MINT 9th AGM Summary and my H2FY19 strategies
Wow, time really flies and this is already the 9th AGM (MLT has just pass 10th anniversary)
I attended 2 AGMs last week and since NinjaStar has covered MLT, hence I will do Mapletree Industrial.
Walk past a High SES car before I enter the auditorium (oh well, work harder)
As usual, Chairman Meng Meng gave his usual welcome reception and disclaimer and this is followed by CFO Ler Lily who covers the financials.

Most points can be found in their annual reports and ppt, but for my summary, I will just regurgitate and add in my point of view.
    • Distributable income for FY18/19 grew by 7.4% year-on-year to S$231.8 million due to higher net property income and full-year income contribution from MIT’s 40% interest in the portfolio of 14 data centers in the United States (“US Portfolio”).
    • DPU of 12.16 Singapore cents for FY18/19 was 3.5% higher than the DPU of 11.75 Singapore cents for FY17/18. This represented a total return of about 9.4% for our Unitholders in FY18/19, which comprised capital appreciation of 3.4% and a distribution yield of 6.0%.
    • Lily emphasized a healthy return of over 200% returns for those who have invested since IPO (Oct 2010, me lah!).
    • Very importantly, a 50 bps increase in interest rate will result in 7cents decrease in DPU (vice-versa if interest rate decrease)

    In terms of Growing the Hi-Tech Buildings Segment,

    • Acquired and upgraded 7 Tai Seng Drive to a data center for Equinix at S$95 million
    • Completed Mapletree Sunview 1, the third build-to-suit (“BTS”) data center development
    • Acquired 18 Tai Seng, a nine-story high specification mixed-used industrial development at S$268.3 million

    MINT’s balance sheet is robust. Assuming the redevelopment exercise is debt-funded, its gearing is likely to increase slightly from 33.8%, as at end FY3/19, to 36%. MINT has another 500M debt headroom before it hits 40% gearing limit.

    Next is CEO Tham Kuo Wei to present

    In order to manage the impact of interest rate and foreign exchange fluctuations on distributions, about 78.6% of MIT’s total had been hedged through interest rate swaps and fixed-rate borrowings

    90.4% of FY18/19 foreign currency net income stream had been hedged into Singapore dollars through foreign exchange forward contracts. Approximately 10% hedged in USD and MINT has the intent to keep the 90/10 ratio.


    The portfolio growth is 345. i.e. 3 x AEI, 4 x BTS and 5 x Acquisitions

    • Oct 15: Announced new SGD77m AEI at Kallang Basin 4 to develop a 14 stories high tech building (at the existing car park) to be completed in 1Q 2018.
    • Mar 17: Secured new SGD76m BTS data center project targeted for completion in 2H 2018.
    • Oct 17: Announced maiden overseas acquisition of 14 US data centers at USD750m (SGD1.02b) through a 40:60 JV with its sponsor, pushing data center contributions from 6.5% to 16.6% of its AUM.
    • Apr 18: Executed novation (purchase) agreement for 7 Tai Seng Drive from sponsor and MLT to be upgraded into hi-tech building fully leased to ICT tenant for 25 years.
    • Jul 19: Announces redevelopment of Kolam Ayer 2 cluster into high tech precinct at SGD263.0m and 8.0% yield on cost.

    MINT has the intent to reduce the 23% of flatted factories to 10%.

    They see demand in Hi-Tech buildings but see some pressure for business parks and flatted factories.

    CEO spends a good part explaining about the plans to redevelop the Kolam Ayer Cluster 2 at Kallang Way into

    a hi-tech industrial precinct. The rationale of the exercise is to reposition the Kolam Ayer 2 flatted factory cluster into a hi-tech precinct and to utilize existing untapped plot ratio. This cluster will enjoy a 71% increase in total GFA to 865,600 sq ft, post redevelopment.

    ● The proposed exercise will include a built to suit (BTS) facility for a global medical

    device company, taking up 24.4% of the enlarged GFA. The anchor tenant (never mention name) has

    committed to a 15-year lease, with the option to renew for another two 5-year terms.

    ● The proposed exercise will include a built to suit (BTS) facility for a global medical

    device company, taking up c.24.4% of the enlarged GFA. The anchor tenant has

    committed to a 15-year lease, with the option to renew for another two 5-year terms.

    Redevelopment to start from 2HCY20

    ● The redevelopment exercise is scheduled to commence construction in 2HCY20 and complete in 2HCY22. The

    redevelopment exercise is expected to cost S$263m and projected to generate an 8% return, which works out to be around 15-17M.

    The effect on tenant movements is likely to be felt from 2HFY21. 

    This cluster accounted for 1.8% of MINT’s revenue in FY3/19.

    ● MINT has put together a Tenant Assistance Package for existing tenants at the

    cluster. Tenants will be offered an extended notice period of 12 months at a

    preferential gross rental rate for their remaining leases at the Kolam Ayer 2 cluster.

    Based on past experiences, retention is around 50%

    Questions and Answers

    Q1) What is mgmt doing that ~20% of Lease Expiry Profile is less than 20%, around 16% of land lease is less than 20years?
    The large supply of industrial space and the uneven recovery in the manufacturing sector continued to affect the performance
    of the Singapore Portfolio. The Singapore Portfolio occupancy rate decreased to 87.9% in FY18/19 from 89.1% in FY17/18.
    This was due to lower occupancies registered across most property segments, except the Hi-Tech Buildings and Light
    Industrial Buildings segments

    The land lease expiry is a perpetual problem, as explained by CEO and mgmt is keeping a close eye on it.
    There is a need for the team to keep continuing engaging the customer.

    Q2) Why there is a drop in business park retention of 70% to 64%?

    Around 1.7 million sq ft (GFA) of business park space is in the pipeline between 2Q 2019 and 2020. The largest
    pipeline supply is CleanTech Three (673,000 sq ft) by JTC, which is expected to complete in 2020. 
    There are upcoming projects to be completed from 2Q 2019 to 4Q 2019.
    Despite the fall in occupancy, the lack of new supply led to an increase in rents of business park
    space. which rose by 6.5% y-o-y to S$4.79 per sq ft per month. 

    As explained by my Chairman, MINT is also still feeling the effect of the vacated space by Johnson & Johnson at The Strategy (20% space) and is challenging to fill. Kolam Ayer is a good example of refurbishment but they cannot do all at one go. It is a matter of priority and they can't put cash where returns are low.
    Short term pain, Long term gain.

    Q3) Someone brought up the question on MAS seeking the views on raising 45% leverage limits for S-Reits?
    Chairman answered this and I will briefly summarize. It is MINT's DNA to stay prudent and it will not do it just because the government says so.
    They gave a very good analogy, is like the speedometer. It does not mean that if the government allow you to drive faster, one may go above 120KM.
    Gearing is a secondary consideration, the primary question is whether there is good stuff to buy.

    CFO also chimes in, stating under the watchful eyes of SG investors, the moment gearing exceeding 40%, they will start fretting.

    For folks who are new to SREITs, the last time the leverage limit was changed was in 2015 when MAS raised it to the current 45 percent, from 35 percent of the fund's deposited property, in a move to boost Reits' operational flexibility to rejuvenate maturing portfolio of assets. Prior to 2015, the leverage was as much as 60 percent if the Reit obtained a credit rating and disclosed it to the public. This changed after the MAS adopted a single-tier leverage limit which saw the removal of this provision.

    Q4) Someone asks about the Fitch ratings, will higher gearing lead to rating downgrade?
    CFO "suan" the guy, if it is based on gearing ratio, anyone can do Fitch rating liao. It is one black box with formulas that no one knows except Fitch. But she guesses it could be market size, cash flow, diversification of assets etc.

    Q5) Someone asks that capitalization rate has dropped from 6.25% to 5.7%.
    CEO answered that MIT’s 87 properties in Singapore were
    valued at S$4,336.3 million by Knight Frank and Colliers International Consultancy & Valuation (Singapore)

    The US Portfolio held through MRDCT was valued at US$801.3 million and this represented an overall increase of
    US$17.9 million over the previous valuation of US$783.4 million. The answer is lower the better.

    Q6) One question was why are there so many directors?
    Chairman answered that by Sep CY19, it will be reduced from 14 to 10.
    Ended with a nice bento set at half-past 4.Quite a meaningful session and I am positive about the MINT's future.


    Why the Tried and the True Triumph Over the Bold and the New
    I just finished a book by Jeremy Siegel, The Future for Investors.
    One thing I learned is that investors can do to remain exposed to risk assets while hedging against short-term downside risk is to devote a sizable portion of investable capital to strategies that have been shown to outperform the market over long periods of time.

    Siegel demonstrates that, in some ways, it's better for old dogs not to learn new tricks; that is, older, time-tested companies with stable business models tend to outperform the bold, new, hotshot companies. Even in dying industries, many of the oldest companies still perform phenomenally well. While technological innovation spurs economic growth, it has not been kind to investors. Industry sectors many regards as dinosaurs—railroads and oil companies, for example—have actually beat the market. Siegel uses the example of the best performing stock of all time - cigarette maker Philip Morris.

    Since investors, in general, will likely become more worried about future growth and see more value in defensive real asset investments, we expect the current macroeconomic environment to favor REITs and other more defensive high yielding investments. In such an atmosphere, I expect most of the returns to come from income rather than growth

    The long-term impacts of these sustained historically low-interest rates are uncertain and could very possibly lead to an eventual enormous economic meltdown. While there is a risk of an imminent recession, or getting fairly close to it and, therefore, now is the time to prepare. At the same time, we do not know for certain how the future will play out. Therefore, I am taking the following steps to hedge my portfolio against this uncertainty and cautious outlook while still seeking to generate attractive returns today.

    FACK M
    No, I am not scolding you but this is how I remind myself. FACKM stands for the group of Frasers, Ascendas, Capitaland, Keppel, and Mapletrees. This is the time to be defensive in times of turbulence and continued to stress the need to be tactical when it comes to SREITs selection.

    Heading into 2H2019, doubters have again expressed switching out of SREITS as they had just enjoyed one of the best-ever rallies. Some have argued the recent selldown of Singapore bank stocks on concerns over US-China trade tensions has made them attractive on valuation grounds, outshine even the much-vaunted, high yielding S-Reit sector.

    I do need to highlight some key factors to consider before your first level thinking do a Reits-to-Banks switch. 
    • Forward yields on bank stocks range from 3.8 percent to 5.3 percent, not that far off from that of the average Reit.
    • A rate cut that hangs over the heads of banks will hit the loans business. But it should be said that banks' profitability can look vulnerable at this point, all things equal.
    • Banks make money from their net interest margin (NIM) earned from lending, with a looming recession, this spells pessimism of a weaker NIM for the rest of 2019.
    • wealth management transactions are likely to be hurt by dour market sentiment. In a risk-off environment, wealth clients do not trade actively. This is why private banks are steadily growing their business of discretionary portfolio management, from which they earn a steady, recurring fee for helping clients manage a portfolio. This initiative may help to offset somewhat a drop in pure transaction revenue.
    • Singapore will issue up to five new licenses to digital banks and begin taking applications from August. I always remember UBER once mentioned that they have years of experience and technologies are so much way ahead. I would also reinforce the fact that Singaporeans has no loyalty and we will have no qualms switching from GRAB rides to Go-Jek, what makes you think we will not switch out of local banks.

    My bull analysis for FACKM

    • "lower for longer" rate environment, the question to ask in pitting banks against Reit is whether S-Reits, in general, have comfortable debt headroom, are managing leverage well, and will be able to easily refinance or engineer property buys to add to their portfolio mix.
    • Analysts expect a positive re-rating of the S-Reit sector if it gets a higher debt headroom but with a caveat - that Reit managers remain prudent on capital management. 
    • REITs: An asset class that has strongly underperformed in recent years. While broader equities kept pushing new highs, REITs have barely moved in the recent years despite improving fundamentals and growing cash flow until recently.
    • Hong Kong wealthy folks want stability and Reits are a great vehicle to park
    • Potential upcoming 2-3 interest rate cuts would be supportive of SREIT valuations. This would translate into cost savings for many SREITS as I would not be surprised if most of the SREITS would let their interest rate hedges lapse when they come up for renewals in 2H2019.
    • Outperformance commonly follows underperformance. Valuation plays a key role in explaining long-term performance.
    • REITs are not really cheap now but fundamentals are strong.

    TakeAway

    The main reason why I like REITs so much is that at the end of the day we are not smart enough to predict what will happen to DBS, Bitcoin or even Netflix (NFLX) in the long run. We know however that quality real estate bought on the cheap is a strategy that produces solid returns in the long run with high dividends and moderate growth.

    I have also uploaded an interesting image on technologies but I am out of time, we'll discuss next time.

    “The intelligent investor is a realist who sells to optimists and buys from pessimists.” Benjamin Graham


    Until Next Time

    K,tks,bye

    Grandpa

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    59 likes
    86 comments
    Allan

    Thank you Grandpa Lemon for the article. I really LOL at the FACKM part :P

    NinjaStars

    Thanks Grandpa Lemon for the wonderful write up. I have my doubts for Keppel office reit but overall, Ninja likes FACKM too.

    NinjaStars

    Reply to @GrandpaLemon : In terms of TA, like nothing can jeep... But I am watching FLT and MNAC if there are temporary weakness (weak AUD, HK Protests respectively).

      View More Replies
    Sporeshare

    the selling down is fierce! broken down the support at 2.25, looks bad!

    Sporeshare

    Reply to @leewe : I prefer to wait for a lower entry price. no point chasing..

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    Sporeshare

    XD tmr , looks like we may see $2.20 !

    Sporeshare

    Reply to @GrandpaLemon : same here! I would see how it fares after XD! today fund offloaded, we will know the next few days how it is trending.

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    GrandpaLemon

    It’s the ‘banking week’ with DBS reporting on Monday, UOB & OCBC on Friday. According to CIMB, the Q2 core net profits of DBS, OCBC & UOB are set to dip 10%, 3% & 1% QoQ respectively.

    Beyond peaking SIBOR/SOR rates and the revision of mortgage rates, the key downside risk of a Fed rate cut in 2H19 will weigh on NIMs over FY20-21,” CGS-CIMB analyst Andrea Choong said.

    The US central bank is widely expected to lower interest rates by 25 bps when it meets this week (2am Thurs morning). Chances of a larger cut are not likely possible after the better than expected June jobs and prelim Q2 GDP reports.

    US Q2 GDP expanded by an annualized 2.1%, beating market expectations of 1.8% (1Q19: 3.1%, 2Q18: 4.2%). Stronger private & public demand offset weaker exports and inventory. The better than expected Q2 GDP report cemented expectations that the Fed will only need to lower interest rates by 25bps rather than 50 bps this Thursday morning.

    Fun week ahead :)

    mj0101

    Reply to @GrandpaLemon : Actually - its become like the US, about forward guidance.
    Results were good, but forward guidance for H2 was just ok - growth rates were almost halved. Still growing but not double digits - as we would expect or priced in. The IRR and Divi growth rate will reduce but cost of equity also reduces - so not all bad.
    Myself - I would let the market settle, let it get disspointed and if P/B and P/E looks better, may re-look to enter for more. If to switch from Reits, I would need more - for reits to also outperform simultaneously.

    Bro - you are a pro, love to hear your thots too.

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    julietan0

    Good read, thanks for the write up!

    ljunyuan

    Many thanks for the great summary! :)

    Incognito

    Support, just added CapCom, Areit and MINT.

    layers

    Reply to @Shien : well can buy others rather than 4% yield all time high price

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    richdad

    The bento looks gd, next year go together? 🙂

    GrandpaLemon

    Reply to @richdad : (pun intended) I will go with RichDad anytime😁

    CoryLogics

    Great sharing. Appreciate.

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