Divestment of Cache Logistics and Keppel DC REIT

I did a portfolio update back at the end of last month about what I intended to do with the existing holdings. I did a write up mentioning how I would close out the Keppel DC REIT and/or Cache Logistics Trust positions if share prices ran up. And so it happened for Keppel DC REIT right after the announcement of strong results, the next morning the share prices surged, rising from $1.06 to $1.08 in a day. This was in contrast to the languishing REIT universe, perhaps due to the impending interest rate hikes.

My take on this is that until the rate hike is announced, it is likely that the REITs will continue to stay weak and subdued, with fear stemming from the uncertainties of the rate hike timing. Markets hate uncertainties, and will punish those assets perceived to do badly in the worst case scenario. 

Here are my opinions on why we observed the diverging sentiments Keppel DC as opposed to other REITs.

Keppel DC REIT

Keppel DC REIT is probably perceived to do well comparatively against the other REITs, given its strong balance sheet and fundamentals. The phenomenon we noticed I believe is due to funds moving out of REITs which were perceived to do badly in rising interest rates into cash-rich firms or companies with strong fundamentals. As I had mentioned in a previous post, in an environment of rising interest rates, REITs with a strong interest coverage ratio, with lower average debt costs and low gearing would do comparatively better than other REITs. This are the 3 key criteria I look out for in REITs in a rising interest rate environment, and Keppel DC REIT checked all the boxes. For the reasons on why Keppel DC REIT, check out my previous post here.

So if I felt that Keppel DC REIT would do well, why did I divest? Well, on hindsight, it was more of a mis-timing on my part, with REITs doing poorly all around, the expectation that this rally was short-lived led me to believe that Keppel DC REIT would test the previous high of $1.08 and fail to break out. So I took profit at $1.075 and soon realised a few days later that it was a mistake. I had also wrongly predicted that the REIT would stay weak until the rate hike, which is widely expected to be announced in September, therefore in turn allows me an opportunity of a better entry to get back in. However, the stock defied gravity of negative REIT sentiments to surge on, even continuing to surge after it went ex-dividend. I don't believe in buying higher prices which may be prone to huge corrections after a strong rally, and so there was I, kicking myself for letting go too early.

Cache Logistics Trust

Cache Logistics was a disappointment on many fronts. I had wrongly predicted that prices would rise from the previous low of $1.13/1.135 towards the high of $1.20 which happened many times before, clearly obvious in its share price chart.

I had also ridden on this for a couple of times successfully, buying at $1.15 back in October 2014 to selling at $1.19 within the same month. I repeated my tactics in early 2015, buying Cache Logistics at $1.145 per share, and selling at $1.20 after holding for slightly more than a month. And then most recently in mid March, I took advantage of the FOMC meeting jitters to buy at $1.15 again and selling the shares at $1.20 after Cache Logistics results were announced.

This time, I tried another time, putting in 3 times the usual amount of capital and waiting for a strong rebound in prices. The moment came a few weeks later, but the strength in the rally was clearly weakened by the hidden selling pressure. I had realised this as early as towards the end of June, when selling pressure continued to pile onto Cache Logistics Trust, selling into strength of any uptick in prices. This was unlike the uptrend movement I experienced previously, and this got me a little suspicious. A quick check with insider trades of Cache Logistics Trust revealed the following.

As if the already weak sentiments of REITs are not enough, there were many insiders selling their stakes into the market, BNY Mellon was one of the major sellers along with sponsor CWT Limited and C & P Holdings selling rather large stakes as well. A quick check further earlier in history showed CWT and C & P Holdings did sell stakes before, albeit always together, but at much lower stakes than recently. The situation was further exacerbated by BNY Mellon and the other investment firms selling their stakes all within a day. The large amount of shares suddenly introduced into the market has allowed more shares in circulation, which means any buying pressure would be absorbed by the large amount of shares sold into the market. I had observed liquidity of Cache Logistics shares had always been lightly traded, with only about 4 million shares traded in its highest volume day, usually the average was about 500k shares a day worth of volume. This time volumes were higher, (highest almost 8 million shares traded!) which validates my observation.

If we look at the recent volumes to the right of my cursor, average volumes are noticeably higher since the beginning of June 2015. This is in contrast to the volumes experienced to the left of my cursor in the earlier periods.

Furthermore, the recent quarterly results revealed weaker fundamentals which I have not expected. The distribution was announced to be the same steady amount of 2.140 cents this quarter, but do not let the numbers fool you into another quarter of steady DPU (distributions per unit). This quarter's distribution includes the contribution from the recently acquired Australian properties as well as a partial capital distribution from the divestment of the Kim Seng warehouse on top of the usual income from its existing properties. One would expect distributions to be much higher than the usual 2.146 cents the previous quarter, but alas the distribution was a disappointing 2.140 cents. This is after it has geared up to an uncomfortable 36+% gearing, which leaves little room for growth in future DPU. Further investigation into the announcement of the Australian properties acquisitions revealed nothing was mentioned about the properties being yield-accretive, instead mainly focusing on how this diversifies the portfolio of assets geographically. Therefore, I can conclude the acquisition resulted in Cache Logistics be ing much higher geared with no net improvement in distribution, something I am very disappointed with. The results also revealed the lower distributions to be due to the conversion of properties from single tenanted to multi-tenanted, and the resultant higher expenses of the conversions. One good point to take from this, however, is that the conversion expenses is likely to be a one-off expense and not likely to affect the sustainability of the DPU.

Perhaps I am reading too much into it, but the price movement of the counter persistently showed it was clearly rather weak, failing to breach the first hurdle, the resistance of $1.16. In the earlier sessions, it was not too long before the resistance was breached, before easily gaining ground towards the stronger resistance of $1.20. As we can see from the price chart, the resistance of $1.16 was tested 3 times but failed to break through. I had tried to sell my holdings at this level multiple times, but to no avail. So I did the next best thing, I sold my entire stake in Cache Logistics at $1.155 to preserve my capital as I have a feeling once the stock goes ex-dividend, there will be persistent weakness in the stock. Will that happen? Only time will tell, and I will be ready to get back in once the price is right.

I did not gain much from the trade, but it was a worthy lesson for me. Doing the proper research into insider trades as well as diversifying instead of putting all your eggs in one basket even when you feel pretty sure that it is going your way is inevitably taking on a large risk. Only one man has been able to do that, and do it so well, and that man is Warren Buffett. I definitely cannot say I did as deep a research into a company as he did, so its much better for me to diversify instead. I am perfectly alright with lower but yet decent returns.

Shale oil drillers' lifeboat won't last much longer

Before last year oil price crash in 2014, many oil producers bought insurance on their selling price of crude oil at approximately $90 or more, most above $100 per barrel. This was to protect oil companies from oil price shocks like the one the world suffered in the past year. Now this insurance is expiring this year.

Maybe this year is what OPEC is waiting for. The year where majority of the oil price protection would give way, and many oil companies, particularly the smaller ones, would be vulnerable to the low oil prices. We can imagine OPEC eagerly waiting for this moment where many of the shale oil producers start to fail and disappear from the market, enabling OPEC to consolidate further market share from the US producers, while enduring low oil prices which were hurting their country's economic budgets. But it is probably worth it, as they renewed their efforts to continue pumping supply into the market even at depressed prices.

The purpose of buying such hedges was not so much of the protection of the margins, but more of the buying of time for these shale oil producers. The transfer of risk to counterparties has allowed producers to focus on cutting costs and on more efficient oil-producing regions before the day of reckoning is about to begin. For many companies, this allowed them time to cut back on the number of oil-producing assets, particularly the inefficient ones, which were more vulnerable to the tighter margins that is to come.

For oil exploration company SandRidge Energy Inc, the protection from such hedges was so crucial that it had made up at least a whopping 60% of the company's income for the quarter!

Now with the insurance expiring this year, such oil producers could buy insurance at the current price of around $50 per barrel, which may not make sense, unless the oil prices continue to decline. Or perhaps they may not protect against the prices, and focus on delivering profits on the already squeezed margins. Whatever the decision made, the true test for oil companies is beginning to unfold.

Some oil companies may, however, continue with hedges, as they see it as a form of insurance and part of the business costs, to protect from sudden shocks of the oil market.

Unfortunately, the situation may be about to get worse. With the hedges expiring, the risk grows and creditors would be much more cautious when it comes to lending more debt to oil companies, particularly so since it is likely oil producers would be facing a tighter cash-flow from then onwards. This is a double whammy for shale oil producers, which may need not just fight for margins and market share in the already weak oil market, they have to contend with the tighter credit lifeline. 

How I hoarded $20k in 9 months

9 months is a significant milestone for many, from the birth of a beautiful baby from conception to the faces of proud officer cadets in the passing out parade after months of tough training. 

It is of no exception for me, as I have managed to save $20k of savings from my salary alone over the same period. This is excluding CPF contributions, allowances to parents, contributions to the company stock plan as well as miscellaneous spending.

For better understanding, many would ask what my current salary is, given it is the main contributor to my savings at the moment. As a fresh graduate of almost a year into my working life, I am considered to be an average wage earner amongst my peers, getting about $2k after accounting for CPF, stock plan contributions and allowances to parents.

So in 9 months, simple maths would mean that I had managed to save about $2.2k per month. Now, that is funny you might say, how was I able to save even more than how much I take home from my day job? And to add to that, I have not even accounted for miscellaneous spending, which would result in me saving slightly less than $2k per month.

First, the year end small bonus did help a little, but that only added about $1k to overall savings, after the pro rated adjustment as I started work only from the second half of the year onwards.

Second, I was able to limit miscellaneous spending, partly because I am not seeing someone currently, and that helps me to save a fair bit. Spending at lavish restaurants and clothes are basically limited to only moments that call for celebrations and limited by necessity respectively. I am currently living with my parents so that cuts down on a major cost, i.e. rental and that also takes care of utility bills and dining options. The next bigger expenditure would be lunches during workdays, which I have always brought my own lunch to work wherever possible. Same goes with my breakfast, eating a simple bread and spread suits me better than having an oiler alternative in my company in-house canteen. On days without home-cooked lunches, spending at the in-house canteen is relatively cheaper, limited to $3, as compared to my peers working in town, where prices of food range from $4-5 to the high tens.

Third, where we put our money to work provides an invisible helping hand to our finances. We might not think that the income is substantial, but do not underestimate the power of compounding returns. Do refer to my previous post on the power of compounding for more information.

http://a-dividend-simpleton.blogspot.com/2015/05/with-great-discipline-comes-great.html

Where we put our money would depend on which gives us the biggest bang for our buck. On the back of miserable interest rates provided by bank saving accounts, it may seem a daunting task to get higher returns for our money. Fortunately, OCBC's 360 account had provided me with probably the best solution so far. Most of my idle cash is currently with OCBC, where I feel is the best interest paying account for my situation at the moment. Do refer to this post for more information.

http://a-dividend-simpleton.blogspot.com/2015/05/ocbc-changes-terms-of-ocbc360-account.html

It has been less than a year with OCBC360, but it has been largely rewarding so far. It has been providing very good returns for the almost no risk taken. Seriously, where can we get that kind of deal? It has been so significant that I found myself considering whether the opportunity cost of taking funds out of the account to invest into certain counters for a potentially higher return, BUT this involves taking substantially larger risk!

Fourth, my investments has helped to play a role in providing some spare cash to cover for much of my expenses. I would consider myself lucky to have my strategies working out so far, and am currently reviewing all strategies as I go along. However, the risk aversion in markets currently is a tricky environment to navigate and I think there has to be a greater consideration for risk management has to be part of my future strategies.

And there you have it, this was how I did it. It requires quite a bit of discipline and patience, but delaying instant gratification would definitely provide for a stronger platform to grow your wealth much significantly in future when the power of compounding kicks in. If Dividend Simpleton can do it, so can you!