We chat with Ian Tai, one of our regular contributor here at Value Invest Asia. Ian is sharing with us why Cromwell European REIT is interesting, especially for income investors looking for more diversification in your portfolio.
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Disclosure: Stanley and Ian do not own Cromwell European REIT at the time of recording.
Stanley: Hi! This is Stanley, and welcome to another episode of investing ideas. This week, our guest is none other than Ian Tai; our core contributor here at valueinvestasia.com, Ian is also the founder of bursaking.com, where he shares a lot about what he knows about the Bursa Malaysia market. Ian also invests very regularly in the Singapore market, and he call himself a dividend investor, so he seeks out stocks and companies with very strong cash flow and stable dividend. So, this week he’s going to share with us, one of such ideas, and I am very sure that you guys will find this company very interesting, and definitely worth for you guys to add it into your watch list. So, without further ado, let’s get started.
Interlude: [Music] from valueinvestasia.com, this is investing ideas; where we talk to investors from all walks of life, learn from them, and find out some of their favorite investment ideas.
Stanley: Welcome to another episode of investing ideas, this week we have Ian. Hello! Ian, how are you?
Ian Tai: Hey! Hi! Stan, how are you?
Stanley: Yeah! I think our audience are quite familiar with you, given that you are a regular contributor to us at VIA, but before we you know, dive straight into your investment ideas, which is a very interesting one, why don’t you just share a little bit about yourself, and explain your core investment strategy; what is it, and how do you define yourself as an investor?
Ian Tai: Okay! Sure, and before I do that, first and foremost, thank you so much Stanley for having me on the show, and it’s a pleasure to not only just speak in your events, and as well as to write a bunch of articles in VIA. So, that is actually one of the key things that kept me busy, which is to write quality articles to Value Invest Asia, of course I do a whole lot bunch of writing to KCLau.com, which is a personal finance website in Malaysia, and as well as of course perhaps your competitors, Fifthperson, and as well as small-cap Asia. Alright! So, in terms of my investment style, I’m pretty simple, I like to keep things really, really simple. So, I’m dividend investor all right, and I primarily invest for dividend income, so that is my main focus. Currently, I’ve built a portfolio where 80% of my portfolio consists of SGX stocks, I mean to say, if you are a Singaporean perhaps, this may not be anything, but just to give you how would I say, more background into it, I’m a Malaysian, so for those of you who are listening and you’re from Malaysia. So, I’m a Malaysian who invests quite a lot in Singapore stocks, and currently my portfolio, I have calculated my dividend yield; on the average, it’s about six plus % per annum, and I do collect dividend income every now and then, so if every year we have like twelve months, I will collect dividend practically speaking around eight to nine months, in those twelve months.
Stanley: Yeah! So, you don’t even need to work?
Ian Tai: Still need to work on to build up my dividend income, so but at least to say this dividend income they pay some of my bills. So, I find they are quite helpful, as I’m speaking right now, of course that is the surface part of what I do, and what I aim for when I invests, but if you dive a little bit deeper, I have a system to building that kind of portfolio, like for example, my primary aim of course, is to increase dividend income, so naturally I will go with stocks that not only pay dividends, but they have to pay growing dividends on a consistent basis, and of course, since I’m into dividend investing of course, I would like to buy all of these stocks at the cheapest possible price. So, valuation ratios like P/E ratio, P/B ratio, and dividend yields, are my favorite kind of ratios to assess whether or not it’s a good time to buy.
Stanley: Wow! Okay. So, you say that you are dividend based investor; does that mean that you completely don’t have any stocks that don’t pay dividend?
Ian Tai: No, all my stocks pay dividend.
Stanley: Wow! Okay! Cool, and today you’re going to share with us another dividend stock, one that to be honest, caught me by surprise when you suggested this stock. So, why don’t you go ahead, and introduce it, and tell us a little bit about this stock, what is this stock about?
Ian Tai: Okay! So, the stock is about – so this time my pick is on Cromwell European REIT, so this is my stock, and of course we have the SGX symbol which is CNNU.
Stanley: So, it is listed in Singapore.
Ian Tai: Yeah! So, is a once again, listed in Singapore, and Cromwell; so I would just briefly use it as Cromwell, so if you talk about Cromwell, it is Cromwell European REIT. It is actually a diversified REIT with a wide range of portfolio, wide range of assets, like for example, we have office properties; Light industrial warehouses, logistics, properties, and as well as retail assets. So, all of these assets are based in Europe, in seven countries mainly in Holland, Italy and France, so Cromwell European REIT has a very good sponsor, and the sponsor is Cromwell Property Group; which is an Australian listed real estate conglomerate, so later I’ll get into that, and currently as I speak, it is in the midst of acquiring another six more properties, and when that happens, it will have 102 properties in its portfolio, valued at 2.07 billion Euros. So, that’s a brief info of Cromwell European REIT.
Stanley: Okay! So, definitely not a small REIT, but you mentioned the sponsor Cromwell Property Group listed in Australia, so this is the Australian property company, but the REIT is only a European asset, is that right correct?
Ian Tai: So, if I may just go straight into the sponsor, so I would just give you a little bit of background, of who Cromwell is, and maybe we can understand the relationship a little bit better. So, Cromwell, what I’ve gather is this; Cromwell Property Group is a listed company in Australia, but then it has assets globally, mainly in Australia, New Zealand, and as well as Europe. So, currently it has 270 plus properties, which is worth about 7.5 billion Euros, or if you want to convert it into Australian dollars, it’s about 11.9 billion dollars, and that is property portfolio, huge customer base of three thousand tenants, and Currently Cromwell Property Group owns about thirty five point six five percent of Cromwell European REIT. So, what they do is that; the sponsor, which is Cromwell Property Group, actually they form the REIT, which is Cromwell European REIT to all other European assets, or at least part of its European assets in the REIT. Yeah!
Stanley: Okay, and so far you say they’re a diversified REIT, what does that really mean, do you have the breakdown of where are the property located geographically; number one, and also the type of asset that they have that is the breakdown of the type of assets they have?
Ian Tai: Okay! So, let me just go through review the geographical breakdown. Alright! So, it has properties in seven countries, all of them are based in Europe currently, okay but I will give you the top three now, because that’s more memorable. So, the first one is in Holland, or the Netherlands, so you know in the Netherlands, it has around seventeen properties, and the portfolio valuation as I speak is 627 million Euros, which accounts for thirty point four percent of the total valuation of the portfolio. So, that’s Holland, in rank number two, we have Italy, where it also have seventeen properties, worth around 459 million Euros, and which accounts for twenty two point two percent of the total portfolio valuation, and the third one is France, it has about twenty seven properties, although it has larger amount of quantities in terms of properties, but the portfolio valuation is 421 million Euros, but it still accounts for 20% of the total portfolio valuation. So, if you add it up; Holland, Italy and France, it has around 73% of the total portfolio Valuation, and the remaining countries, which includes Denmark, Germany, Finland and Poland; so they will make up the final 27 percent of the portfolio valuation, which is around 558 million Euros, and that’s about 41 properties. So, that’s the geographical breakdown for Cromwell European REIT.
Stanley: Wow! Okay. So, actually from what you say, it’s actually quite diversified, and just listening to you talking about how many properties that they own, and across so many countries, I feel safe already. On the other hand, how do they match up with the asset classes? You say they have office; Light industrial warehouses, Logistic, and even retail. So, do you have the breakdown for that?
Ian Tai: Okay! So, currently I may not have the breakdown for that, because I thought this will be a very brief and very swift session.
Stanley: No, no, you thought wrong, you thought wrong. I’ll dive very deep with you on this one, from the top of your head, do you remember like, which is the main asset class that they are focusing on?
Ian Tai: How about we skip that for now, I will work through that review shortly, as I download its annual report and stuff like that,
Stanley: Yeah! let’s jump to that tenant mix first, you mentioned that they have so many properties, and actually a lot of them they are multi-tenanted. So, they have many tenants as well, from your own observation, do you like the tenant mix and the tenant concentration do you see any issue there?
Ian Tai Okay! So, in terms of tenant concentration; so, let me just give you a breakdown, first and foremost, Cromwell European REIT has a large customer base, it derives income from 911 tenants, so it’s about one thousand tenants, currently the portfolio occupancy rate is ninety one point six percent, which is quite healthy, and most of these leases they are quite long term with built in vendor escalation, and family overall in terms of its portfolio, it’s weighted average lease of expiry or will is 4.9 years, which is quite a very long time, 75% of its leases will begin to expire only in financial year 2022; which means to say that’s pretty good, considering that right now we are in 2019, which means for the next two or three years, we can expect to see income visibility, or we can say that the income from all these leases will continue for at least the next three years, pretty good. Now, in terms of its tenant breakdown, what I have here is that in terms of its trade sector, if you look – what I gather is this, it is pretty much diversified, it’s not concentrated on any single, or any particular industry, because it is quite well spread towards government sectors, which is known as public administration, we have financial services, we have people in the science industry, transportation, administration, construction, retail, manufacturing, IT, and entertainment, and so on, and so forth. So, it is not exactly quite biased towards any certain kind of industry, which is quite diversified, and of course, when it comes to its top 10 tenants; 37% of its top 10 tenants, — no, what I mean to say is the top 10 tenants actually account for to 37 percent of the total hit line rent of European Cromwell REIT, and most of them are actually if you can see, the most of them are actually from the government sector, especially the first one, which is from Italy we have that Agenzia Del Demanio which is the Italian State Property Office. So, they account for 15% of the total rent of European Cromwell REIT. So, that’s breakdown…
Stanley: Okay! So, essentially betting on the Italian government, for this: Yeah! I guess the dynamics is very strong and everything, from your investigation, are you able to see what’s the typical rental contract that they have, we see a lot of oversea REIT in Singapore where they have a rental reversion, according to say the CPI numbers or anything, do they have like such a step-up mechanism for their typical rental agreement?
Ian Tai: In a way, yes most of them have, in terms and they are basically indexed to the inflation, right so they are inflation adjusted or required CPI.
Stanley: But the problem is, Europe is not having much inflation some country may also be experiencing you know negative inflation, does that mean the rent will go down?
Ian Tai: Hopefully not, usually when it comes to a step up rent, it’s not exactly like it’s always like there’s a downside protection whereby, there’s the initial base rent, so that is like a minimum thing and then on the year-on-year basis, then only we add to its a inflation. That’s why it’s called inflation adjusted; if it’s negative, let’s say negative one percent in inflation rate, which is a deflation then our supposed year, will maintain the base rental rate for the following year. Yeah!
Stanley: Okay! Fair enough, I guess, I sort of can see it from your point of view; you know, why don’t you share a little bit about their financials, why do you like this REIT?
Ian Tai: Okay! So, in terms of its financials; first and foremost, it is actually pretty stable, ever since listed, it has been quite, it has actually generated quite a relatively stable income. Partly, I’m going to give snapshot of its latest 12 months financial results, so as you can see here, when it comes to the net property income; quarter three, quarter four, it’s about 21 million dollars, but then quarter one, quarter two, it has a step up, as you can see from quarter four 2018, net property income is about 21 million; quarter one 2019, that is a step up of 6 plus million euros, and quarter two 2019, net property income has again increased slightly to twenty seven point seven million Euros. this is because in the course of let’s say 2018, what quarter for 2018 to quarter one 2019, what happened was Cromwell European REIT has actually increased alright its property portfolio once again, it has actually completed a number of acquisitions; particularly in France, and Poland. So, this has actually contributed to the step-up in net property income for the REIT, and this has actually translated into growth, in terms of its distributable income, where the disputable income in quarter three quarter four of 2018, it’s about seventeen million, quarter one quarter two 2019, it has increased to 22 million, which is very positive. if I may continue on its – a little bit about its distribution; per unit quarter three quarter four is about one point zero eight cents, quarter one quarter two 2019, it’s one point zero two cents, although that is an increase in distributable income, there’s a marginal decline in distribution per unit, simply because Cromwell European REIT has actually exercised or undertaken rights issue to acquire these properties, and therefore it has enlarged its unique holder base, and therefore that causes a slight drop in DPU, alright by anyway…
Stanley: Yeah! I’m just going to stop you here, because I found something that I cannot resist I have to say, you mentioned it’s growing very well, but we see that – in a lot of – in many REITs, that’s one of the key problem of a lot of REIT’s, which is that you know, they grow their net property income, but because they are REITs, and they don’t have excess cash lying around, when they make acquisition, they always have to have private placement, or right issue and it ends up diluting the existing shareholders, so even if their distribution income is increasing, but as a unit holder, my distribution per unit is actually dropping, as the size of this REIT is increasing, don’t you see that as a negative rather than a positive?
Ian Tai: There’s a mix there, in terms of rights issue. So, for me, there are two sides to a coin. So, if I were to say from the positive, from one angle, let’s say we have Cromwell European REIT, initially it has that amount of properties, let’s say around like 90 plus properties, and finally, after having undertaken a rights issue, it has actually grown is portfolio to about hundred Plus properties. So, in that sense, you can say that the income will be much more stable, because instead of generating income from 90 over properties now, it has hundred over properties; more properties, more tenants. So, it actually reduces the concentration risk of each property, each country, and as well as each tenant, when it comes to its income generation, so I believe that in that way it adds to the stability of the REIT. So, that’s the positive part, but of course I do agree with you in terms of its negative, because sometimes it may enlarge the base of the unit holders, the number of units issued out to the market, and therefore it will cause slight adjustments, and usually the adjustments are downwards towards the distribution per unit. So, when it comes to this; of course, where we calculate our returns from our dividend yield, from this particular REIT, we have to exercise a little bit of caution, and we have to take into this as a consideration.
Stanley: Okay! So, what I’m hearing from you is, yes they are decreasing their distribution per unit, but as a unit holder, you don’t really mind because the whole REIT is sort of reducing in risk exposure, because it’s becoming more and more diversified more stabilized, is that fair to say that’s your point of view?
Ian Tai: In a way, yeah. You can say that.
Stanley: Okay before we go, before we continue as a disclaimer, you do own this REIT right?
Ian Tai: No.
Stanley: But it is something that you’re already looking at?
Ian Tai: I mean to say this is something that I believe that because it has good, it has the positive, and as well as some form of negative, I believe that is going to be juicy enough for us to have a discussion, that’s the reason I choose this REIT.
Stanley: Okay! Yeah, then since you already say that you don’t own this REIT, I’m going to press you even harder, what’s holding you back right now on this REIT, and not investing in them?
Ian Tai: Alright! That’s a very good point; I’m not too sure whether I should reveal this here. Well! Because I’m actually considering a real estate in Malaysia, because of that, I need cash for the down payment for the property.
Stanley: So, it’s more of personal reason rather than anything wrong with the REIT. Right!
Ian Tai: Yes.
Stanley: So, if you have all the capital in the world, this is definitely one that you don’t mind investing in as well? You’re saying.
Ian Tai: I don’t mind having a small position in this REIT, if I have excess cash. Yeah!
Stanley: Okay! Sure, before we go into the valuation path, I think a lot of people would be interested in how you value this REIT, just before we go into that, why don’t you share with us a little bit, what do you think is the most pressing risks with this REIT, for an investor who is looking at Cromwell right now?
Ian Tai: Okay, I would say that there are two. The first one of course is the currency risk, because the unit price will be denominated in Euros, the financial accounts will be reported in Euro, and if that’s it; for example, I’m investing from Singapore, I’m currently using Sing dollar, I’m investing my Sing Dollar into this REIT, I have to take note that the Euro has been depreciating against Sing Dollar for quite some time right now, so that could, if you want to measure your returns in Singapore dollars, then of course, you may want to take that into consideration, but since I’m a Malaysian, and I’m using Ringgit; of course, that actually differs, the point of view may differ, because from a Malaysian point of view, I believe that the Euro is a far more reliable currency as compared to the Ringgit. So, maybe it’s a chance maybe I will probably take, and that is, if let’s say for example, if you are a Singaporean, or you’re investing your Sing Dollars into Cromwell European REIT, then of course, do take mind of this currency risk. Now, the second thing which I think is more pressing to me is that, for me I’m a dividend investor, and I love to look at track record, I love to look at stocks track record, and I will assess it based on the 10-year basis, five to ten years basis, but Cromwell European REIT is relatively a new REIT, because it was listed on November 2017. So, in terms of this financial track record, it has shorter track record, as compared to other REITs. So, in that sense, I may put a little bit of discount for this particular REIT because of its short track record.
Stanley: Okay! Fair enough.
Ian Tai: Yeah!
Stanley: I guess it all links back to what we’re going to discuss right now, which is valuation, because everything has a price, if you say that there is all these REITs, and you know, if the possible return, the expected return from this REIT is high enough, or attractive enough, then the investor might be willing to take on that risk. So, why don’t you share with us a little bit about how you value this REIT, and you know, what’s your opinion on the valuation right now?
Ian Tai: Okay! So, let’s go back to, if I were to record back, what I’ve said about distribution per unit. So, q3 2018 is 1.0, q3 and q4 2018 is one point zero eight, that was before the rights issue, and after it has exercise its rights issue, q1 and q2 2019, it has paid out one point zero two zero cents. So, with that said, so in this sense, for me, I will actually ignore the one point zero eight, rather I would take the quarterly distribution, the latest quarterly distribution per unit of one point zero two Euro cents, as a basis of calculation. So, if let’s say I would take one point zero two Euro cents, which is the latest two quarters, and I will multiply by four quarters, I will get an annual distribution of 4.08 Euro cents. On the per annum basis, the current unit price is 51 cents, so if you take 4.08 and you divide by 51 Euro cents, you will get eight point one percent in terms of its gross distribution yield per annum. So, let’s keep that in mind 8.1%, so in terms of this P/B ratio, 51 cents current unit price, its net asset value per unit is fifty two point three cents, so if you take 51 cents, and you be divide it by fifty two point three, we have a P/B ratio of 0.975, basically it’s trading slightly below its book value. So, these are the two valuation ratios that I can give to your audience currently.
Stanley: Okay, and then based on this two valuation, I guess ratio, do you feel that they are quite undervalued at the moment, or do you think that they just fairly valued, because you can say that the price to book is below one, but sometimes it does not necessarily mean that its cheap, right? We’ve seen a lot of property companies, even this Singapore, and Hong Kong land, or right now, all the Hong Kong properties, they’re trading at 0.2, 0.3 book value, but I wouldn’t consider them as undervalued. So, you know what do you think of the valuation right now?
Ian Tai: Okay! So, this one is a bit tricky, because for me, I personally like to compare the current the current distribution yield and P/B ratio with its past track record, but unfortunately for this REIT, we cannot compare with it’s past averages. So, therefore we have to take another approach. So, if I’m the one investing, I will have to compare it with its peers, so it’s immediate peers is actually iREIT global REIT, or iREIT global. So, that’s another SGX listed REIT, which invests in properties; usually office towers, office buildings in Germany, by they only have five office buildings in Germany. So, if I want to compare iREIT global with Cromwell; I’ll still go with Cromwell, now I’ve already calculated Ivy global, in terms of its distribution yield zero, it’s again about eight percent. So, if I were to compare Cromwell European REIT with Ivy global, I’ll still take Cromwell European REIT, because of its large quantity of properties, and it is actually more active in terms of its acquisition of new properties. So, in terms of that, I will still prefer Cromwell, if I’m given a choice, but of course, if I were to compare it with other REITs that pay more than 6% in distribution yield, as I’m speaking right now, it could be an SGX listed China based property REIT, it could be something like BHG Retail, and maybe CapitaLand Retail China, or something like that, and maybe EC World, or stuff like that.
Stanley: I guess it’s totally different, why you would want to invest in say Capitaland China retail trust compared to the Cromwell REIT, right?
Ian Tai: Of course, I’m extrapolating it a little bit, because the common ground between the two is the distribution yield. It’s not exactly the geographical location of these properties, and in terms of this distribution yield, let’s say Cromwell is paying around 8%, and let’s say EC World is paying around 7%, I will still go with Cromwell, because most of its properties are free hold, and even if they are lease hold, they are like perpetual lease hold kind of properties. If I were to choose a China REIT, or China based REIT; they are predominantly leasehold properties, and their leaseholds are usually below 50 years.
Ian Tai: So, I’d still go with the European REIT.
Stanley: Okay! Wow! Cool, I think you shared a lot today you know, from what I heard, it’s definitely a very diversified REIT with quite high quality asset all around Europe, and both tenants, both geographical breakdown, they’re all quite diversified, but as an investor, we do have to take on the current risks, and also you know, if they are continuously building up the REITs, there will be some dilution risk for us as well. Would you agree with that?
Ian Tai: Yes.
Stanley: Okay! Cool. So, I guess do you have anything to add before we go Ian?
Ian Tai: I believe that what we have discussed is quite a lot already about Cromwell REIT, and of course, the addition depends on you now Stanley, whether or not you still want to [Unclear 32:57]
Stanley: No, I think we cover most of the basics, and I think you have convinced me that this is a viable option for investors looking to diversify away, from say if they already have a whole portfolio that is completely exposed to just one country like Malaysia or Singapore. This is a great stock for them to consider diversifying away, and yet still owning some quality asset as well. So, definitely I am so on the idea, once again, thank you so much Ian Tai, from bursaking.com; he is also one of our most regular contributor here at valueinvestasia.com. We’ll definitely have him back again very soon. So, thank you for your time Ian, hope to see you very soon.
Ian Tai: Alright! Thank you so much Stanley, hope that you guys have benefited from me.
Stanley: Alright! Cheers.
Ian Tai: Alright! See you.
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