Sunday 4 February 2018

Potential Replacements for GLP

After it became clear that Global Logistic Properties (GLP) would be privatised, I have been looking for a replacement. The investment thesis for GLP is that it has a REIT manager business model, constantly developing new logistic properties and spinning them off into REITs and private equity funds. The more properties it spins off into REITs and funds, the less it owns them, and the more it resembles Uber, which owns no taxis but is considered the world's largest taxi company. See The GLP Story for more information. Thus, when I look for a replacement for GLP, I am looking at a company with a similar business model.

The easiest leads would be to look at the REITs listed on SGX and identify who are the REIT managers behind them. There are a couple of REIT families, managed by ARA, Ascendas, Capitaland, Frasers Centrepoint (FCL), Keppel Corp, Lippo/OUE and Mapletree. Among the names mentioned above, only Capitaland, FCL, Keppel Corp and OUE are listed on SGX. Keppel Corp is a conglomerate with many businesses, and the key consideration in deciding whether to invest in it is the prospects of its Offshore & Marine business, which is still in a decline. See Is A Recovery for Oil & Gas Shipbuilders Near? for more information. As for OUE, it does not appear to have many properties in the pipeline to inject into the REITs. Thus, only 2 companies from the above-mentioned list are up for consideration as replacements for GLP.

Among the 2 names, FCL is actually the most promising in terms of business model. It has REITs and Business Trusts covering all major property segments -- office, retail, hotel and industrial. Besides rolling out new REITs/ trusts and injecting properties into them, it has also been acquiring new properties with the intention of injecting into the REITs/ trusts subsequently. In addition, it also acquired stakes in like-minded companies that manage REITs. It has a 39.9% stake in Golden Land and 41.0% stake in TICON. Both companies are property developers in Thailand and manage property funds and REITs.

However, the key concern with FCL is its debt levels. As at end Sep 2017, its debt-to-equity ratio is a high 89.1%. That is not counting debts residing in joint ventures and associates, which are reported on a net asset basis instead of separate lines for assets and liabilities. I had been deliberating on FCL when it was trading at $1.66, before finally initiating a small position at $1.92. However, the high debt ratio proved to be too much of a concern and I sold at $2.07. It is a pity and I hope it would reduce its debts progressively before I consider buying again.

The other REIT manager that has fairly extensive scope but is less aggressive in terms of debts and acquisitions is Capitaland. It has REITs in office, retail and hotels but not industrial properties. Its debt-to-equity ratio is a less demanding 62.4% as at end Sep 2017. Business-wise, there is nothing to fault Capitaland. However, I remember the lessons learnt from GLP, which is to buy it cheap even though the market price is within valuation limits. See Bye Bye, GLP! for more information. I decided against buying at $3.50 even though the Net Tangible Asset value is $4.16. This stock will be on the watchlist.

Other than these 2 companies, there are 2 outsiders to the list. The first is Straits Trading. Most people probably would not associate Straits Trading with a REIT manager, but it has a 20.1% stake in ARA and a 30% stake in Far East Hospitality, the REIT manager for Far East Hospitality Trust. It also manages 2 property funds. It is not yet a big-scale REIT manager. I bought a small position at $2.38 just to keep track of its developments. However, its recent developments have been disappointing. Its latest move was to invest $106.5M into a Japanese property fund managed by some other fund managers. I am looking for a REIT manager that sells properties to other investors and manages their funds, not the other way around. I sold it last Fri at a small loss at $2.31.

The other company that I considered is Boustead Projects. Although not a REIT manager, it has been carrying out a couple of Design-Build-Lease projects. Under such projects, Boustead Projects would design, build, and upon completion, lease the buildings to clients for a long period of time. Such portfolio of properties could be spinned off into an industrial REIT. In fact, there were suggestions for such a move, but the portfolio was considered too small to be an independent REIT. Moreover, considering recent market developments of consolidation among smaller industrial REITs into larger ones, the plan to spin off a REIT might be too little, too late. I am still monitoring, through my position in Boustead, which owns 51.3% of Boustead Projects.

In conclusion, after 6 months of searching, I still have not found a good replacement for GLP. It is difficult to find a capable replacement for a good company. This is why I usually do not like privatisations, even though they might offer a good price for the company.

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  1. How about F&N? Look like solid business model with ThaiBev

    1. Thks for your suggestion. F&N and ThaiBev are good F&B companies, but I am looking for a company in the REIT management business.

    2. Actually Im holding few Keppel REIT. I feel difficult to grow because is big enough. How you think?

      I very enjoy reading your articles. Waiting for your replacement selection for GLP.

    3. I haven't been following Keppel REIT since I sold it a few years ago. I understand they bought some buildings in Australia, but given the high prices of buildings nowadays, they are more conservative in buying new buildings and expanding.

  2. Have you considered Hong Kong land / ascendas India trust? Love to see your analysis on them.

    1. I'm not familiar with both. But when I look at Mandarin Oriental, I suspect that it is undervalued mainly because capital values for buildings in Hong Kong have gone up significantly. If they are not selling, then the high capital values for their buildings are also useless. The same would apply for Hong Kong Land's office buildings.