Have you X-Ray the Revenue of Retail REIT?

As a REIT investor, nothing beats the pleasure of receiving growing distribution payout or passive income from a REIT.

In order to receive growing distribution from a REIT, there must be rising distributable profit. But rising profit could only happen when the REIT achieves higher amount of revenue or incur lower costs or combination of both.

Let's revisit the basics of revenue equation of a company first:

Revenue = Quantity x Price

There are few observations that could be made:

1) A company could increase its revenue by increasing the prices of products sold or services offered.

2) A company could increase its revenue by selling more in terms of quantity. 

3) A company could increase its revenue by selling more at higher prices and this is the best scenario!

So how does the revenue equation applied to a retail REIT?

Retail REIT's Revenue = (Occupancy Rates x Net Lettable Area (NLA)  x  Rental per Square Feet) + Other Income

A REIT that we would like to invest into should possess the following attributes:

1) Higher revenue due to stable or rising occupancy rates, rising NLA and rental per square feet. These are the characteristics of a good quality REIT as far as revenue line is concerned.

2) Revenue of a REIT usually consists of two types of income, namely rental income and other income.

3) Apart from rental income, REIT also derives income from parking Income, kiosk rents, advertising income and etc. These are BIG money to a retail REIT.  Mid Valley and Gardens Mall  (under IGB REIT) earned RM44.2 million of car park income alone in 2015!  kiosk rents amounted to around RM23 million^! 

When you pass by any kiosk in the mall next time, think of the kiosk rents that would accrue to the REIT and eventually, part of these kiosk rents will go into your pocket! The same goes to parking payment as well.

4) In summary, there are many factors that could influence the REIT's ability to maximise its revenue. Hence, investors must be aware of these factors so that the REIT that we invest into could continue to pay us higher amount of distribution! 

^ Kiosk rent of RM23 million may include other leasing income of which the breakdown is not available.

Have You Found Your Golden Eggs?

Once, there was a poor farmer who had a goose. The goose laid one golden egg a day, the farmer will sell the egg at market and obtain a decent sum of money everyday!

One day, the farmer became greedy and wanted to have all the eggs inside the goose so that he could sell more eggs and get more money instead of waiting for the goose to lay one egg everyday.

He took a knife and "killed" the goose and only found out that there was only one egg inside it. The greedy farmer lost the goose that lay egg and became poor again in the end.

In this story, you can view the goose as an ASSET and the eggs produced as the CASHFLOW generated from the ASSET.

Five Key Lessons:

1) Not to simply kill the goose for short term gain in the beginning. Hence, try not to simply sell your asset for short term gain unless it is a viable move.

2) Focus on how to grow your asset so that it could generate more passive income to you. You can focus on how to grow your "goose" so that it could lay more eggs to support you and strengthen your financial position.

3) It takes time for a goose to lay egg. Similarly, it takes time for your asset to generate cashflow to you. Some REITs or companies have half yearly or quarterly distribution or dividend payout, thus we will need to wait patiently for the REITs or companies to generate its profits and pay some of its profits to you so that you could enjoy the passive income. As the saying goes, don't rush, anything that is worth having is worth waiting for. 

4) So take your time and grow your "goose" patiently.  

5) When you earn more dividends from the companies or REITs, you could reinvest the dividends to buy more shares of the companies or REITs so that you stand a better chance to earn even more dividends from the same asset. This is the power of REINVESTMENT.

In the end, there are various equity investment strategies out there such as technical analysis, trading, buy and hold and many more. We just need to find out which strategy works well for us, then stick to it and hopefully, the strategy will eventually bear fruits and improve our cashflow and networth position!

What is REIT?

REIT is simply an investment vehicle that allows us to invest via stock exchange and gain instant exposure to various properties held under the REIT.  There are 17 REITs which are listed in Bursa Malaysia.

REITs can be categorized into Retail REIT, Office REIT, Healthcare REIT, Hotel and Resort REIT, Industrial REIT and many more. For example, if you want to earn rental income from hospitals, Al-Aqar Healthcare REIT allows you to earn rental income from certain KPJ hospitals in Malaysia such as Damai Hospital in Sabah, KPJ Ampang Puteri, KPJ Penang and many more.

Besides, If you have been to Tanjong Jara Resort in Terengganu, you will be delighted that it is a nice private resort with beautiful and white sandy beach facing South China Sea! You might also be delighted that this particular resort is one of the properties owned by a REIT called YTL Hospitality REIT of which we could potentially invest into!

Source: www.iatemywaythrough.com 

In terms of REIT structure, there are 3 parties generally speaking.

Firstly, REIT manager is responsible to enhance the value of the properties, identifying potential property to be acquired by the REIT, adopt and maintain debt level of the REIT and etc. 

Secondly, property manager provides property management services such as ensuring properties are in clean condition and etc. Lastly, trustee provides check and balance to the REIT to ensure that the REIT is managed according  to REIT guidelines trust deed and applicable laws. In return of these services, fees will be charged against the REIT as well.

REITs in Malaysia are required to pay out 90% of its net profit (distributable portion) to its shareholders in order to be exempted from paying corporate tax at REIT level. Some REITs even have 100% payout ratio in the past.

Ultimately, the goal of a good REIT manager is to achieve higher and sustainable net profit for the REIT so that shareholders could continue to earn passive income from the REIT and enjoy long term capital appreciation!

Note: The REITs mentioned above are meant for illustration purposes only.

Would You Like to Earn Money from Shopping Malls?

Do you love shopping? I think it is safe to say that Malaysians generally love shopping and going to the malls could be a favourite pastime activity especially during the weekend and holiday.

We could be sipping coffee at Starbucks, watching movie at GSC and buying books at the Popular bookstore. But have you been paying attention to the amount spent on certain food items or products that you usually purchase in the mall? If you do, you would have noticed that the prices of these items might have increased over the years.

The cruel fact is that the same quantity of items or products that we usually purchase might cost us even more nowadays. As a consumer, we might feel unhappy and ‘victimised’ in the extreme scenario due to potential cashflow pressure brought by rising costs of living.

 

Is there anything that we could do to improve our situation?

 

Yes! What we need to do is to EARN from the mall while we SPEND at the mall instead of just SPEND & SPEND. Think of the possibility of owning some stakes in the mall, your perception would change instantly. Think of Real Estate Investment Trust (REIT) which is an investment vehicle listed in the stock exchange that owns a portfolio of income producing properties for a moment.

If you own some stakes in the mall via REIT, you are not just a consumer, you are one of the owners of the mall as well! The equity ownership in the mall entitles you to receive rental income distributed by the REIT as Malaysia REITs are required to pay at least 90% of its net profit to its shareholders. Apart from earning a steady stream of cashflow from quality REIT, you could also enjoy capital gain in the long term if the market price of the REIT increases over time.

 

When you visit your favourite malls such as Mid Valley, The Gardens, Sunway Pyramid, Subang Parade, Mahkota Parade and Pavilion, think of the possibility of owning some stakes in these malls via REIT so that when you spend at the mall next time, you can also earn from the mall!

Life is wonderful when we can have the best of both worlds!

Dividend Yield (DY) Info that You Must Know!

Dividend Yield (DY) is an important yardstick for dividend investors. Although there are many financial ratios which are important as well. We will focus on DY for this sharing.

How should we interpret DY in our effort to create passive income from dividends?

Dividend Yield=  Dividend per Share (DPS) 

                                     Share Price 

Companies declare DPS in two ways, either cents per share or percentage per share. Do refer to the examples below for reference. We will exclude the transaction cost for simplicity purposes.

1) Cents per Share: If company A declares 5 cents per share, it will translate into 5% DY if market price is assumed to be at RM1 per share. So if you buy 1k shares of company A at RM1 per share, your capital invested will be RM1k, the 1k shares will entitle you to RM50 dividends, in line with 5% DY.

2) Percentage per Share: If company A declares 5% per share, you need to multiply the percentage declared against par value of the share in order to derive the DPS. If par value is RM1 per share, DPS will translate into 5 cents ( 5% multiply RM1 par value). Do find out the company's par value from its financial statement if the company adopts this method,

Dividend declared and paid are known as single-tier dividend, reflecting the fact the the company that you invested in has paid the income tax on the dividend on your behalf, hence the dividend that you receive is already net of tax.

For aspiring investors who are about to begin their investment journeys, perhaps you might want to explore dividend investing first as companies that are paying stable dividends are likely to be financially stronger and operating in a matured industry. Hence, translating into lower investment risk and higher probability of earning positive return provided that you do not pay excessive price for the company shares.  

Once you start to earn positive returns from your equity investments, you will feel more confident and you could eventually asset allocate part of your capital into growth stocks as part of your learning & investment journey.

Think of the process of constructing a building for a moment, the foundation is always the most crucial part of the building. Similarly, you could build the foundation of your equity investments portfolio by investing into dividend paying companies. 

If you invest into 5 good quality companies that are paying consistent dividends to you, you would have successfully created 5 money printing machines that are generating extra cashflow to you.  You could reinvest the cashflow earned into the same companies to earn more dividends, and eventually grow your financial buffer and strengthen your financial position. The additional cashflow could also alleviate any cashflow pressure that you may face due to rising cost of living!

So, do ask ourselves, have we built the foundation of our equity portfolio well?

Is Dividend a Source of Passive Income?

If you are a shareholder, can you treat the dividend received as a source of passive income?

When it comes to equity investment, most investors may associate equity investment as a financial tool to earn capital gain instead of passive income. It might be more exciting to invest primarily for capital gain as opposed to dividend. That said, there is nothing wrong to invest primarily for capital gain as price appreciation is still an important component of our investment returns on top of dividend income.

Instead of investing primarily for capital gain, why not invest primarily for dividend and wait for the price appreciation at the same time? 

You could treat the dividend received as the primary income and capital gain as a bonus. Bear in mind that capital gain is a one-off gain if you dispose off the entire shares while dividend that is safe and sustainable could provide continuous stream of cashflow to you as long as you remain invested in the company.

However, dividend paid to you can only be deemed as passive income if the following criteria are met:

1) The company MUST be CAPABLE to continuously share part of its profit with you. The company needs to be profitable and enjoy rising profitability in the long term. Without profit, there is nothing left to be shared with shareholders. Worst still, the share price might decrease if a company suffers declining profitability or losses without any recovery in sight.

2) The company MUST be WILLING to share part or most of its profit with you. You could assess the company's willingness to pay dividend based on its historical track record of dividend payment. If company A makes RM100 mil profit and declare RM50 mil dividend, the dividend payout ratio works out to be 50% (RM50 mil / RM100 mil), it means the company is sharing 50% of its profit with shareholders. Most importantly, if the dividend payout ratio has been consistent or on a rising trend, we may expect company A to continue its dividend payment in the future barring any unforeseen circumstances.

3) In short, companies that are matured and do not require huge amount of money for expansion, are likely to pay stable dividends.  The following is an example of a company that has been rewarding its shareholders consistently, namely Carlsberg Malaysia as a reference.

	2012	2013	2014	2015
Net Profit (RM’mil)	193.7	186.6	216.9	220.2
Dividend Declared (RM’mil)	192.6	186.5	217.1	220.1
Dividend Payout Ratio (%)	99.4%	99.9%	100.1%	100%

Source: Carlsberg Malaysia Annual Report 

Carlsberg Malaysia is a dynamic brewer with interesting products such as Carlsberg, Somersby Cider, Jolly Shandy, Asahi, Royal Stout and many more. It has been rewarding its shareholders consistently in the past by paying almost all of its profit because it is capable and willing to do so.

In summary, do remember to assess the companies' CAPABILITY and WILLINGNESS in paying dividends. These 2 factors are likely to determine if the dividends received could be treated as passive income!

Note: The company mentioned above is merely for discussion purposes and it is not a recommendation.

Let's Enjoy Life as a Business Owner!

While we work hard for our employer in order to earn higher salary or bonus, wouldn't it be great if we can become business owner of certain good companies at the same time?

But wait! we only have 24 hours a day, net off the 6-8 hours of sleep and additional 8 hours of work, we might be too tired to "handle" our business.

What if your terms of employment forbid you from engaging in other businesses?

We might be earning a decent income from being an employee. But in 10 years time, are we still going to rely on our employer to make a living? or are we going to create multiple source of income from investments and hopefully, the income or cashflow generated from investments could cover our living expenses one day.

If we are keen to generate additional cashflow from investments, investing in public listed companies could be one of the solutions.

1) When you eat Maggi noodles or MILO ice cream, think of Nestle Malaysia Berhad.

2) When you pay your electricity bill, think of Tenaga Nasional Berhad (TNB).

3) When you drink Dutch Lady milk, think of Dutch Lady Berhad.

4) When you pay toll at LDP or SPRINT, think of Lingkaran Trans Kota Berhad (LITRAK)

By investing in these companies' shares, you will become the shareholder by owning a fraction of the equity ownership in these companies. Although you cannot control how these companies are being run as a minority shareholder, you could still benefit from the following:

1) If the companies make more profits and declare dividend to you, the dividend will be an additional cashflow to you. 

2) If the companies' businesses prosper in the future, the companies' share price might increase to reflect the improved profitability. 

3) You are entitled to vote in AGM or EGM to express your view and many more..

While you are consuming any products or utilizing any services in the future, always think of the company that produces or offers the products or services. Chances are you might come across a good investment opportunity.

Investing in a company's share means participating in the company's business with the expectation of sharing the profit of the company in the form of dividend and long term capital appreciation.  

Despite being a full-time employee, you could still generate extra income by investing into good quality companies!

How Safe is Your Investment Return?

Do you want to earn double digit investment return in a year? 50% return in a year or 100% return in a year? How SAFE do you think is your investment return?

Some investors might be chasing for certain company shares with the hope of achieving high double digit return in a short span of time in order to pump up his or her networth. Aiming for higher return is fine, but the investment position could be rather risky if it is done without considering the inherent risk. It is akin to driving and looking at the side mirrors at all times, resulting in higher probability of getting into an investment 'accident'.

Let's revisit the basic of wealth equation:

Wealth= Capital x Time x Return

There are few observations that could be made from the equation:

1) The above-mentioned 3 components are crucial blocks towards wealth building.

2) Capital invested could be big or small amount relative to your investable assets.

3) If return achieved is zero, the wealth equation will not work.

4) If your return is negative, the losses could reduce your networth.

5) While capital amount is important, what is more critical for an investor is to harness the power of compounding interest by earning a sustainable positive return over a long period of time.

Imagine if an investor invests RM10k in a company share and suffer capital loss of 20%, the ending capital will then be RM8k, In order for the investor to recoup the initial capital, a return of 25% is required just to make back his or her money since the capital base is smaller now.

On the other hand, if an investor lost 50%, a return of 100% is required just to make back his or her capital. 

Hence, it may not be a bad idea for an investor to begin their investment journeys by focusing on equity or REIT investment that could potentially generate SAFE, SUSTAINABLE and STABLE return first instead of  chasing SKY HIGH return during the initial investment years.

If we could earn STABLE returns over a long period of time, the capital invested will eventually grow into a decent sum!

Why Bother to Invest?

How much is the cost of a cup of MILO today? if you compare the current price of a cup of MILO to 5 or 10 years ago, the price would have increased by a large extent in percentage terms.

Make no mistakes, the cost of living in Malaysia has been on an uptrend due to the combination of the following factors:

1) The recent implementation of GST

2) Subsidy cutback by Government

3) Positive economic growth

4) Weak ringgit, resulting in higher prices for imported items

Rising cost of living concerns a lot of people, but there is NOT MUCH we can do to control the external factors. What we could do is to FOCUS our energy on areas that can be controlled, so that we could minimize the negative impact brought by rising cost of living, or better still, we are likely to have a happy life if we can learn how to benefit from the rising cost of living.

Rising cost of living will erode our purchasing power, if we take 6% yearly inflation, your purchasing power will be halved in 12 years time based on rule of 72, which is scary. It means if your capital generate zero return or return that is below inflation rate, the value of your money will be eroded in the future, guess what would happen to our quality of living? financial security? what about our financial freedom? can we still finance our kids' tertiary education? do we still blame our government?

I am sure you could picture the future challenges brought by rising cost of living. Hence, one of the key objectives in investment is to generate return that is EQUAL to or HIGHER than inflation rate, so that we could preserve or increase our purchasing power.

So if your return is 8% and inflation rate is 5%, your net return is positive 3%!  You should be able to sleep well knowing that your purchasing power has increased.

Although we are aware by now that we must aim for return that is higher than inflation rate in order to increase our purchasing power, is it easy to achieve a sustainable positive return in reality?  This is the question that we will explore in the future..

Welcome to Dividend Investing and REITs 101!

Welcome to my little blog on dividend investing and Real Estate Investment Trusts (REITs)!

This blog serves to share ideas on dividend & REIT investing 101 while documenting my personal journey in creating passive income from dividend investing and REITs.

For aspiring investors who are about to begin their investment journeys, hopefully the sharing here could add value to your thought process when it comes to dividend investing & REITs.

I do welcome discussion :)

Most importantly, while we work hard to achieve our financial goals, remember to have fun and enjoy life too!