ARA US Hospitality Trust: 1H2023 Update

ARA US Hospitality Trust has announced its 1H  results without any major surprise.

Summary

• Downward Revaluation of US$6.7million (approx -1%)
• Revenue Growth due to Higher Occupancy Rates in its Hotels
• Leverage Ratio Grew to 39.7%
• Dividends grew by 2% and now stands at 1.5 US cents per half a year (Dividend Yield of 8.5% at current price of 36.5 US Cents)

Business

The business of ARA US Hospitality is that it runs the hotel chains of the lower priced ranged hotels for the luxury brands of Hyatt, Mariott and Hilton in USA.

It has 37 hotels, at the 4 stars range and unitholders enjoy the dividends generated from these 37 hotels.

Prospects

US tourism has not recovered to its pre-covid levels and the hotel occupancy is still trending higher to 68.9% now. Overall, the occupancy of the lodging industry in USA is still 2% lower than where it was in COVID. Hence, for ARA US, it shows there is still some room of growth in occupancy which leads to more revenue and dividends.

Personally, I think ARA US will be able to grow to 1.6 US cents per dividend per half a year. 

Debt Profile

ARA US trust's cost of debt has risen tremendously due to the rising interest rates (from 3.8% to 4.6%). I expect it to rise further to the 5.0% mark which will erase all Gaines made by its higher occupancy and improved hotel room charges. This means diviends will remain constant.

I am not worried about the short maturity of its debts because refinancing it now will yield a loan of about 5.5% which is not far from its current servicing interest rates. However, when the US Fed starts to lower interest rates, like all other US REITs, I expect dividends to grow fast which is good news for dividend investors.

All in all, ARA US Hospitality is a decent propect to own, a trust of a leverage ratio with sufficient buffer, 8% dividend yielder with prospects to grow its dividends further. Similar to other US REITs, there are definitely a league above the Singapore REITs and USA is now a good place to own investments for Singapore dividend investors.

Will Sea Group Completely Turnaround a Profit?

This is a pre-post to Sea Group's Financial Results next week.

The question in a few people's mind will be if Sea Group is able to continue its turnaround and probably maintain a 400 million quarterly profit.

In my view, it is a yes. Here is my explanation:

E commerce platforms are like Tolls in Highways

E-commerce platforms are durable and profitable entities when scaled to a large enough size with traffic. The business model of e commerce platforms is that they take a cut for every sales transaction. They also earn from marketers/shops who try to advertise in it (Termed as Customer Management Segment). 

Alibaba is the best example where it is competing in a market of 1.4 billion chinese people. Despite having about 7 well known e-commerce platforms (of which alibaba owns 3 of these 7), there is sufficient scale for Alibaba to turn around a large amount of profit due to the homogeneity of the Chinese markets (US$20 billion per year).

Sea Group is also turning around now. As the largest of the 3 e-commerce platforms in South East Asia (home to a population of 687 million), Sea's Shopee seems to have turn around a positive margin and is now earning US$100 million per quarter via "tolls" on merchants who sell on their platform and advertising. That is a lot of money to be made.

With the growing scale and population size of South East Asia, I do feel Sea will be able to rake in about US$400 million per quarter, in proportion to how much Alibaba earns in China based on its reach and earning powers of the different regions factored in.

Downside- Free Fire Falls

In the start up stages of Shopee, Sea Group was able to capitalise on Free Fire's profit generation to shield the losses. However, this is starting to change with Free Fire (Garena) earning US$275 million vs Shopee's US$115 million based on the latest quarter.

I expect it to change where shopee will become the No 1 generator within this year and Garena becomes only a small time generator of US$50-US$100 million due to declining popularity.

Long Run- Definitely Profitable and a Cash Cow

In the long term, Sea Group (on its e commerce and gaming arm) is able to generate a billion in annual profits. Its a definite that Sea has grown into a group capable of delivering $1 billion in cash flow due to its success in branding; which I truly did not expect when asked about it 4 years ago. The company has proven me wrong and delivered. 

In terms of debt profile, with its cash cow of US$1 billion per year, Sea Group can comfortably pay off all its outstanding convertible bonds even if its share prices do not go above $100. Relying on its moat in being an e commerce toll machine which has become a durable branding with jingles most in South East Asia knows. 

The next step which I will not be surprised is the announcement of dividends which i believe would happen in 2024.

The digital services arm is a mixed bag and its next frontier. If Sea does well, it will create a digital bank that is the size of US$30 billion market cap. This is similar to the next step Alibaba took when it grew Ant Group by onboarding its merchants from Alibaba, knowing their sale profile and offering them financial services in factoring against their sales receivables; however with Grab/Singtel and Trust Bank being strong, I doubt reaching this goal is easy. However (again), Sea has proven me wrong once and therefore, they might indeed beat Grab and Trust Bank to be another no 1.

<Not Vested in Sea Group as the margin of Safety is still far>

Why I Will Continue to Buy Keppel Pacific Oak REIT

The post is to update my future direction of my growing my portfolio. To make it short, there will only be one stock I will accumulate until something changes and that is Keppel Pacific Oak REIT (KORE). Below are my explanations:

1. Strong DPU

KORE's portfolio occupancy has trended lower but on a small scale. Currently, it stands at 90.8%. While occupancy has slightly declined, overall revenue still grew as the increase in rents overcame the fall in occupancy. This shows KORE has the ability to maintain or slightly grow its revenue.

Secondly, KORE mentioned for every +50 basis points in the SOFR rate will lead to a decline of 0.066 US cents in dividends. The SOFR rate in US tracks the US Federal Reserve Rates very closely at a high correlation of almost 1. Therefore, I can assume that DPU will decline for about another 0.1 US cents. With 1H 2023 DPU at 2.5 US cents, we can expect 2H2023 DPU to be at 2.4 US cents. 

This means the forward expected dividends for KORE is about 4.7-4.8 US cents on a full year basis. At 4.7 US cents and 30 US cents share price, KORE is wroth its price at 15.6% dividends

2. Resilient Portfolio Tenants

Unlike PRIME and ManuLife, KORE has not seen a vacancy of a large tenant. With a low tenant concentration, KORE does seem okay

3. Leverage Ratio has not Increased to Dangerous Levels.

KORE's Leverage ratio has remained at 38.4% and there was no sudden downward revaluation. With a huge buffer in leverage and history of no adverse portfolio revaluation, the odds of a cash call from KORE is low; unless it is purchasing a new property which is rather unwise in this climate

4. DPU Rise in the Future

Post 2023, the Fed is looking at reducing its interest rates from a 5.75% range to around 3% range. With SOFR rate (the loan peg that KORE takes) following closely to the Fed rates, we can expect about 250 basis points decline, which will lead to about US0.3 cents rise. This means KORE can become a 5 US cents dividend yielder for a full year. Such an investment can yield me a large accretive yield, if it pulls through the current US commercial office crisis.

5. Moving Away from China 

One will notice I have a large holding in Alibaba and China based busineses, the purchase of KORE will help dilute it. It is a way of diversifying away.

All in all, KORE will be my main accumulator in which I will continue to add shares with the prospects of yield and capital appreciation.

Why Singapore Banks Reported Profit Growth and Which Bank is the Best to place a Deposit

In the latest financial report given by our 3 local banks, they have reported a high growth in net profits. This is largely due to growth in net interest margin (NIM) banks are reporting. In layman term, it is the interest rate they are lending out as loans minus the interest rate they are paying for deposits.

Just look at the net interest margin growth across our 3 local banks

DBS: 1H2022 (1.52%), 1H2023 (2.14%), Growth in NIM of 0.62%

OCBC: 1H2022 (1.63%), 1H2023 (2.28%), Growth in NIM of 0.65%

UOB: 1H2022 (1.63%), 1H2023 (2.13%), Growth in NIM of 0.5%

Across all 3 banks, due to the rising SORA and global interest rates, the interest rates these banks charge to their customers, consumers and companies are higher; HOWEVER, the amount of interest they are giving depositors has not increased as fast. As a result, banks are announcing a large net interest margin

Which was the Stingiest Bank?

While all 3 banks have given a higher deposit rates to its depositors, the bank which gave the lowest increase to depositors was DBS bank, which likely explains why their net profits recorded the highest growth. Below is a snapshot of their increase in deposit rates:

Deposit Rates

DBS: 1H2022 (0.38%), 1H2023 (2.19%), Growth of 1.81%

OCBC: 1H2022 (0.52%), 1H2023 (2.64%), Growth of 2.12%

UOB: 1H2022 (0.55%), 1H2023 (2.70%), Growth of 2.15%

What it Means to Us Individuals?

From the above snapshot, we can infer that it is better to be a DBS and OCBC shareholders because they have been able to report a higher net interest margin and DBS in particular, gives the lowest rate to its depositors and yet seems to have a loyal fan base.

From the viewpoint of savers, UOB bank is the best bank to place your deposits. This to me is validated by the fact UOB has the best savings account called UOB one account which gives a realistic 4-5% interest for depositors who use their UOB one bank account, credit card and credit their salary into the UOB One account.

It is surprising till now, many Singaporeans have not maximised the benefits of UOB one account and there are a few parking large amount of cash in DBS which is giving them a low deposit rate. It is evident DBS is giving a lower deposit rate to depositors by about 0.5%. This is a lot of interest foregone by depositors.

<Not vested in any of the bank shares and this post is not sponsored by UOB>

Invest in Foreign Assets which are Giving High Returns

Over the past few days, the Sing Dollar has weakened a bit. It has also made my purchase of an additional 20,000 shares in Keppel Pacific REIT slightly more expensive.

Overseas Assets are Providing Higher Returns

As mentioned due to the diverging interest rate environment between Singapore and the rest of most economies, the yields and expected returns from other countries' assets are double that of ours. Both China and US assets are providing double the expected returns against Singapore's (7%-15% vs Singapore's 3%-8%)

Japan an Example

Japan is an economy that has a 0% interest environment rate while other economies are going at 3-5% risk free rate. It is no surprise that this is one of the main factors that has made the yen depreciated about 20% against other currencies. I too am expecting the same thing with the Sing Dollar if our country's interest rate continues. This is an additional factor why holding foreign assets may be better

Weakening Interest, Time to Buy Foreign Assets

For context, the Singapore SORA rates are now falling which reflects a lower risk free rate. Personally, i think the high interest rate environment globally means the Sing Dollar will depreciate a bit more as our local interest rate is falling.

For Singapore investors, it is a good time for us to take advantage of the Sing Dollar strength to accumulate stronger yielding companies to supplement dividends. There is a whole long list of dividend companies for us to capitalise on such as the China state banks such as ICBC (HK:1398), ABC (HK:1288), CCB (HK:939) or the foreign REITS such as Ireit, Keppel Pacific, Elite Commercial, Utd Hampshire (all listed in SGX). Beside me, a few bloggers have good evaluations in Ireit and Keppel Pacific.

Look to China and USA For Better Investments

Over the span of a few months, there are 2 interesting observations.

Better Yields Found in China and USA

If one follows FSM latest offering, FSM is offering 4.5% interest on USD cash for Singapore accounts. This shows how much interest can be earned on USD dollars. Similarly, among SGX-listed US REITs, it is noticed even the presumably safer US REIT such as United Hampshire is offering a 4% yield higher than S-REITs.

In China, the state own entreprises which extends beyond the large China state banks (such as China Construction) are offering 7-8% dividend yield. Ping An, the largest China private insurer is offering 5.5% dividends; compare this to Singapore's Great Eastern which is offering a paltry 3.5% dividend yield. Do note most China State own enterprises and Ping An are trading in Hong Kong Dollars.

This shows how good yields are in these countries as compared to Singapore.

Sing Dollar (SGD) is near all time highs against USD and HKD

The second thing that helps us local investors is that our SGD has been unusually strong against USD and HKD. This offers Singaporeans a chance to buy these stocks cheaply.

With such an opportunity based on these 2 observations, it makes sense to change some SGD into foreign currencies to snap up the higher dividend yielding comparables. I would be capitalising on these 2 observations to purchase more foreign assets.

I do not forsee SGD to be continuously strengthening and going to the 1.25 range against the USD/SGD. This is because a too drastic appreciation will affect Singapore's economic competitiveness. So it is unlikely for SGD to appreciate much more than what it has done.

Prime REIT: A 18% Dividend Yielder for Accumulation

PRIME Reit has fallen due to the Manulife Saga where the latter did a surprise downward valuation on its properties.

To clarify my doubts, I had emailed PRIME Investor relations and received a reply that the REIT is not conducting a valuation exercise for this upcoming 1H results. The usual will be done year-end In addition, the REIT has spoken to valuers and auditors and no material change is expected. 

Safe For Now

With this, we can be sure for the next 6 months, PRIME will not be breaching any financial covenants nor MAS's regulatory limit. 

What's Next for 2024

Naturally with the expectation of a 0.5% hike from the Fed and the worsening of the US office rental situation, it is definite the capitalisation rate for PRIME properties will rise by at least 0.75%. Currently the valuation of PRIME's property are going at a Cap rate assumption of 6.25%-8.50%. It is likely for this year's 2023 annual report, we will see cap rate assumptions of 7.00%-9.25%.

With this, one can expect property valuation to decline another 12% from PRIME's reported segment. Therefore the leverage ratio will likely change from 43.7% to 49.7%. This means PRIME should just be slightly below the regulatory limit.

However after 2024, cap rates should fall because the US federal reserve is expected to reduce their interest rates from the last quarter of 2024.In this sense, 2025's cap rate should not increase but reduce a little.

Expected Dividends

Dividends wise, I am expecting 1H2023 to report in a 2.0 US cents dividends. However, with the rising SOFR rate which its loans are pegged to, one should expect some decline in dividends in the 2H. Hence I'm expecting a 1.5 US cents for 2H 2023. This brings the total of 3.5 US cents, equating to a yield of 18% at current price.

All in all, its a REIT that can be considered. However, investors should set aside some of the dividends they receive in case equity raising is needed by the company if conditions deteriorate.