TTI’s Thoughts (Jan 2017) + Sabana REIT & International Healthway Corporation

Here’s wishing all readers of SG TTI a fantastic CNY and a fruitful year ahead, both financially and in all your endeavors! I’m just back from a trip (again), and feeling as refreshed as ever.

Check this out:

This is a world heritage site: a massive crater that’s on top of a hill, that looks out to the vast sea. Simply marvelous. See if you can guess where it is.

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In the past several months, I’ve met up with some of my readers, some fellow bloggers, and many other investors. The people I’ve met literally spans across several age groups, with different portfolio sizes and come from all walks of life.

There’re quite a few accountants, 2 professional fund managers, 3 students, 4 IT professionals, a compliance officer, some guys who work in the media and quite a few retirees who are investing their nest egg.

Interestingly, both the fund managers (in separate meetings), asked me practically the exact same, sharp questions. All of which revolve around healthcare. Looks like they sure know what they’re looking out for.

I do have a confession to make.

I was initially very apprehensive about meeting any of you (which is why I turned down some and postponed many) because I thought that there’s surely a hidden agenda. I’m glad and sheepish, to report that nobody has tried to sell me insurance or some financial plan. Yes, I gotta try to be less skeptical of the good nature of people.

It’s like… the investing community here is just genuinely and sincerely interested to meet and know each other. I’m really surprised by that. In some meetings, I’ve arrived only to find that everyone seems to know everyone else. Almost like it’s a club. Yet, it’s not.

I’ve enjoyed the meetings immensely. Particularly the larger group organised by “sgmystique” from valuebuddies. I think we spent >3 hours discussing and debating, very passionately I’d have to add.

I don’t think you guys noticed it, but some of the other patrons from the other tables away from our cozy corner were peering/staring at us cos I think our discussions got a bit loud at times. There was a rather pretty girl who was seated facing us, but she stood up and changed to the other seat so that her back was towards us. I get the vibe that she’s not very interested in what you guys had to say about G.K Goh Holdings… LOL!

Anyway, I genuinely feel bad to be the guy who had to break up the meeting cos I had to leave. Otherwise, I think we’d be at it for yet another couple of hours…

Also, here I’ll apologize to Budget Babe (once again) (http://sgbudgetbabe.blogspot.sg/) for being very late for our meeting. I usually have an organized daily schedule, and I’m seldom very late. But I was for this, and I think it kinda screwed up her appointments after that too. No defense for that.

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While I was away, 2 events in our local investing scene caught my attention.

The 1st is the currently ongoing push by unitholders of Sabana REIT to vote out the manager. I received a polite email from a unitholder asking if I could participate. Somehow, people think I’m deep pocketed enough to make a big difference.

I did take a look at the situation, worked out some math superficially, but ultimately, I declined.

I really really hope the minority shareholders making a push for this, do succeed though.

We can debate about their compensation structure, but come on, look at the long term performance of Sabana REIT. There’s no denying that it’s been outright terrible.

In the managers’ defence,the industrial property sector is undergoing one of its worst periods in recent memory. I think it’s even worse than during the GFC, cos at least the GFC is a relatively short, albeit sharp, correction. This is kinda like death by a thousand cuts… and counting.

Sabana REIT’s manager said as much in this press interview:

http://www.straitstimes.com/business/sabana-reit-manager-to-meet-unit-holders

BUT, tbh, IMO the interview reeks of arrogance.  Mr Xayaraj is basically saying that the problems for Sabana is industry wide. (read: there’s nothing the manager or any other new manager could’ve done)

But that’s not completely true. Sabana’s performance is the worst amongst all related peers. Yes, the worst.

Of course, there’s always a reason to point to for poor performance. In all my experience looking at companies, I’ve never come across shitty management who says the reason for the poor performance is because they suck.

There’s always something to blame.

“It was only in the last three years that we had quite a number of leases that were not renewed, and many of them were converted into multi-tenanted leases. To find suitable, qualified anchor tenants, there are just not enough to go round in Singapore right now,” he said over the phone.

“There is a mismatch in supply and demand in the current economic slowdown, that explains why our distribution per unit (DPU) has been on the decline for the last three years.”

To stabilise the DPU, the Reit manager will continue to divest underperforming assets. It is in the process of divesting a warehouse-cum-office building at 218 Pandan Loop, which will be sold for a gain, Mr Xayaraj added.

Right. So master leases were converted to multi tenanted ones, and basically nobody wants to lease from them.

If a manager cannot foresee these problems, and correct them, then what good is the manager?

Yes, there are lesser anchor tenants around, but what about the other industrial REITs that have done better? What are they doing that this manager isn’t?

Finally, divesting assets to stabilise the DPU, is like saying “oh, the arm has a cut so we’re going to cut it off to stop the bleeding.” Unitholders don’t want to “stabilise the DPU”. They want to increase it.

If what they do want is just to “stabilise the DPU”, why not make the DPU…. zero. That’s as stable as it can be.

He emphasised that the manager’s fee structure is “in line with market practice in the Singapore Reit sector”, and offered another perspective on the recently completed rights issue: “Certainly the rights issue has strengthened our balance sheet. It was a great success, and two times subscribed. Even better than our IPO subscription.”

Does anyone seriously think that it’s over subscribed because unitholders are clamoring for more units because of the excellent performance of the REIT?

The simple fact is that the exercise price is substantially below that of the market price, and unit holders do not want to get diluted. We can argue whether it’s a smart move or not, but that’s not the key.

The key is that they were almost strong armed to subscribe. These same subscribers would be clamoring to sell once the price rises and they could “break even”.

Ultimately, I declined to participate because:

1. I have minimal experience with REITs and their structures.
2. I’ve already committed funds elsewhere, any new idea will have to be amazingly compelling.
3. Honestly, I think the odds are stacked against the MI. (Sorry, but that’s just the nature of the world. It’s not fair, and never will be)

“Asked how Sabana Real Estate Investment Management would act if unit holders decided to press on with requesting a meeting to vote on its removal, Mr Xayaraj said: “We will comply with the relevant rules and regulations, and if it ends up in (extraordinary general meeting) voting, then all unit holders are entitled to exercise their voting rights.”

The Reit manager would exercise its votes as well, he said.”

Unless big boys come in to support this movement to remove the manager, it’s tough to win, even if they get an EGM going.

Having said all that, from an investment perspective, it may not be a bad one. The share price has tanked to multi year lows, and it is substantially below the market value of it’s assets.

My declining to get involved is simply a reflection of my lack of knowledge in this sector, not an opinion on the actual merits of Sabana REIT as an investment, at this stage.

As they say, knowing what you don’t know is probably much more important than knowing what you do.

The 2nd incident is that of International Healthway Corporation and all the saga in the news. I followed it with great interest because sagas like these can sometimes be great for finding value.

One of the best investments I’ve made was in Tepco sometime back, when the earthquake and tsunami struck, causing the nuclear plant/radiation fallout. My investing thesis then was that the markets think Tepco would go bankrupt under the liabilities from the nuclear fallout, but the markets didn’t realize that the Japanese government would backstop them because they just cannot afford to let Tepco go under.

So I do look out for such “difficult situations”.

I can’t comment too much on this intelligently though, because although this is somewhat healthcare related, IHC behaves more like a property developer or manager rather than a healthcare player.

It just so happens that the assets are healthcare related.

On top of that, they’re not local assets, so my knowledge of it is further crimped.

I am still in the midst of doing DD on this, but superficially, my initial thoughts are that IHC’s assets are currently earning next to nothing on it’s returns. Most of IHC’s earnings come from revaluations, which can be quite crazy. One of them that I briefly looked at, had a 500% revaluation gain in a single year.

LOL! Maybe I oughta look more carefully. That asset must be in Zimbabwe.

Yup, the wealthiest country in the world, where you need to be a multi billionaire to enjoy a banana.

Where the people are so rich, they use money as toilet paper:

The dreamland where inflation looks like this:

1300% inflation rate. Yup, that’d explain the asset’s valuation gain.

Damn. Why do these iffy management think they can get away with doing shit like this?!

It’s almost funny if you really think about it. I wonder what they talk about during management meetings. In my work, I sit through management meetings every week. I betcha theirs would be a lot more fun than mine.

The healthcare company that I’m working in currently, is likely to do an IPO in the somewhat near future. It’s highly likely in fact. I hope we don’t ever screw up as badly. And even if we do, it won’t be for lack of trying. Or a lack of integrity.

As an industry insider, I actually have a lot of in depth knowledge of our local healthcare sector. I wish I can talk about it here in greater detail, but I can’t. Or rather, shouldn’t.

I will say that most of the analyses (most, meaning >50% of the time) that I’ve read, either in blog posts, in forums or even in analyst reports, are either misguided, looking at the wrong things, 1 dimensional and sometimes, just outright plain wrong.

1 particular blog report that I’ve read on a local healthcare company, is SO plain outrageously ridiculous (to me), that I even shared it with colleagues in our internal whatsapp group, and we all had a good laugh at it. Seriously. Even the colleagues who are working in the mentioned company had a good laugh. (Of course, I can’t be rude and link to it here.)

Yet “investors” read stuff like this, some even believe it. It does look credible to the noob on the streets. I shudder to think that these guys doing this analysis are running courses and teaching others how to, errr think like them. (To be fair, only their qualitative analysis is so wrong that it is funny. Their quantitative part, albeit backward looking and simple, isn’t wrong)

Anyway, back to IHC. The Oxley and Quarz capital guys have done a good job kicking out the previous management, of course with the help of disgruntled minorities. It’s hard to not have their support, seeing how the previous management had screwed it up real badly.

My only issue with Quarz’s plans… is that they all revolve around realizing the stated valuations for IHC’s assets. Stuff like hiving off assets into a REIT, selling part of the land parcel to recognize the value etc do not improve the OPERATIONAL efficacy of the business.

It’s how an investor would think, but not how a business owner would.

On top of that, there’s also the big question mark of the $100mil bond that IHC may have to pay back if the convenants are breached. Since nobody knows where OUE got it’s stake from, and what they intend to do with it, it’s hard to predict if the bond needs to be repaid.

Again, I’ve only superficial knowledge of this issue currently (I did just return from a trip, didn’t I?) so my thoughts may, and in fact, most likely would, change as I start to investigate further.

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On a separate note, it’s interesting how once you have a vested interest in a company, any news that you read that affects the company, immediately catches your attention.

I’ve previously described my positions in Dutech Holdings, so when this came up, it caught my attention:

http://www.channelnewsasia.com/news/world/eu-slaps-china-with-new-steel-anti-dumping-duties/3472612.html

Now, this oughta keep steel prices contained in the immediate to mid term. If China has difficulty off loading the steel produced in the country, they’d have only 2 options:

1. Limit steel production by the producers
2. Lower steel prices to stimulate demand

Well, theoretically there’s a 3rd option, which is to find novel new ways to utilize steel, so as to create new avenues for steel demand, but since steel is an age old material, there’s no easy new way to massively increase demand with new avenues.

Option 1 is also tough as the producers themselves are in a tough spot. Many would be laid off if the economy switches to a true free market tomorrow, and everything is guided by supply and demand.

The Chinese government cannot have these producers going under in a broad way. The implications would be catastrophic. Many loans would go sour, the banks would be insolvent. Not to mention the massive layoffs in some steel towns, and that’d lead to unrest and anarchy.

So IMO, the steel prices would have to moderate somewhat from here. It has been rising rather rapidly in the 4Q16 as I’ve mentioned in my report on Dutech Holdings. Low to moderate steel price is a good thing for Dutech, obviously.

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Anyway, that’s all I have for this post. It’s time to start getting into the groove of things, feels weird to have been disconnected, even if it’s only for a couple of days.

As always, have fun hunting!