PRESCIENT TIMING – Why Have Reits With China Assets Not Performed? Is It Time To Change?

SREITS WITH
CHINA ASSETS
IPO
Date
IPO
Price
Share Price
25/5/2018
Price
Change
%
Change
BHG Retail Reit 11th Dec 2015 $0.80 $0.780 ($0.020) -2.50%
EC World Reit 26th Jul 2016 $0.81 $0.720 ($0.090) -11.11%
Dasin Retail
Trust
20th Jan 2017 $0.80 $0.865 $0.065 -8.12%
Sassier Reit 29th Mar 2018 $0.80 $0.780 ($0.020) -2.50%
AVERAGE     -2.00%    

Since 2014, there have been 5 listings of SREITS and Business Trusts with China assets. Sad to say, with the exception of thinly-traded Dasin Retail Trust, all the SREITS with China assets have not performed well. Looking at the latest closing prices, the average return is a negative 2% compared to their IPO prices. The very first SREIT with China assets, Capitaland Retail China Trust will not be discussed here, but readers can refer to https://gcpglobalsg.wixsite.com/gcpglobal/blogs/prescient-timing-why-did-i-become-the-top-20-shareholder-of-capitaland-retail-china-trust-in-2017, for a detailed analysis into Capitaland Retail China Trust.

BHG Retail Reit listed on 11th Dec 2015 at an IPO price of $0.80. As at 25th May 2018 (the time of writing of this article), the share price is 78 cents, down 2 cents or 2.50%. BHG seem to have missed the optimal time for its listing, listing at a time when one of its properties had converted from a department store to a multi-tenanted mall, which subsequently took a toil on its NPI as the rent-free periods kicked-in.

Also, BHG had a complicated step-down yearly arrangement with the sponsor (which holds 30% of the REIT) to waive its distributions. Investors had perceived this as a different kind of financial engineering with respect to its DPU payout. It is clear that unless BHG’s 5 properties step-up in revenue and NPI, the off-setting step down arrangement with its sponsor will result in lower DPU for investors, hence the underperformance of its share price since IPO. Interestingly, the daily volume on BHG shares has been so appalling that on certain days, there are NIL trades done.

The newbie onto the market is Sasseur REIT which is led by its CEO, Mr Anthony Ang, one of my very first students who attended my investment classes close to 30 years ago when I was lecturing for SGX in the 1990s.

Lunch with Mr Anthony Ang, CEO of Sasseur REIT , Mr Chen Zhen, Head Investor Relations, Sasseur REIT and Mr Fred Chee, Deputy CFO, Sasseur REIT

Sasseur REIT debuted on SGX on 29th Mar 2018 at an IPO price of $0.80 and has fallen to 78 cents on 25th May 2018.

While Sasseur major shareholders boast the likes of Ping An Real Estate, L Capital, an affiliate of LMVH Moet Hennessy Louis Vuitton and JD.com, I had conveyed to Mr Ang during our recent lunch meeting that correcting the market’s (mis)conception of Sasseur is the key to its share price performance.

To do that, the market needs to understand the intricacies relating to its Entrusted Manager Arrangements (EMAs) with its Sponsor in its formula for income support. Presently, Sasseur Turnover Rent/Property Income = 77.2% of property income. To make matters worse, the high of fixed or turnover rent contributes 21.8% to property income while fixed rent only contributes to only 0.9%! Turnover rent is thus highly dependent on tenant sales and sales footfall.

The inherent nature of Turnover Rent is highly variable and not suited for REIT investors (and we have trained more than 7,000 in our past 8 years in our various REIT investment classes) who by nature, invest in structures where the rental component is highly stable and uncomplicated. So much for EMAs!

EC-World Reit listed on 26th Jul 2016 at an IPO price of $0.81. At the time of listing, EC World Reit then-CEO, Mr Peter Lai Hock Meng, a good friend of mine for the past 20 years was optimistic that it would ride China’s booming E-commerce and logistics market. After all, all its 6 assets were in Hangzhou, the birthplace of Alibaba, China’s foremost E-commerce player.

As at 25th May 2018, EC World Reit share price was 72 cents, down 9 cents or 11.11% down from its IPO price. Many student investors of my REIT classes (Our next REIT Masterclass is on 28 Jul 2018) who have invested in EC World Reit are really puzzled with its underperformance despite its relatively good assets.

Lunch with Mr Goh Toh Sim, CEO of EC World REIT , Mr Li Jinbo, Head Investor Relations, EC World REIT and Mr Johnnie Tng, CFO, EC World REIT

EC World Reit major assets comprise of Chongxian Port Investment, Stage 1 Bei Gang and Hengde (cumulatively accounts for 77.7% of its total NPI of $21.5 million). These assets continued to help drive the REIT’s growth beyond its IPO forecast stated in its prospectus with respect to Revenue, NPI and DPU. For instance, both Total NPI at $36.8 million and $82.7 million for FY2016 and FY2017 respectively, were 2.9% and 0.9% higher than forecasts. The market seems to not have noticed such improvements. Of course, for the smart investor, we look for such opportunities, as what we teach in our REITS Education classes. Our next Master class is on 28 Jul 2018. Do sign up at http://notice.shareinvestor.com/email/20180728_gabrielyap/index.html to enjoy the thrills and spills as I share and warn of which REITS to look at and which to avoid.

A close look at EC World Reit performance may reveal why it has underperformed so far. In the past 6 quarters since listing, the REIT had delivered a start-stop-start kind of performance at the Distributable Income and DPU level. For instance, Distributable Income ranged from $11.281 million in 3Q2017 to $12,024 million in 1Q2017. DPU had tracked the former’s behavior, registering between 1.44 cents in 3Q2017 to 1.541 in 1Q017. Both the Gross Revenue and Net Property Income in the past 6 quarters have confirmed a very mixed performance from EC World Reit.

However, as smart investors, we look for the opportune time to position into a REIT, best when its share price seem to be near the bottom at 72 cents while its fundamentals, whilst seem mixed in the past, could be on the cusp of a major change.

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