Hektar – declining dividends per unit for the long-term investor

[i4value]

Hektar is a Bursa shopping centre REIT with currently 5 properties with about 2 million sq ft of lettable area.

A long-term unit holder would have suffered during the past 15 years with declining Dividends per unit

While Revenue and FFO in 2022 were higher than those in 2007, PAT was lower. We can trace the financial performance to the declining tenancy performance.

The number of units in Hektar increased from 320 million units in 2007 to 469 million units in 2022 while the financial performance deteriorated. This meant that on a per unit basis, unitholders were worse off in 2022 compared to 2007. Earnings per unit and FFO per unit declined. This then led to a declining Dividend per unit.



When hunting for REIT, don’t look at current dividend yield. Look at its history of how it grew. Growth may not benefit you.

For more insights of Bursa companies, refer to “Are these outstanding stocks - what to consider? (Bursa Malaysia)”

[weijian]

I will probably unashamedly use our VB's blog post back in 2017...one increase 1583%, the other is 30%.

Number never lie part 2

https://illdoitmyself.wordpress.com/2022...ie-part-2/

[i4value]

You seldom hear about the potential reduction in the DPU for REITs. But this is a strong possibility as REITs need to raise money to fund their expansions. So if mgt is not clued on, unit holders will suffer

[weijian]

You seldom hear about the potential reduction in the DPU for REITs. But this is a strong possibility as REITs need to raise money to fund their expansions. So if mgt is not clued on, unit holders will suffer

Seldom? I haven't looked much into Bursa REIT sphere but on the SGX, there is a good number of REITS demonstrating large reductions in the DPU. Most of them have a common denominator - All have large leases with the master tenant (often also the REIT sponsor). All of them trade at "irresistible" high single teen yields - Mr Market is quite good at helping minorities to identify them

Of course, the SGX REIT sphere is much larger than Bursa and so even if it were a small percentage of issues on SGX, the absolute number might be larger. As a sponsor of an extinct "bird of prey" Trust once said, we have a "captive liquidity source for exit".

But of course, we do have our own good (GLC) sponsors. The good thing is, they have helped us to diversify out of Spore in terms of asset base (Spore is too small). So rather than looking at REITs with foreign assets and foreign sponsors, might be easier for minorities to depend on the local GLC sponsors to do offshore investment instead.

And mind you, the example in the blog is a GLC sponsor!

[i4value]

Sorry, wrong choice of word. What I meant is that a lot of the articles promoting the benefits of REIT do not cover the reduction in the DPU. So the poor retail investor focus on the dividend yield and forget that he could lose on the capital gain side.

[ghchua]

FCT divesting its stake in the REIT.
https://links.sgx.com/1.0.0/corporate-an...13397695cb

[weijian]

FCT divesting its stake in the REIT.
https://links.sgx.com/1.0.0/corporate-an...13397695cb

I haven't calculated the TSR returns that Hektar REIT provided for FCT. But based on the last 30years of MYR depreciation against the SGD, the FX hurdle rate would be ~2% per annum. REITs inherently have low ROE and so i am making an educated guess that the FX adjusted return for the foreign investor in msian REIT would probably not have beaten inflation?

For foreign investors, the main risk of investing in Msian stocks would probably be the FX risk. It can be a tailwind or a headwind.

Companies that produce revenue largely in MYR (serving domestic market) but have relatively bigger COGS share in international currencies (USD/EURO/RMB) due to imports to produce their products, are probably in for a rude shock. Inverting this, we (as foreign investors in Msia) probably have to look for companies that record revenue largely in international currencies with local costs (ie. companies that exports msian produced goods).

Nonetheless, Msian has a relatively big domestic mass market and so any consumer/retail brands that eventually make it big, would probably be reflected in high ROEs that keep growing and giving back. Inverting this, anything that has persistent low ROE will probably not be giving back as much to the foreign investor.

[donmihaihai]

Companies that produce revenue largely in MYR (serving domestic market) but have relatively bigger COGS share in international currencies (USD/EURO/RMB) due to imports to produce their products, are probably in for a rude shock. Inverting this, we (as foreign investors in Msia) probably have to look for companies that record revenue largely in international currencies with local costs (ie. companies that exports msian produced goods).

Nonetheless, Msian has a relatively big domestic mass market and so any consumer/retail brands that eventually make it big, would probably be reflected in high ROEs that keep growing and giving back. Inverting this, anything that has persistent low ROE will probably not be giving back as much to the foreign investor.

Isn't both the same, revenue in foreign currency and cost in local currency and revenue in local currency while cost in foreign currency.

Companies in Singapore will face the same mismatch perhaps in higher % because of smaller domestic market and import basically everything.

Only companies with high leverage are able to source in their selling currency.

[i4value]

I think that from an investor's perspective, when you invest in a foreign stock exchange, it may be better to separate the forex risk from the business performance risk. Many businesses have international exposure either in the cost of sales component or revenue component, or both. So they will (hopefully) take the appropriate hedging measure. So we judge the business performance base on it operating, financial and forex capabilities and project the performances accordingly. We will then use this to decide whether to go in or not. Then we layer the forex issue which is about our money in vs our money out. I think it is easier to separate the forex impact this way .

[weijian]

Isn't both the same, revenue in foreign currency and cost in local currency and revenue in local currency while cost in foreign currency.

Companies in Singapore will face the same mismatch perhaps in higher % because of smaller domestic market and import basically everything. 

Only companies with high leverage are able to source in their selling currency.

There is of course no difference, on paper, as long as FX doesn't fluctuate much.  Last I recall, only the Brunei dollar and HKD are relatively stable to the currencies that they are pegged to.

Because Spore is an importing country, so there are incentives "at certain times" to keep SGD strong - especially in the past year. A couple of stuff happening for local companies - (1) Translation losses of overseas PPE. (2) Folks like Shengsiong enjoying this tailwind as it imports COGS but sells to us in SGD. SSG's gross margins has slowly but surely expanded over the past decade it was listed. Of course, scale is probably also a key to its GPM expansion but I suspect strong SGD provided a good tailwind. (3) Lower overseas earnings - Like in this case for FCT receiving Hektar REIT's dividends. And eventually realizing their translation loss.

Of course, if the foreign operations can grow, then that it is another story. Jardines would be an example. IDR has depreciated from 1:8600 (2011) to 1:15000 (2023), a 75% depreciation! But for Jardine Cycle and Carriage, FY22 dividend per share are probably only ~8% lower than FY11's record. If we are to add in the 2015 rights issue, I think DPS difference could be insignificant?

So the gist of my post - value investing as in the style where one looks for reversion to the mean (cycle) or waiting for value to be realized from "traps" might not be applicable for foreign investors when investing in Msia. Not applicable in the sense that one has a real headwind risk in the form of FX. To make money investing in Msia, it may be better to look for growth first.