Chlorophyll Inc

Having developed a keen interesting searching for value in beaten down REITs, i stumbled onto two REITs that interest me the most. They are Ascott Residence Trust and CapitalCommerial Trust. But since i already stated that CCT is one of the best REITs i found soo far and have mentioned the good points about it, i will only mention about Ascott for today's short entry.

A little information about it as stated in their website : Ascott Residence Trust a.k.a (ART) is the first pan-Asian serviced residence real estate investment trust (REIT) established with the objective of investing primarily in real estate and real estate-related assets which are income-producing and which are used or predominantly used, as serviced residences or rental housing properties in the pan-Asian region. In other words, this REITs is just like a trust fund buying condos and rent it out.

ART has an initial asset portfolio of 12 strategically located properties in seven pan-Asian cities (Japan/Singapore/Vietnam just to name a few). The Trust was listed with an asset size of about S$856 million and as at early 2009 ART’s portfolio has expanded to 38 properties with more then 3,550 units in 11 cities across seven countries, with a total portfolio asset value of around S$1.688 billion.

Ok, so let take a quick look at what a value investor will look out for in Ascott.

Trading at a disgusting low unit price of 0.355 as at 25th Feb 2009 9:44am, the value ratios are as follows

- A 75.8% discount to its NAV (Huge discount)

- A 17-20% yield expected to received in 2009 (Estimated DPU of 6-8cents)

- A price to book value of <0.35>

They are securities that sell like a stock on the major exchanges and invest in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate.
Individuals such as you and me can invest in REITs either by purchasing their shares directly on an open exchange or by investing in a mutual fund that specializes in public real estate.

An additional benefit to investing in REITs is the fact that many are accompanied by dividend per unit (DPU). Among other things, REITs invest in shopping malls, office buildings, apartments, warehouses, ships, retail spaces and hotels. Some REITs will invest specifically in one area of real estate - shopping malls, for example - or in one specific region, state or country.

With current market being so depressed, good REITs have fallen to a point where their unit price are significantly below their NAV, of course the word "good" is subjective to ones' own research and opinion on this security.

So, the question is how to identify good REITs to invest in? The ideal would be to buy into a good track record REIT that offers sustainable high yields, prudently managed capital/assets, low gearing, ability to easily obtaining capital for refinancing, strong reputation and backing by a well known group and trading at a huge discount (40-50%) below its NAV.

With that mouth full, let’s start with a 8 simply steps on what to look out for and what to think about with when investing in REITs listed in our local exchange.

-Which country/ries does the REITs have assets in?
For example, Asscott REITs have about 50% of its assets in developed countries like Japan/Singapore and the other 50% in developing countries like Vietnam.

-What are some of the good qualities stated in their website?
Information like, the FIRST REITs established in Singapore, the BIGGEST REITs in South East Asia, 10 YEARS of diligent distribution of dividends etc...

List them down here.

-What caught your attention at first?

This sub-step is basically for you to written down, what caught you attention, that invoked you to spent your previous time researching this REIT instead of the other hundred over different REITs listed in the world. 30 REITs in Singapore

Like for example, Saizen REITs caught my attention because

1) It's high yields

2) Share price have dropped way below NAV per share

3) Exposure to Japanese residential market etc

Step2: Study the C & I in more detail

C refers to countries and I refers to the industries.

Basically, this step is for you to research a bit more in detail about the countries and industries that your REITs assets are allocated at. Do touch a bit on the following such as

-Population figure and growth

-Demand and Supply figures

For example, in Singapore Office rental spaces are forecasted to increase in supply , but the demand is to drop etc, drop by how much?

-Employment levels are they drastically falling?

-Governments policies on REITs (if any): Any help available for them? Like allowing them to reduce their minimal distribution to 50% etc

-What type of industry is this REITs involved in? Properties/Officers/Retail/Malls/Shipping/Residential/Hospital and healthcare Some REITs have a combination mixture of both industries, say for example Sun Tech REITs rent out both retail malls and offices spaces.

-Industrial Cycle: Look at charts in that particular country and industry, estimate, basically how long the cycle whether properties/shipping etc took to bottom out (Indonesia's longest downtrend for properties is 16mths), my best guess is that now , or perhaps most of the cycle charts are at their over sold level or have fallen from a great high since 2007.

Get to know the industry itself more, which industry is more resilient, why is it that Hospital and medical industries are more resilient to say as compared to shipping industries?

Of course, according to value investing principals, "Invest when fear is the greatest" The best time to invest in these REITs is when there is server downturn or a recession such as now, this then results in very low REITs unit price, higher yields and the downside is some what limited.

But one has to be at least aware where the REITs allocation is at, you don't want a REITs that allocates its assets in countries like Iceland (renting out igloos) or North Korea (renting out military faculties for nuclear war-heads) etc

Step3: Past Performances -How old is this REITs

According to some industrial experts, it is best to invest in REITs that have at least 3 years of consistent good history. This is because (I think), the longer the REITs have been in profitable operation, the more likely its business model, asset allocation , capital management, refinancing matters are more or less taken care of.

-Data collection table

Create a table, that shows the REIT's revenue/operational cash flow/operational margins since listing. In this way you'll probably get a clearer picture as to whether the REITs you are looking at, is or has been doing well these past few years. Basically I avoid REITs that have a very inconsistent history of revenue/operational cash flow and margins, these is because, for the last 3-5 years if you cannot show me consistent increasing results, what makes you think you can do so for the coming tough years, that this particularly drastic crisis have caused?

-What policies are established into the REITs? Policies like deferred units establishments (Dilutes your yields in the future), management payment via units(Ensures management work hard to increase the Share price of the unit) etc Establishing good relationships with tenants for example, passing government benefits, yearly free estate fixtures. All these can be found in the REIT's quarterly presentations and pass news.

-Any strong backing/pipelines?

Like Keppel REIT is backed by parent company Keppel Corp and Capitalmalltrust/CCT backed by Capitaland. I believe backing is important, this is because say Capitalmalltrust were to ever be short on cash, I’m confident the parent company CapitaLand will pump in money from its $7billion or so cash reserves. This backing provides investors an extra safety net to ease our worries.

-Are they confident in the business? Look out for significant holdings by Directors/CEO and insider buying, these information should be easily obtain either via the RIET's website or go to SGX.com or simply call the investment relationship manager.

-What are the managers doing about any short/long term problems? Like what are they doing to conserve cash (Converting short term loans to long ones?) What plans are taken to reduce debt? What meetings, conferences, negotiations, measurements are going to settle matters like refinancing

Step5: Health of the REIT's finances
Years/Acc 2005 ~2006~ 2007~ 2008

Receivables 2,762 ~12,987 ~10,246 ~27,749 ~(PASS)

DER ratio 0.240 ~0.230 ~0.210 ~0.350~(PASS)

Shareholdings 0.890b~ 1.201b ~1.321b ~1.361b~(PASS)

NAV per share $1.62 ~$1.85 ~$2.69 ~$2.94 ~(PASS)

Here we look at accounts like receivables, finding out whether they are increasing drastically as compared to the pervious years? If so, then ask yourself, why is this so? Am ever increasing receivable would mean a higher chance of bad debts occurring. Means that clients or tenants are not paying up! Just like Peter Parker (Spiderman)...despite his heroism, he is always late paying his rent, causing a lot of anger to his landlord. You don’t want too many of him in staying in the properties of your REITs because parkers are really fuckers to your dividends. Next will be Debt to Equity Ratio. If the ratio shows 1.5 times in any of those years, one have to be alert. Because the higher the REITs debts, the more interest it needs to pay, the chances of going bankrupt (if loan is not refinanced) is high. A healthy REIT is one that takes up 50% less its market capital.

And lastly the most important measure, the NAV value. Especially for REITs, the higher the NAV, the better it is for investors and for the company to refinance its loans via collaterals. In fact, the intrinsic value should also be based on the NAV of the REITs, however in times like this, prices of REITs per unit have fallen way below its NAV, so a good buy would be a price that is about 40-50% to its NAV. Also take note of falling property values, because the more the prices fall, the more jittery banks become, the faster they want their loans back. Likewise borrowing will also be hard for REITs if its properties are falling in value.

Step6: Their investment portfolio
Only four simple questions to be answered here
1) Are their portfolios well diversified?

2) What are some good points they mentioned about their properties? Award winning, most traffic alluring buildings,

3) What are their current plans or future plans?

4) Have you seen their portfolio in action?* (subjected to certain REITs only)

What I mean in question 3 is that, for etc, CapitalMallTrust (CMT) has its investment income generating properties like IMM/ Tampinies mall, seeing them in action simply means just going down to these malls, take a look at the crowd, the influx of people, the general feel of the place. Because more crowds means more business, more business means more sustainable occupancy level means more stable dividends. Speaking of sustainability, that brings us to our next step

Step7: Sustainability of the yield
Step7 is basically putting all the data relating or influencing the sustainability of the yields in a table. So you have a better view of what's falling or rising

Years/Acc ~2006~2007~2008

Rent rates ~$7.00~$8.73~$8.00 ~(PASS)

Rate ~99%~98%~99% ~(PASS)

Investing FCF ~(151k)~(842k)~(39k)~(PASS)

Revenue ~1.67m~1.88m~2.55m~(PASS)

Interest Rate ~3.3%~3.4%~3.9%~(PASS)

Shareholdings ~0.890b~ 1.201b ~1.321b ~1.361b~(PASS)

Here we again look at the historical data of the rent rates/occupancy rates/investing cash flow etc. With regards to rent rates, its best to invest in REITs that have been charging low rental rates with its clients in the pass years, in that way there is buffer for both down and up side. What I mean here is, take CapitalCommTrust for example; they charge an average of $7.14 per sq foot to their office tenants, while the market average is a high of $11.40. So, if this downtrend were to drag this office rental space to $7.40 according to some property valuator expert, if this happens, CCT will be able to more or less maintain this $7.14 per sq foot regardless, likewise there is an potential upside if the market were to raise back to $11.40 giving CCT the ability to chare more in the future. Next we look at occupancy rate and interest rates, in which both variables are likely to increase in the coming months or years; investors will have to taken note and expect a lower DPU. Ensure also, that investing FCF, if there’s huge spending from the last year (the REIT bought another building or ship or space), the next year should or must yield back a higher revenue figure.

Lastly we come to our finally step,

Step8: Summary
This finally part, involves listing down the latest NAV per share, your intrinsic value via Gordon's dividend discount model with realistic assumptions http://www.answers.com/topic/gordon-model The current share price, risks involved, margin of safety etc. It would look something like this

NAV per share as of Dec 2008: $1.55 per share
Intrinsic Value: $1.40 per share for the next 10 years using 5% discount rate
Current Share price: $0.77
Risks involved: Possible deflation, Assets not that diversified, $600m to be refinanced in dec 2009
Margin of safety: (I’ll use NAV in this case) about 40%-50%
Yet, despite doing so much (subjective) research on particular REITs in mind, there will always be risks in any investment, and these risks are sort of heightening in these current market. Some risks to take note of, socially for REITs is

1) Deflation. If you noticed, under most REIT's balance sheet their long term assets socially the account like their buildings/ships/estates has been inflated through out these many years. What I mean by inflated is for example, CMT (Capitalmalltrust) bought IMM for 1.6billion in 2001. So in 2002, the value of IMM rose to 1.8billion, in 2003 rose to 2.2billion , in 2004 rose to 2.6billion and so on, so you can see, these properties are inflated in their holding value by a property value. So, if their value can raise so fast, isn’t it possible to even drop that much? That has yet to be seen in this current market, and if drastic devaluation takes place, problems like Loan to value will take place, banks start to panic and ask for more compensation or return them their loans, refinancing will thus take place.

2) Ability to refinance, due to credit crisis now, REITs faces a drying pool of credit. What happens if a REIT is not able to get refinanced? Then bankruptcy will occur, possible unfortunate events like fire sale of their assets might be possible, that why the importance of buying way below their NAV per share gives you that margin of safety from this unfortunate event. In addition, but looking into track records, past performance, strong balance sheet, reputation, consistency in DUP payouts, who are the shareholders etc will more or less screen out those good REITs that can easily get refinanced.

Hopefully this simple guide will be useful to investors looking to invest in Singapore REITs which have fallen to such a level deemed very attractive to me.

The first sign of an improvement will be...corporate silence. As in no more draconian job-cut announcements. Once that happens (or doesn't), the unemployment rate will plateau. Then, companies might start hiring again, and a couple of months after that, the unemployment rate will start to fall. Three straight monthly declines would be a good sign that the economy is really on the rebound. That probably won't happen until 2010.
If you're wondering what's the point of the stimulus package if it won't do much to help workers in 2009, look to 2010. And 2011. That's where the plan will make a bigger difference. Moody's Economy.com estimates that by the middle of 2010, the unemployment rate will start to drift back toward 8.5 percent. But without any stimulus plan, it would have hit 11 percent. Viva la government.

More stable home prices. The realestate boom and bust is what torpedoed the economy in the first place, and the economy won't start to recover until the housing bubble fully deflates. The good news is that housing prices have already been falling for more than two years, with prices down more than 20 percent nationwide. And we might be more than halfway toward the bottom: Moody's Economy.com predicts that housing prices should stop falling nationwide by the second half of 2009. Overall, the forecasting firm predicts a 30 percent drop in home values from the peak values of 2006.

Others think it will take longer, but whenever it happens, an end to the housing slide will mark an important turning point. Hardly anybody thinks that prices will shoot back up or there will be another buying binge. But a boomlet, maybe. Once prices stabilize, buyers will stop worrying that they could be purchasing a costly asset that's falling in value. As they buy, other kinds of consumer activity - like shopping for furniture and kitchen upgrades - will follow. Slowly.
A consumer confidence rebound. Since consumer confidence closely tracks the job market, the dismal numbers of the last few months probably won't improve by much until late in 2009, or 2010. Homeowners have lost more than $3 trillion worth of value in their homes over the last three years, and investors have seen their stock portfolios shredded. So even people who feel secure in their jobs are dour.

Turnaround in the housing or stock markets would break the gloom and help some people feel better off. So would easier lending by banks, which would help solvent consumers buy a few more cars, appliances, and other goods. But consumer confidence won't really start to improve until workers start to feel more secure about their jobs and income. Think 2010.

A less volatile stock market. Every investor hopes that beleaguered stocks will come roaring back in 2009 and regain some of the ground lost since the peak in 2007 - when the S&P 500 stock index was nearly 50 percent higher than it is today. But a better indicator of economic health would be a steady recovery - without the manic swings that seem to come from every hint of undisclosed trouble at some big bank or rumor of new government intervention.
The stock market is harder to predict than most other parts of the economy, since it's deeply dependent on psychology and other intangibles. The market could bounce back by mid-summer. Or it could remain stagnant for years, like it did for most of the 1970s. The experts can't be any more sure than you or I.

One hopeful sign would be less market sensitivity to events in Washington. The biggest market mover these days is the federal government, since fortunes stand to be won or lost - mostly lost - depending on how deeply the government intervenes in the activities of megabanks like Citigroup and Bank of America, and how much federal spending will be available to stand in for plunging consumer spending. The markets will be back to their old selves when earnings reports, IPO announcements, and M&A deals are what send stocks up or down, and utterings from Washington amount to little more than an echo. Since the government seems to be the only institution spending money so far in 2009, it could be awhile before Wall Street returns to form.
Economic growth turns positive. By economic standards, the current downturn has already lasted longer than the typical post-World War II recession. Yet there's still a lot more pain to endure. A recent survey of economists by the Wall Street Journal found that the majority think the economy will continue to contract for the first half of 2009, with growth turning positive in the second half of the year. That outlook is much worse than a few months ago, and even when growth turns positive the economy could sputter along without many new jobs or bold moves in the private sector.

It's always possible that impatient consumers will get sick of holding back, and start running up their credit card balances once again (if the banks let them). The bank-rescue plan might spur more lending than expected, goosing businesses and consumers alike. Or the stimulus plan might spread goodwill and optimism throughout the land. If you get the urge to spend, that might be the strongest indicator of all. Call the economists.