Tuesday, April 30, 2019

Dividend Warrior's 2Q2019 S-REITs Performance And Passive Income Update

*An increase of 26% compared to 2Q2018 passive income

No Need For Panic Over MLT
MLT was aware of the financial difficulties facing CWT's parent before they acquired the properties, so 6-month rental security deposits have been collected. CWT has not defaulted on its rental payments to MLT so far. It is still business as usual for CWT Pte Ltd (CWTPL)Due to the high-quality and well-located properties, coupled with Mapletree's connections & wide network in the regional logistics industry, MLT should be able to find replacement tenants within half a year. About 30% of the leases to CWT are sub-let to third-party end-users under sub-lease agreements. If CWT goes bust, MLT will take over these sub-leases directly. For the remaining 70% of leases, MLT can refer the end-users to other third-party logistics (3PL) providers, which could take over the leases. In fact, MLT has received queries from other 3PL providers expressing an interest to take over CWTPL’s operations if available. 

Long-Term Tailwind For MCT
Back in March, URA launched its Draft Master Plan 2019 for the Greater Southern Waterfront (GSW). MCT owns two properties in the vicinity, VivoCity mall and Mapletree Business City I (MBC I). These two 'crown jewel' properties should enjoy an uplift in valuations over the long run. 

Some of the redevelopments along the GSW area are likely to start within the next 5 to 10 years. The increase in commercial activities with a larger catchment population in Pasir Panjang could drive future rental growth at VivoCity and MBC I. If MCT ever launch a rights issue to fund a DPU-accretive acquisition of MBC II, I would be more than happy to subscribe for excess.

Staying Vested In Frasers Logistics & Industrial Trust (FLT)
Despite a slight dip in its quarterly DPU, the fundamentals of FLT did not weaken. The weaker DPU is mainly attributed to the fluctuations of foreign exchange rate between the $AUD and $SGD. Currency risk is one of the expected risks when I decided to invest in FLT and my entry price near its NAV allows me to continue holding it for a yield above 7%. There is no overwhelmingly better alternative being offered in the markets right now. Besides, I am already vested in AREIT, MLT & MINT. In my opinion, there are no better substitutes out there. 

Secondly, the majority of the assets in FLT's portfolio have freehold land tenures. This is an advantage which most Singapore's industrial properties lack. Freehold land tenures is important for long-term real estate investing. Let me explain. FLT owns properties in major cities of Australia, Germany and Holland. The governments are making it tougher every year to build new properties. The building codes/regulations are getting tougher, the zoning is getting more restrictive, and the construction costs are increasing at all levels. Vacant land is limited in cities like Brisbane, Sydney, Melbourne, Amsterdam, Dortmund, Hamburg and Munich. As a result, the value of freehold land in these major growing cities tend to appreciate over the long run. It is actually the value of the land that helps real estate perform favourably over time. Older warehouses are eventually torn down to build newer, better, higher-yielding ones.

Saturday, April 27, 2019

Notes from DBS AGM on 25 April 2019 - Achieved Broad-Based Growth in 2018

2018 Annual report of DBS & the electronic voting device

Growth Drivers:
  • The wealth management business grew 5 times and the cash management business expanded 8 times over the last decade. Both formed around one-third of the bank's total income. Their growth rate is encouraging/important because they are considered 'high-returns' businesses, which are less capital-intensive.

  • Achieved significant income growth from the Hong Kong & China markets. This shows that the acquisition of Dao Heng Bank years ago, has paid off. Prosperity of HK is closely tied to the fortunes of China. The CEPA between China & HK would benefit DBS in the long run 
  • The ASEAN-HK FTA signed in 2017 has started to take effect on the real economy as the trade infrastructure & business networks ramp up progressively. It should continue to drive economic growth in the region. This is advantageous to DBS as the bank has significant presence in SEA countries like Vietnam & Indonesia.

  • The consumer/wealth management segment achieved 21% income growth. Attributed largely to the acquisition of ANZ's wealth management & retail banking businesses in 2017. DBS was able to extract value out of this acquisition with a focus on maximising profits while keeping costs under control. This is reflected in the bank's cost-income ratio since 2015. The cost-income ratio has come down and remained steady. 
  • Launched a wholly-owned subsidiary in India, which already started in March 2019. Looking to open more branches in India.

  • DBS is not only acquiring more digital customers but also better-quality customers. The ROE from digital customer base is better than traditional customers.
  • DBS has formed plenty of partnerships with a wide range of digital platforms such as GoJek. The number of digitally-acquired individuals and SMEs have been rising steadily. This shows that the bank is making good progress in transitioning to digital acquisition of customers. This is important for future growth because this is a low-cost, manpower-light method.

Risk-Management & Challenges Ahead:
  • One shareholder is concerned about the sustainability of the current generous dividend payout in the event of an economic slowdown. The CEO replied that the bank focuses on stable, sustainable dividends in terms of the 'absolute amount' paid out. Current payout ratio is considered 'comfortable'. Confident of maintaining the current $1.20 per share annual dividends. The payout ratio might fluctuate a little from year to year, but the bank is confident that its current operations is able to support the 'absolute amount of dividends'.

  • One shareholder is worried that NPLs from China's clients might spike up if the US-China trade war drags on this year. The CEO replied that DBS has always focused on working with big, stronger companies in China. Their domestic financing needs can be met by the major Chinese banks. But when they want to expand into overseas markets, they require the services of a reputable foreign bank like DBS to help them with international trade finance. DBS is very selective when doing business with mainland China clients. The bank performs lots of stress-testing before committing to loans. Even if the clients are forced to shift their production & supply chains out of China, they are going to countries like Thailand & Vietnam where DBS also operates in. So, it is possible that DBS can still participate in their growth. The bank has a specific committee that looks closely and assess credit risks on their loan portfolio. They are very conservative/careful in this aspect.
  • One shareholder voiced his concerns about potential disruption from Fintech. The CEO replied that re-positioning DBS into a digital bank is how it guards against disruption. He believes that banks which can disrupt themselves and adapt quickly enough, will survive.
  • One shareholder was worried that a dovish US Fed & a flat yield curve would affect DBS's NIM profits this year. The CEO replied that global GDP growth has indeed slowed down. This is likely the start of a synchronized slowdown. Even though there is some co-relation between the rates in Asia and the US Fed rates, the effect is not immediate. There is a lag and the co-relation is not exactly 1:1. Due to this 'delay' effect, he still expects to see healthy NIM this year despite the Fed rate hike pause.
  • A shareholder voiced his concerns about DBS's role in the Hyflux perpetual bond default. He is wondering if DBS's analysts lack the 'foresight' on Hyflux's financial problems. The CEO assured the shareholders that DBS has done all the required due diligence and followed all the rules & regulations set by MAS. Although what happened to Hyflux is unfortunate, the analysts could only make their best educated 'judgement call' based on the data provided by Hyflux at that specific period of time. Nobody expects things to deteriorate so badly at Hyflux.
Post-AGM refreshments provided. Received a $20 voucher :)

Wednesday, April 17, 2019

Notes from Keppel DC REIT AGM on 16 April - Steady Hands On The Wheel

Future Growth Catalysts:

  • The development of the new Intellicentre 3 East data centre (IC3 East DC) in Sydney, Australia is expected to be DPU-accretive. Upon completion by 2020, Macquarie Telecom will sign a new 20-year triple-net master lease with Keppel DC REIT (KDC) for both Intellicentre 2 and Intellicentre 3 East. The lease includes built-in annual rental escalations with renewal options. This expansion aims to meet the needs of hyper-scale cloud providers, enterprise and government customers. After witnessing the successful execution of the mainCubes DC in Germany, I am confident that IC3 East would be similarly rewarding for unitholders in 2020.
IC3 DC East Sydney is a Tier III data centre built on the vacant land next to the existing IC2 DC

  • Growth strategy remains the same. KDC has enough debt headroom to pursue inorganic growth through acquisitions. The focus will be on Asia-Pacific region. The management had looked at the US DC market, but the cap rates are lower and the taxes are higher. So, the US market is not as attractive.
  • Besides Australia and Europe, Singapore remains a key market for KDC. The rapid growth of cloud services and digital enterprises are driving demand for hyper-scale DC capacity. Singapore is a strategic DC hub in the region due to its list of considerable advantages compared to other neighbouring cities:
  1. Economic & political stability
  2. Stable energy supply from the power grid.
  3. Sufficient internet bandwidth
  4. No natural disasters
  5. Rich connectivity to Asia, the US and Europe
  6. Ease of setting up business

Risk Management:
  • KDC performs natural hedging of foreign currencies to ensure stable distribution to unitholders. They hedge the distributable income 2 years in advance.More than 80% of debts is on fixed rates, which will offer some protection against future Fed rate hikes.
  • One unitholder asked if KDC would consider building its own DC instead of acquiring them. The CEO replied that although it is cheaper to build instead of acquire , it would alter the fundamental risk profile of KDC from a REIT to a developer. There would be higher operational & development risks involved, especially at the initial stage. There are lots of testing to be done and other technical regulations to be met before a new DC can run smoothly. There is no need to take on these risks as a REIT because KDC already has a sponsor in Keppel T&T who is a reputable DC developer. It would be safer to wait for Keppel T&T or Alpha DC Fund to develop the DC and stabilise it before injecting the asset into KDC.

  • Hyper-scale cloud providers form the largest tenant base of KDC's portfolio, they house their 'mission-critical' operations in the DC. Their top concern is the physical on-site security. Their risk appetite in this aspect is zero. So, the property manager's track record in providing top-quality security/safeguards is critical when it comes to attracting and retaining big-name tenants.Due to the solid operational track record of KDC's sponsor, Keppel T&T, the tenant retention rate is in the high 90%. The CEO also mentioned that some new DC players struggle to lease out their new DC even after a year due to a lack of track record.
  • Setting up the infrastructure of a DC is extremely costly and time-consuming. It takes a lot of capex and time to ramp up the operations. Similarly, it is a huge hassle to 'power down' operations in one DC and make a complete shift to another DC. Too much hassle and wastage. Unlike your home desktop PC, the DC cannot be 'turned off' with a flick of a switch. Besides, these hyper-scale cloud providers require their services to run 24/7. They cannot tolerate any downtime. As a result, the DC business is 'highly sticky'. As long as the on-site physical security is up to standards, tenants would not consider moving out, ever.
  • One unitholder asked a pretty common question. Since DC is such a good business, why don't these hyper-scale cloud firms save on rental costs by building their own DC? The CEO replied that contrary to popular belief, rental costs actually take up only a small portion of operating a DC. More importantly, these cloud service firms (your Amazons, Microsofts, Googles, Facebooks and such) want to grow really fast. Some of them aim to deploy up to 15 DC in a month around the world! Nobody can build so fast. Therefore, they still need to lease from DC landlords like KDC.

In conclusion, the CEO and the chairman gave me the impression that they have a good grasp of the DC business. I am happy to stay vested. Looking forward to the completion of IC3 DC East in Sydney! :)

Friday, April 12, 2019

Dividend Warrior's 2nd Pot Of Gold Series - BTO Flat Booking Day!

Recently, URA released its Draft Master Plan 2019  and new expansion plans for the two Integrated Resorts in Singapore, making me more confident that Singapore's GDP growth will remain steady over the long-term. Generally speaking, there is a high correlation between a nation's GDP growth & property values, especially in a tiny city-state such as Singapore. That's why owning a tangible piece of physical asset on this glorious sunny island has often been touted as a 'sure-win' long-term investment. 

How would increased real-estate construction boost a country's GDP per capita? In simple terms, a robust real-estate sector helps to lift the finance and insurance service sectors as property loans are likely to trend up. More infrastructure developments would also lead to increased earnings for major construction companies and their smaller sub-contractors. The economic 'trickle-down' effect is potentially huge.

3D Model of BTO Launch Site at HDB Hub ground level

The URA Draft Master Plan 2019 came out before my appointment for BTO flat booking. Talk about perfect timing! Back in February, I decided to put my CPF OA to good use. So, join me on my journey to buy the single, largest financial asset of my life! :)

Preparation Work:
  1. Received a SMS and email from HDB one month before the booking appointment, informing me to download & print the application form and other documents from the HDB portal. Through the portal, I was able to look at the BTO site map, interior floor plans and the units available for booking. 
  2. Applied for my Home Loan Eligibility letter (HLE) 2 weeks in advance.
  3. Prepared my Notice Of Assessment (NOA) & tax e-filing Form B, CPF yearly statement, CPF contribution statement over 12 months.
  4. I applied for the grants (AHG & SHG) on the appointment day itself, but you can submit your application earlier if you wish to.
  5. Did my sums to ensure I can afford the units I am eyeing. The higher the unit, the more expensive it is. I also observed that the few blocks closer to the future MRT station have slightly higher-priced units.
  6. A day before the appointment, I narrowed down my list to 3 choices. Some of my earlier picks have been booked by people who were ahead of me in the queue.

Appointment Day:
  1. Brought along all the prepared documents.
  2. Brought along my ATM card to pay the booking fee through NETS. 
  3. Arrived at the HDB Hub 15 minutes earlier to look at the materials that HDB is using for the Optional Component Scheme (OCS). These materials are displayed just next to the waiting area on the ground floor. I opted for the OCS. 
  4. Got my queue number at the kiosk. Plenty of seats at the waiting area. My number was called within 10 minutes. Approached a friendly HDB sales officer in a rather spacious cubicle setting.
  5. After going through the documents, the sales officer told me that they need my CPF statement for 2017. To my relief, there was a laptop on the desk for such situations. I logged into my CPF account and printed the statement.
  6. Told the sales officer my choice of unit and she entered the booking into the system. My 1st choice unit, which is near the future Tengah Park MRT station is available. YES!
  7. Signed the 'Option To Purchase' and paid the option fee.
  8. The sales officer explained the home financing calculations to me. She told me to note that this was just a preliminary estimate because my financial situation might change 4 years later when I collect the keys. As long as I stay employed and keep contributing to my CPF ordinary account, I should be fine. 
  9. I would be notified to come down to HDB Hub again to exercise my option to purchase within 4 months. By then, I would also know whether my grants have been approved or not.

The entire booking process was smooth-sailing and not as nerve-wrecking as I expected. The sales officer was polite and helpful. Shook her hand firmly as I thanked her and walked out of the HDB HUB with a bright orange plastic file ^__^ 

Owning a home is a keystone of wealth
Dividend Warrior

Friday, April 5, 2019

Dividend Warrior's Best Quarterly Performance In 10 Years! Another New High!

At the end of March, my portfolio market value hit a new high of S$472,287 with no new transactions done, inching ever closer to that S$500k milestone! I collected a total of $4,320 in dividends and distributions in the first quarter. Power of CD! ^^

Banks and blue-chip S-REITs have been rising steadily through March. Uncertainties from a slowdown in global economic growth, inverted yield curve, potential hard Brexit, and ongoing trade talks between the US and China did not dampen the spirits of the market. I guess the pause in Fed rate hike helped alot in supporting the current 'rising tide'. In my opinion, the interest rate is unlikely to return to its previous high of around 5% during 2006-2007. Firstly, the inflation rate in US and many other developed nations remain historically low. Secondly, the US economy is showing no signs of overheating. 

The More You Learn, The More You Earn
Dividend Warrior