Setting Your Ultimate Investment Objective!

Before we invest into a company’s shares or REIT, before we crunch the numbers to find out which company to invest into, before we read the economic news which could make us feel overwhelmed, there is one step that we must not neglect as we begin our investment journeys.

I am fortunate to learn this concept from a group of friends that I network with. The concept originates from Simon Sinek, one of his publications that piqued my interest is the book called ‘START WITH WHY’.

Sometimes, certain investor might invest into a company shares or REIT upon hearing about it without further due diligence. What he basically wants to achieve could be the potential quick capital gains and this could be akin to gambling. He may know WHAT he is investing into, he may know HOW to purchase the shares, but he might not know WHY he invests into the company or REIT at the first place.

WHY do we invest into equities, REITs, properties, unit trust or forex?

Is it due to the burning desire to achieve financial freedom and provide a better life to our families?

Is it due to the burning desire to fund our children’s tertiary education?

Is it merely due to the desire to make a quick bet or to speculate bulk of our capital to earn ‘fast’ money which could be a dangerous decision?

At the end of the day, making money from investments is likely to be the end result from our investment actions, what matters most is the rationale and thought process behind our investment actions. In the absence of a strong WHY, we might lose focus, we might end up making investment mistakes and we might even start to doubt ourselves in a negative manner.

Once we are crystal clear with the WHY behind our investment actions, we could then proceed to think about HOW to achieve our investment objectives and subsequently, WHAT to invest into in order to realize our financial goals (the WHY). Start with the inner circle first!

If the WHY behind an investment action is to achieve financial freedom by certain age with certain amount of wealth, we will be more disciplined in studying the companies or REITs, to understand the business model of the companies and its profitability.

So, what is the end result if we start with WHY?

The making of an educated investor in the long run!

Harnessing the Power of Demographic Dividend in Malaysia

Have you heard of demographic dividend?

It basically refer to a country with favourable demographic profile such as young population base, positive population growth, rising labour force and etc.

Malaysia is blessed to have a demographic profile which is positive to our long term economic growth. 

Key statistics:

a) Malaysia's population is estimated to hit 31.7 million people in 2016 as compared to 31.2 million people in 2015, translating into an estimated growth of 1.6%. 

b) World Bank reported that Malaysia's death or mortality rate has been on the declining trend, from 11 deaths per 1 thousand people in 1960 to 5 deaths per 1 thousand people in 2014.

c) Although birth or fertility rate per woman in Malaysia has declined from 6 births per woman in 1960 to 2 births per woman in 2014, our overall population growth remains in positive territory.

d) The average age of our population in 2016 is estimated to be around 28 years old.

e) Age group of 15-64 years old make up 70% of our population whereas age group of 65 years and above make up only 6% of the population. 

What could we possibly conclude based on the above information?

a) We are unlikely to face ageing demographic profile yet and the risk of shrinking population in the near future remains low.

b) Unlike country like Japan which has an ageing population with age group of 65 years old make up 26% of its population, rising mortality rate, less married couple and rising mortality rate. These factors could result in demographic crisis and further aggravate the various economic challenges in Japan.

c) With favourable demographic profile in Malaysia, there could be rising pool of working class and consumer base which could provide a 'sweet spot' to a lot of public listed companies in Malaysia. 

Rising population could result in:

a) Rising demand for food, electricity or even tissue paper ( i.e. F&N, Tenaga &  NTPM).

b) Rising demand for life and general insurance coverage ( i.e. Allianz & Takaful)

c) Higher demand for cars and houses and electronics appliances (i.e. UMW Holdings & Panasonic Manufacturing)

d) Higher demand for air travel (Air Asia).

e) Rising number of shoppers which could benefit retail malls (retail REITs).

f) Higher demand for brewery products (i.e. Carlsberg & Heineken Malaysia).

In short, investors could invest into companies which are the potential beneficiaries from the country's demographic dividend!

Rising population could result in higher demand for the companies' products or services which in turn, result in potentially higher revenue and profitability for the company. Eventually, a company with rising profitability is likely to generate more value to shareholders in the forms of dividend payout & capital gains.

Disclaimer: The companies mentioned above are strictly for illustration purposes only and should not be construed as an investment recommendation.

Would You Like to Earn Rental Income from Hospitals?

For investors who are looking to earn rental income from hospitals in Malaysia, there is a REIT which could pique your interest, namely Al-Aqar Healthcare REIT (a member of Johor Corporation Group).

The REIT was listed in Bursa Malaysia in 2006 and became the first listed Islamic REIT in the world. Al-Aqar Healthcare REIT is supported by KPJ Healthcare Berhad.

Al-Aqar REIT earns rental income from its portfolio of hospital assets, comprise of 19 hospitals and 4 healthcare related properties in Malaysia and Australia as at end-December 2015. At least 90% of the REIT’s distributable profit would be paid to unitholders in the forms of distribution or dividends.

For its hospital assets in Malaysia, it has KPJ Ampang Puteri, KPJ Damansara, KPJ Ipoh, KPJ Damai, KPJ Tawakkal and many more. Most of us would have come cross or pass by KPJ hospitals.

Prior to any REIT investment, investors are encouraged to first analyse how does the REIT generate its rental income? Can the REIT increase the rental payment by a high single digit reversion rate? Is there a formula to calculate rental payment of the tenants?

Al-Aqar REIT	2012	2013	2014	2015
Revenue (RM’ Mil)	103.3	107.4	108.6	110.9
Revenue Growth %	22%	4%	1.1%	2.1%

Based on the table above, revenue growth for Al-Aqar Healthcare REIT might not be strong in the past few years except 2012 where revenue was boosted by rental income from newly acquired hospitals.

Al-Aqar cannot simply increase the rental rate of the hospitals as the rental reversion is subject to a formula of which the rental reversion would take place every 3 years.

The revised rental is subject to the higher of the minimum rental or 10-year Malaysian Government Securities (MGS) yield plus 2.38% multiplied by the property’s market value. Subsequently, the rental rate for the next 2 years will be at a 2% rate increase per year before it gets reviewed again.

Hence, rental reversion for Al-Aqar REIT might not be straightforward and investors might want to understand the rental reversion formula before venturing into this healthcare REIT.

Strong and positive rental reversion means higher rental income, higher rental income means potentially higher distribution or passive income to investors. Hence, the flexibility of a REIT to impose higher lease payment is a critical area which we must take note.

Important Dates that Dividend Investors Should Take Note

In our quest to be a successful dividend investor, there are 4 important dates that we should be familiar with in order to build our streams of dividend income.

1) Declaration date:

This is the date on which the company or board of directors declares that a certain amount of dividend would be paid to the shareholders.

2) Ex-date

This is the date or first day the stock trades without the right to receive dividend. If you buy on the ex-date itself, you will not be entitled to receive the recently declared dividend. To qualify for the recently announced dividend, you need to buy before the ex- date. 

Some investors buy into the shares one day before the ex-date in order to 'capture' the recently declared dividends. However, the share price on the ex-date will be adjusted lower by the amount of dividend declared, making the total value of your investment to be the same theoretically. That said, the actual quantum of adjustment might differ from the amount of dividend declared due to market forces.  

If you want to sell your shares and still entitle for the recently declared dividend, you have to sell your shares on or after the ex-date of recently announced dividend.

3) Entitlement date

This is the date on which the company will refer to its records of shareholders to determine who the shareholders are.  Entitlement date is 2 business days after ex-date.

4) Payment date

The date on which the dividend is paid out, dividend is now credited into your bank account electronically or what we call E-dividend. This is the date where dividend investors feel happy and delighted!

Let's look at an example of the latest dividend declared by Heineken Malaysia (formerly known as Guiness Anchor Berhad).

On 18 July 2016, Heineken Malaysia declared dividend of RM0.35 per share, The ex-date is on 7 September 2016 and entitlement date is on 9 September 2016 with payment date on 7 October 2016.

Hence, investors whose name appear in the records of shareholders on 9 Sept 2016, will therefore be entitled to the dividend payout on 7 Oct 2016.

Do remember these 4 dates in your dividend investing journey!

The Importance of Lease Expiry Profile in REIT

If you are a landlord owning income producing properties, nothing beats the pleasure of receiving higher rental income from your tenants in the long run.

Similarly, when the tenancies of a REIT expire, we hope that the REIT could retain the tenants or secure new tenants at higher rental rates. In another word, higher rental payment translates into higher income to the REIT and potentially higher distribution to us.

If we dissect Pavilion REIT’s tenants expiry profile for Pavilion Mall, you will notice that there is a lumpy lease expiry in 2016 of which 69% of the mall’s occupied NLAs will be up for renewal. These tenancies account for 66% of the mall’s gross rental income based on information found in its 2015 annual report.

BIG amount of money is at stake here if the REIT fails to secure the renewal of existing tenants or new tenants to occupy the lettable area.

Some of the Pavilion Mall's tenants with lease expiring in 2H 2016 will be GSC, Hermes, Padini, Parkson and Royal Selangor.

If you are the unitholder, you might hope that:

1)  Bulk of these NLAs which is expiring will be renewed at a higher rental rate.

2) Management could secure new tenants if existing tenants opt not to renew the lease.

We should be able to see positive impact on the REIT’s rental income in the next few quarters when the REIT announces its quarterly result if management manage to secure higher lease payment for the expiring tenancies.

2016 is a BIG year for Pavilion Mall, but a lumpy tenancy expiry profile has its pros and cons. It gives the REIT the opportunity to negotiate on higher lease payment. But if the economy slows down significantly, it may affect the REIT’s ability to retain existing tenants or secure new tenants.

Ultimately, it will depend on the retail REIT’s management quality, location and attractiveness of the mall as key factors in securing higher lease payment in the long run.

Do You Like REITs with High Debt Ratio?

When we are searching for good quality REIT, there is one key metric that we must pay close attention to, namely the DEBT RATIO.

Debt ratio = Total debts of the REIT divide by the REIT's total assets. 

The higher is the ratio, the higher is the debt level and vice versa. 

Higher debts do not necessarily mean the REIT is in trouble, if the REIT incurs higher amount of debts to acquire new property that is yielding positive return in excess of borrowing cost, the higher debt loads is not 100% bad. 

As REIT needs to pay at least 90% of its distributable profits to unitholders, hence there is lesser profits retained at REIT level as bulk of the money has gone into unitholders' bank accounts as distribution. As a result, REIT may need to borrow money in order to pay some of its property upgrading expenses, refinancing of existing obligations or acquiring new properties.

Currently, Malaysia-REITs (M-REITs) are allowed to incur up to 50% debt ratio, which may be increased if REIT obtained approval from unitholders by way of ordinary resolutions. However, under the latest proposed measures by Securities Commission (SC), M-REITs are likely to have a fixed debt limit not more than 50% without the option to increase this limit. I view this measure as positive as it ensures that borrowings of REIT are kept at reasonable level.

REIT	Debt Ratio
YTL Hospitality REIT	46%
Hektar REIT	44%
Al-Aqar Healthcare REIT	41%
Axis REIT	35%
Sunway REIT	33%
CMMT REIT	31%
Pavilion REIT	26%
IGB REIT	24%

The table above shows the debt ratio comparison of selected REITs. You could compute the ratio by taking the total debts and divide by its total assets ( these numbers could be found from the REIT's financial statement).

What are some possible drawbacks of having high debt ratio?

1) If the REIT wants to incur more debts to buy new property, it might be constrained to do so. For example, in view of high gearing of Hektar REIT, it plans to raise capital (a.k.a rights issue) from shareholders to funds its proposed acquisition of 1Segamat Shopping Centre. Unitholders might need to invest more capital into Hektar REIT, nonetheless, it is not an obligation, but rather a rights. 

2) When the debts fall due, the REIT might not have enough money left to pay the loans as 90% of its distributable profits would have been paid out. It is normal for a REIT to refinance its obligations. Hence, the REIT could be at the mercy of lenders in the extreme scenario.  Avoid bad quality REIT.

3) Debts that were incurred by REIT to buy bad quality property, may eventually result in lesser net income to the REIT as rental income generated from bad quality property might not be enough to cover the interest incurred on the debts if the occupancy rate of the bad quality property declines and compounded further by decline in rental rates.

Usually i will only invest into REITs that have debt ratio of not more than 40%.  

For Retail REITs such as Sunway REIT, CMMT REIT, Pavilion REIT and IGB REIT, they are likely to incur more debts to fund the purchase of new malls or new properties since the REITs still have a lot of room for debts before it hit the 50% limit.

This is the key concept of leveraging using Other People Money (OPM), if it is leveraged well, the newly acquired property will eventually contribute net positive return to the REIT and this is what we eventually hope for.

Does Your REIT Manager Add Value to You?

At the end of the day, you are likely to be a happy shareholder in a Retail REIT if the mall that you invest into has a competent management who is proactive in enhancing the value of the mall and always try to bring out the best in the mall.

Apart from quality tenants, we need visitors' footfalls or traffic. Higher volume of visitors' traffic might not necessarily translate into higher amount of spending. But at least it increases the probability that the visitors may somehow spend some money in the mall, some of this money will eventually go into your pocket.

A) Promotional Activities

Sometime in May & June 2016, Mid Valley in collaboration with HSBC brought in 3 ‘live’ angry birds to the mall and the event was a successful one and the crowds were having fun with the 3 birds.

Apart from event linked to a movie, the rejuvenated Sunway Putra Mall went extra mile to bring in artists such as Greyson Chance and G.E.M Tang to the mall in June and July 2016. Hopefully, these activities could enhance the visibility of these malls and more visitor footfalls to follow through subsequently.

B) Renovation to Increase Lettable Area

In 2015, Mid Valley underwent major renovation at 3^rd floor to add extra 40k Net Lettable Area (NLA) to the mall. New tenant such as Magnum Café moved in, good news to Magnum ice cream lovers. The newly refurbished GSC in Mid Valley would also make it the largest GSC in Malaysia with 2,800 seats and further enhance the appeal of the mall.

More NLA means more rental income to the REIT, more rental income means potentially higher amount of distribution or passive income to you!

Pavilion Mall also did some enhancement exercises in 2015 with the Dining Loft at level 7, Couture Pavilion and etc.  

C) Active Remixing of Tenants

For Gardens Mall, Borders book store next to Sushi Zanmai will be moved one floor lower and it will be re-opened on 9 September. This shifting is to make way for new tenants such as Korea’s BBQ restaurant, burger shop and Kids Jurassic by Dinoscovery! Perhaps this remixing could eventually increase the rental income to the mall.

Mid Valley and Gardens Mall have strong tenant’s waiting list of up to 200 and this definitely bodes well to the mall.

D) Acquiring New Mall

A Retail REIT could also grow by acquiring another mall to enhance its rental income. Not all acquisitions are good and each acquisition needs to be analysed. For Pavilion Mall, its extension namely Pavilion Elite (250k square feet) is likely to open its door in December 2016 and the injection of the new extension into Pavilion REIT might happen in the first half 2017. This is a deal that needs to be monitored.

Pavilion REIT has also acquired Da:Men USJ and Intermark Mall, the performance of these malls need to be monitored as well in order to assess its impact to Pavilion REIT in the long run.

Ultimately, a good management is likely to give you a peace of mind while you watch your investment and passive income grow! 

Watch Out for Competition to Retail REIT!

Investing into a retail REIT requires due diligence and the process is quite similar to buying a property with the intention of earning positive cashflow and long term capital appreciation. We should not be complacent in our due diligence on REIT as each capital should be viewed as our seed or soldier to fight for our financial freedom, or if you are already financial independent, there is no harm to receive that extra cashflow to further empower the various aspects of your life.

Take a look at Tropicana City Mall (TCM which is under CMMT REIT). I used to visit the mall in the past for movie. Recently, I visited TCM during Friday evening, the atmosphere in the mall was rather quiet, and businesses at F&B shops were OK but not great. Nonetheless, it is not a conclusive observation as I was only there for 2 hours.

The retail landscape has changed tremendously in recent years and the additions of millions of new retail space are likely to pose competition to the existing malls. Not forgetting that KL and Selangor still have around 4.2 million square feet of vacant retail space respectively. Hence, the Malaysia Shopping Mall Association has also been urging the local authorities to impose two-year freeze on new malls in KL and Selangor.

When you assess TCM, do assess the competing retail space component from GLO Damansara, the rejuvenated Atria Shopping Gallery, Starling Damansara Uptown, One U, Curve, Paradigm Mall and etc. Then form an opinion if you think TCM could prosper amidst onslaught of competing malls. If TCM is doing well eventually, it will contribute positively to CMMT REIT and vice versa.

Let’s take a look at Mid Valley and Gardens Mall, the construction of KL Eco City next to Gardens Mall seems to be progressing well and this project will feature a 300k Gross Floor Area (GFA) of retail component that will come on stream in 2017. Do you think the retail space of KL Eco City would pose a threat to these 2 malls or do you think KL Eco City could complement and further strengthen the position of these 2 malls?  

Location, location, location is important. But if the mall faces fierce competition amidst slowing economy and oversupply of malls in certain location, it is going to be the survival of the fittest. Only the quality malls which have stood the test of time, could survive and likely to prosper in the long term. 

If you are catching Pokemon, Pokemon Go may lead you to that quality malls.