Saturday 25 July 2015

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.


  1. Hi,
    I am a novice.
    Been reading and learning your post and thoughts for quite a while now.
    Can you advise where can you check for insider trader of listed companies?
    Any websites? Links?

  2. Hi Destiny,

    Welcome to my blog:)

    Insider trades are usually listed in the investor relations page of some companies' websites. Otherwise, the sgx website provides changes in interests of substantial stakeholders but it's a little more tedious to dig them out one by one, but it is still good information.

    Hope I have answered your question sufficiently.