Apr 24, 2016

Cory Diary : Dividend Investing ( Cap Rate, Convertible Bond and Capital Distribution )

This is my 2nd part on the topic of Dividend Investing. This week note is about Cap Rate, Convertible Bond and Capital Distribution which I did a quick exploration from recent reading of Suntec Reit 1QFY16 Results.

Key Highlights
1. Completion of Suntec City Phase 3 and Suntec City Office
2. Higher distribution per unit of 2.371 cents which was 6.3% higher than 1Q FY15
3.Capital distribution of S$4.0 million from the sale proceeds of Park Mall.

More cut and Paste from previous announcements that I manage to find.
  • "consideration of S$411.8 million (the “Divestment”),"
  • "Park Mall Investment Limited (“JVCo”) of which Suntec REIT has a 30.0% interest has been set up, to redevelop Park Mall into a commercial development comprising two office blocks and an ancillary retail component (the “Redeveloped Property”)", 
  • "Suntec REIT’s 30.0% interest in the JVCo", 
  • "As the consideration is based on the latest valuation of the Property, there is no gain on the Divestment when compared to the latest valuation of the Property."

The dividends it can generate based on 2,506,484,326 units have it not been sold is roughly  $13,961,117 for a year. If we apply to 1Q16 units using 2,526,912,798 number, this would have been reduction of 0.138 cents dividends.

4. Office portfolio stable in 2016
5. The debt-to-asset ratio stood at 34.7%
6. Construction of 177 Pacific Highway in North Sydney schedule to complete by the second half of 2016. More cut/paste from previous announcements that I could find. "Upon completion, the acquisition will be DPU accretive with a projected initial NPI yield of 6.9% in Year 1" , "Leighton Properties to pay a coupon of 6.32% p.a. during construction phase", "Leighton to provide a rental guarantee for 4 years for any vacant space upon completion"


Note 1: S$280,000,000 of Convertible Bonds due in 2018 which are convertible by holders into units of Suntec REIT at any time on or after 28 April 2013 at a conversion price of S$2.111 per unit.
Assuming the bonds are fully converted based on the adjusted conversion price, the number of new units to be issued would be 132,638,559.

Well, is quite an amount of work to do which I did not anticipate when I started my investigation this round. Every topic in the title worth their own page. And there is more to learn and dig further. However time is an essence and we need to strike a good balance between time and risk.

Question 1 : Convertible Bond Logic
There can be Bond conversion dilution if share price hit $.2.11. Assuming all converted, roughly 5% or more dilution. Share price increase will be more than 20%. Good problem to have.

Question 2 : Parkmall divestment logic
The dividends loss is due to the sale for a consideration of $411.8 million. On first look, is a DPU falls if we ignore the Capital Distribution of $4M. However with this amount it can funds the distribution for 100 quarters theoretically assuming ...., had it not use for re-investment or loan reduction.

Divestment/re-investment strategy makes sense considering the cap rate for Suntec Reit is rather low. Therefore viewing the Reit using Cap Rate alone is myopic without considering it's ability to rejuvenate itself while realising shareholder value in key locations. Capital Distribution is part and parcel of Suntec Reit attribute in it's returns as a whole we have to be accustom to.

What is Cap Rate ?
Capitalization rate, commonly known as cap rate, is a rate that helps in evaluating a real estate investment. Definition: Capitalization rate, commonly known as cap rate, is a rate that helps in evaluating a real estate investment. Cap rate = Net operating income / Current market value (Sales price) of the asset.

As it stands based on $1.73 share price with relatively low gearing, Dividend+Capital Distribution is roughly 5.5%. Is a 9.5 cents on my annual returns and/or buffer for market volatility. Long run I feel shareholder value needs to be protected which is something everyone should watch in dividend investing especially in Reits. With current information insights I found, is this good enough for me ?


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