice outlet.

 

What I had initially thought was a simple guideline turned out to be my relative’s dogma, i.e., “I cannot have two rice/noodle meals a day! I need to stick to my arrangement!”. Although this could be a frustrative experience for all parties concerned, such things are commonplace in our everyday lives. I believe you would have encountered situations of your family members/friends/acquaintances/colleagues of preferring, very strongly, a certain item/course of action/decision making basis, even though it might seem trivial at first glance, and there is not really much loss or opportunity cost in foregoing that preference.

 

It is hard to blame those who are insistent on these so-called trivialities. Everyone is born different, and this includes our personalities and characteristics, from which our attitudes to and perceptions of the world are dissimilar. While I acknowledge and agree on this, it is equally important that the person admits that he/she possesses these traits in them. Once these are admitted, then half the battle is won in recognising his/her own strengths and (especially) weaknesses.

 

A Contradicting World

 

Humans are adaptive creatures, so to speak, else we would not have been progressing this far in evolution and our existence on this planet. Being adaptive also meant that we are also flexible by nature. Yet, nestled among this adaption and flexibility are countless instances of adherence to doctrines which may not make sense. This is the contradicting world that we are living in.

 

However, we still need to have doctrines, and be adaptive and flexible at the same time. It is a fine balance between these two extremes. Too much flexibility would result in being frivolous, while too many doctrines would make one labelled as dogmatic. Again, how much balance is dependent on the very core of an individual, i.e., the personality and character.

 

Application On Investment

 

Applying the above to the realm of investment, it is a given that each one of us will have different investment philosophies, methodologies, styles and portfolios. Hence, in my blog posts and eBook, I have guidelines in place for certain issues, e.g., selection of securities and the make-up of portfolio, as I accept and encourage these differences. However, simultaneously I also promote a dogmatic approach on aspects like diversification and rebalancing, because of my conviction in them. This is a case where I am balancing the adaptive/flexibility and doctrinal spectrum in my investment philosophy. Sounds ironic, but we are humans after all.