Sold my last remaining REIT: Daiwa House Logistics Trust (DHLU)

In my 21 June post, I list all the REITs I sold. In the final paragraphs, I explained why I kept Daiwa House Logistics Trust (SGX:DHLU) in my portfolio. However, after some thinking, I also sold this last remaining REIT.   

On 3 August 2023, Daiwa House Logistics Trust presented its financial results for the first half-year of 2023. Link to the PDF of their presentation. The REIT is doing well, with 100% occupancy of its properties reached. The income growth looks satisfactory in Japanese yen terms, while the already low leverage has dropped even more. We can almost conclude that DHLU is a worry-free REIT until we reach the last part of the presentation. Management presents 28 pipeline properties suitable for inclusion into the REIT: 16 in Japan, 12 in Vietnam, Malaysia and Indonesia. These properties are all built by the REIT sponsor Daiwa House Industry Co., Ltd. This is the first time management included such a detailed list of potential acquisitions in its presentation. The message is clear: we can expect acquisitions from this pipeline shortly. This realization made me reconsider my holding. 

As we know, REITs have to finance new acquisitions by issuing new debt or equity. I am not excited about the idea of a rights issue. The share is currently priced at P/B = 0.74, which means a rights issue near the current stock price will be dilutive for the existing shareholders. Let's start with a general observation about P/B ratios. The book value of equity is often prone to manipulation by management, for example, by not writing down goodwill or inventory entries to reflect reality. However, DHLU's assets are modern, fully tenanted warehouses with straightforward valuations. Therefore, I consider DHLU's book value per share a good estimation of the value per share. 

Consequently, when DHLU would issue new shares at P/B = 0.74, it essentially sells a dollar for 74 cents. Warren Buffett buys back shares of Berkshire Hathaway when they are below his estimation of intrinsic value in order to create value for the company. Issuing shares below intrinsic value is the exact opposite and destroys value. Of course, I could participate in a DHLU rights issue to profit myself. However, my existing shares will still be diluted in value. My net benefit will be negative unless I buy a whole bunch of new shares. That would equate to doubling down, a dangerous psychological rabbit hole which I always avoid.

Will management wait until P/B = 1 before expanding the REIT? I doubt it. DHLU was initiated by its sponsor, Daiwa House Industry Co., Ltd., a prominent Japanese developer. The latter's incentive is creating a vehicle to purchase the warehouses it builds. The developer can then use the sales proceeds to build more properties, which is its primary business. The sponsor is not in the business of offering an optimal financial product for third-party investors. Of course, this observation applies to most REITs, and legal restrictions are in place to regulate the resulting conflicts of interest. However, it's good to be clear about the sponsor's incentives. Daiwa House Industry Co., Ltd has a stake of only 12.5% in the DHLU. The Related Parties Shareholding is one of the few weaknesses REIT-TIREMENT flags in its analysis.

Lastly, I have some concerns about this REIT's momentum. The REIT is among the last to be listed during a long Singaporean REIT glory period. The overall sentiment around REITs has turned more negative lately. DHLU's investors are mainly Singaporean private retail investors. We know this from the Annual Report 2022, in which a list of the Twenty Largest Unitholders are mostly nominees connected to retail brokers in Singapore. Private retail investors generally don't hedge currency risks. This means DHLU's share price is susceptible to the JPY/SGD exchange rate. Exchange rates are impossible to predict.

Adding to its fragility, DHLU has a modest SGD 400 million market cap. It's hard to see how DHLU would leap to the premier league of large REITs suitable for institutional investors other than by issuing shares and acquiring warehouses. Lots of them. Perhaps all the 28 pipeline properties. However, as explained, I do not support such rights issues. Not to even talk about issuing debt, which can be even more risky considering the current interest rate environment. 

In summary, we have a paradox. DHLU needs to grow, but I don't want them to expand. Damned if they do, damned if they don't. I chose to step aside.

Disclosure: Sold out Daiwa House Logistics Trust (DHLU)

I sold all my REITs except one

I started my REIT selling spree in early 2023 with the disposals of Suntec Real Estate Investment Trust (SGX:T82U), ESR-Logos REIT (SGX:J91U), and Sunway REIT (KLS:5176) as described in this blog.  My two main concerns are rising interest rates and the relatively short weighted average land lease expiry (WALL-E) that some REITs in Singapore and China are facing. I didn't stop at these three REITS and eventually sold all my REIT holdings for the same reasons. Except for Daiwa House Logistics REIT. Let's go through the details case by case. 

Sold out: CapitaLand China Trust (SGX:AU8U)

Well-run REIT with diversified properties in Mainland China. The WALL-E is below 25 years. I heard that land leases are usually extended in China, but that is anecdotal information. There is still a possibility that a property will lose its underlying land lease holding and must be demolished. Even if a land lease is extended, there is still uncertainty up to the moment of that decision. Suppose a property's land lease expiry is 8 years away and needs some renovations or enhancements. Management can not spend much money because it potentially has only 8 years to earn that investment back. This uncertainty is hard to quantify. The Capitaland China Trust currently has a dividend yield near 7%. It is too low for me to compensate the investor for these land lease expiry risks.

Sold out: China Merchants Commercial REIT (HKEX:1503)

This REIT is also active in Mainland China and has a dividend yield of 14%, which is appealing. Yet, I exited this HK-listed REIT with a -13.23% loss (including dividends received). Like Capitaland China Trust, the WALL-E of the land under the properties is below 25 years. Furthermore, its debt is higher than its equity. The interest coverage rate (ICR) of 3.2 worries me too much. Also, this REIT's debt repayments are not staggered over the years. It agreed on just one revolving loan facility, which is renewed every three years. This seems risky to me. I should have noticed this detail before buying this REIT. In 2022, I bought too many REITs in a short time period. At the time, I naively assumed that REITs are an ultra-safe asset class and don't need deep-dive research.

Sold out: Cromwell European REIT (SGX:CWBU) 

I like this REIT with its good logistics and office properties all over Europe. Almost all of its properties are on freehold land. The ICR is 4.9, which seems very safe until we realize that Cromwell has been borrowing at an average interest rate of only 2.4 %. One can no longer borrow at those rates in the new interest rate environment. This means that when Cromwell's debt agreements expire, it has to refinance at higher rates; 2.4 % becomes 5%, for example. The ICR will drop from 5 to only 2.5 in that example. Of course, Cromwell can raise the rents on their tenants to prevent that, but can they double the rents to keep up with doubling finance costs? I doubt that. 

ESR Group Ltd ultimately owns a large stake in Cromwell European REIT (HKEX:1821). I have expressed worries about the leverage of this group. In addition, I observed that Cromwell European REIT does not seem to fit their profile. By now, ESR Group has indeed announced its desire to sell Cromwell Property Group and Cromwell European REIT. But who will buy this in the current commercial real estate environment? The REIT seems somewhat orphaned now. I believe it is better to side-step these developments for the time being. However, I will keep an eye on Cromwell European REIT and possibly reinvest in the future.

Sold out: Axis REIT (5106.KL) 

This is a well-run Malaysian REIT with industrial and logistics properties. However, the price-to-book value has risen to 1.2 by now. I do not see a reason to pay more than the REIT's self-published net asset value. If anything, we should pay less, assuming the property value estimations ordered by management are likely to be too optimistic. With interest rates rising, capitalization rates are rising, and NAV calculation results will decrease. I am not sure why the market is paying more than the published NAV per share. I held Axis REIT for about a year and earned a decent 6.4% yield in price appreciation plus dividends. I am putting Axis back on my watch list for potential re-investment, for example, if the P/B drops back to 1.

Sold out: AIMS APAC REIT (SGX:O5RU)

Another well-run industrial REIT, but there are some leverage concerns. This REIT has issued a lot of perpetual bonds (perps). The holders of these bonds get paid before the unit holders get paid. In the case that AIMS APAC experiences liquidity issues, they can skip a perps coupon payment at a moment where they also skip the dividend payment to regular unit holders. They have two lines of defence, so to speak, and hence there are two ICR numbers to publish. AIMS APAC lists an ICR of 3.8, excluding distributions to perpetual bondholders and 2.3, including distributions to perpetual bondholders (As of 31 March 2023). I believe that a regular unit holder should use the second number. An ICR of 2.3 seems really low. AIMS APAC has been enjoying a debt funding cost of only 3.4%. Permanently higher interest rates will eventually affect this REIT. 

Sold out: Frasers Centrepoint Trust (SGX:J69U)

This REIT has nine retail malls and an office building in Singapore. Its ICR = 4.4 as of 31 March 2023. When an ICR dives below 1, it becomes problematic as the operating income (EBIT) does not even cover the interest payments, let alone dividend payments. This is unlikely to happen with Frasers Centrepoint, but an increase in finance costs will still have to be financed. This can only be done by a decrease in dividend payments unless it can raise rents drastically. Looking at a weighted average debt maturity of not even 2 years, we know that Frasers has to renegotiate a large part of its fixed-rate debt agreements. 

Instead of repeating my interest rate worries again, let me introduce two Youtubers with similar concerns. SingvestingDiary is worried about higher interest rates for the long term and finds the dividend yield of Frasers Centrepoint insufficient to compensate for this. Gabriel Yap is even more bearish on Frasers Centrepoint and believes the management is too aggressive with its acquisitions for the REIT. Note that the production quality of these Youtube clips is poor, but both have some worthwhile analysis to share. Finally, this article may be interesting if you prefer a similar analysis, although not specifically about Frasers, in written format. 

Sold out: Sabana Industrial REIT (SGX:M1GU)

Sabana has 18 industrial properties, all located in Singapore. All my fears come together in this one REIT. The WALL-E is only 30 years (1 January 2023). That means we lose 3.33% in value to the decay in the remaining land lease value. Hence, of the current 7% dividend yield, only 3.66% is of real value to us. Looking at the debt, we see an ICR of 3.8 on 31 March 2023. Not disastrous, but not very good either. 

To complete my nightmare, ESR Group is involved in Sabana too. ESR attempted to merge Sabana with ESR REIT (Now ESR-LOGOS) with a lowball payout offer. Since it holds only about 20% of Sabana, other shareholders were able to block this transaction. The feuds between the shareholders didn't end there. News of disagreements between Sabana plus ESR management versus other shareholders keeps popping up in the local business media. I want to have no part in this.

Sold out: Frasers Logistics & Commercial Trust (SGX:BUOU)

The disposal of Frasers Logistics & Commercial Trust at a small loss concludes my REIT sell-fest. The ICR of this REIT is 8.4 (31 March 2023), and the WALL-E is 88 years (30 September 2023). My two pet peeve concerns are non-issues here. The REIT is conservatively managed with regard to debt. The properties are mostly located in Australia, where freehold land holdings are the norm. 

So why did I sell? The share price seems high compared to different valuation estimates. Also, I have no insights at all into the Australian commercial real estate market. A few articles suggest that this market is in bubble territory, and weakness is to be expected here. When I came across a cheap consumer staple stock, I sold Frasers Logistics & Commercial Trust to free up funds to buy it. 

I will write about my consumer staples stock buy-fest in the next posting. First, let me wrap up this blog by featuring the last remaining REIT in my portfolio.

Hold: Daiwa House Logistics REIT (SGX:DHLU)

This REIT has 16 large logistics properties in Japan. These warehouses are, on average, only 5 years old. The WALL-E is 67 Years (1 January 2023), and the ICR is 11.4 (31 March 2023). No concerns here. With a Price to FFO of 14.07 and a dividend yield of 9.4%, the REIT seems very cheap considering the quality of the assets. 

The consistent drop of the Japanese Yen against the Singapore Dollar since late 2021 could offer an explanation for the low share price of Daiwa House Logistics REIT. Its share price decline correlates with the Yen decline. The REIT is listed in Singapore, and most of its unit holders are also based in Singapore. The weak Yen means that the REITs' dividend will be lower when converted into Singapore Dollars. It looks like the REIT's share price dropped because unit investors seek a higher dividend yield to compensate for this currency loss. 

Besides the currency rate issue, I don't see any fundamental reason for Daiwa House Logistics REIT to be priced so low. Its logistics business does not seem distressed or irrelevant in any way. We know that Japan is facing an ageing and declining population, but this would first affect labour-intensive sectors such as shops and restaurants rather than e-commerce. If anything, remote areas in Japan will depend more on e-commerce to receive necessities. 

Daiwa House Logistics REIT does not face typical Japanese corporate governance issues. Management consists of Japanese and Singaporean individuals, as does the board. IR materials are in English. Strategy and operational issues are clearly described. I went to the REIT's first AGM. Board members and management seemed frank and open towards investor questions and feedback. The payout ratio of dividends out of income is mandated at 90% by the Singaporean REIT regime. Hence, there can be no hoarding of cash on the balance sheet. Unlike in Japan, there is no withholding tax on dividends in Singapore. Enough reasons to hold on to Daiwa House Logistics REIT.

Disclosure: Long Daiwa House Logistics at the time of this writing

WALL-E; Industrial S-REIT's dirty little secret

An S-REIT is a REIT listed on the Singaporean stock exchange. This article concerns industrial and logistic REITs listed in Singapore and also owning properties there. Most of such properties are built on land leased from the Singaporean government. These land leases are relatively short, 30 to 60 years, and part of that time has already passed. The remaining time is expressed as the Weighted Average Land Lease Expiry, which I will shorten as WALL-E, like in the namesake movie. 

When the land lease of a particular property has expired, the REIT owning that property has to demolish it and return the land to the government. The REIT may also manage to extend the land lease, but it must pay a large lease payment. It is really a lose-lose dilemma for the REIT. This WALL-E issue does not get much exposure in the media. This may be because the weighted expiry is still 30 years or more in the future, which is an eternity for most of us.

Still, it is the elephant in the room for me. Imagine the worst-case scenario where a REIT can not extend any of its land leases after 30 years. The impact on the REIT valuation is like a discounted cash flow calculation without a terminal value. If you are unfamiliar with these calculations, let me assure you that it dramatically decreases the value. Another way to think about it: you should at least get a 3.33% dividend yield per year just to be compensated for the fact that a year of the properties' earnings potential has been lost. Only the yield above 3.33% is what you truly earn. 

The best Singaporean finance blogger Kyith Ng wrote about this issue in 2011  and concluded:

"It will be prudent to value a REIT as if this is a non-perpetual asset with a finite lifespan and calculate the internal rate of return as accordingly."

As Kyith Ng mentions in this article, the JTC Corporation is responsible for either extending a land lease or terminating it on behalf of the Singaporean government. Looking at historical cases, it seems that JTC will usually renew a land lease, but it might not do so when there are redevelopment plans for the area where an industrial property is located. Thus, JTC's decisions seem to be driven by urban planning motives rather than attempts to maximize profits. It may not be as bad as it looks for the REITs. 

Even so, I am annoyed by the WALL-E issue. I do not feel I really own an asset if it must be returned within 30 years. Funny enough, I don't have this concern when a lease expires in 60 years or more. The expiring land lease issue could get increasing media attention as we get closer to the expiry dates of more and more properties. In a few years, the threat might be felt as more pressing and could influence the share prices of REITs. At least one S-REIT manager seems to share this concern...

5. Rebalancing of portfolio to freehold assets, whilst not compromising on growth:

a. With our Singapore properties, accounting for 60.5% of our portfolio by valuation, held through Jurong Town Corporation (JTC) on a leasehold basis, it is prudent that we progressively rebalance AA REIT’s portfolio to longer tenure or freehold properties to minimise the future impact of a shortening land tenure.

(AIMS APAC REIT, Annual Report 2022, page 8)

The WALL-E issue affects S-REITs with industrial properties in Singapore, like ESR-LOGOS REIT, AIMS APAC REIT, and Sabana REIT. It is much lesser an issue for S-REITS with offices, hotels, and malls, which are sectors where land leases tend to be much longer. It is also not an issue for industrial S-REITs like Daiwa House Logistics (Japan) and Frasers L&C (Australia, Europe), which, although listed in Singapore, are active in countries where land lease expiry is very long or properties are typically on freehold land. That said,  there are other countries, such as Vietnam and China, where land leases are also relatively short. S-REITs like CapitaLand China Trust and EC World REIT may be impacted in these cases. 

In my portfolio, the WALL-E issue concerns ESR-LOGOS REIT, AIMS APAC REIT, Sabana REIT, CapitaLand China Trust and China Merchants REIT in Hong Kong. I sold all of these.

Breaking my own checklist rules

Earlier, I revealed my Stock Buy Checklist on this blog. Today, I will review the stock holdings violating this checklist's rules. This gives me a chance to explain some rules in more detail and the reasons for violating them sometimes.

United Plantation Berhad is not in the consumer staples or infrastructure industry.

My most constricting rule is to only buy consumer staples and infrastructure-related companies. United Plantation Berhad is the only real exception to this super rule. It runs oil palm plantations, counting it as a commodity producer. They sell some consumer products like NutroPalm Golden Palm Oil through their associate Unitata, but these activities are minimal. I decided to buy United Plantation shares anyway because its operations are run very efficiently. There are only so many great companies on the Malaysian stock exchange.

Several Malaysian companies have a market cap below 100 mln USD

InNature, Able Global, HAIO/Beshom, Suria Capital, and Spritzer are all flirting with the 100 mln USD market cap threshold. All these companies were well above this threshold when I bought their shares. However, the Malaysian Ringgit has devaluated against the US Dollar since then. That's not enough reason to suddenly remove these companies from my portfolio. The purpose of the market cap rule is to avoid buying a company so small that a black-swan event like a fire, a flood, or a fraudulent employee might threaten the continuity of its operations. In that light, it is not really relevant that a market cap goes from 100 to 98 mln in USD when the actually used currency is the Malaysian Ringgit.

Natural Food International Holding Ltd has a market cap and book value below USD 500 mln.

This company produces cereals and other healthy food products in the Chinese market. The book value is not even 200 mln USD, which is far below my threshold rule for mainland Chinese companies. As I wrote above, the market cap rule is set for my peace of mind regarding the stability of a company. In the case of Natural Food, we have the presence of US food giant PepsiCo as a significant shareholder. PepsiCo is also represented by a board member. I will assume that PepsiCo did due diligence into Natural Food before buying its shares and will continue to keep an eye on developments within the company.

Camellia PLC depends on operations in India and Africa for most of its revenues.

I focus my research on Asia Pacific, Europe, and US-based companies. Although Camellia is based in Kent, United Kingdom, its lands, gardens and plantations are located worldwide. It owns a few brand names, like Jing Tea and Goodricke. However, the bulk of its production should be considered agricultural commodities. Finally, Camellia is a conglomerate. So, here we have three violations of my checklist rules: 1. geography, 2. conglomerate, and 3. commodity-related. I bought Camellia long before I compiled my checklist. Likely, my experience with this company's poor management and its collapsing share price inspired some of the checklist rules. I will sell this share to finance an investment idea that conforms to my checklist better.

Boustead Singapore, CK Hutchison, Saha Pathana, ABF, F&N, and LG H&H are conglomerates.

Talking about conglomerates, I have a few others in my portfolio, although my checklist encourages me to avoid them. Like Camellia, I bought most of these shares before I wrote my checklist. In those days, I still had a value-investing approach where you would calculate the sum-of-the-parts of the different businesses and assets and then compare the grand total with the market cap. You often see a big 'holding company discount' making the share seem like a bargain. Value investing blogs and fora keep pouncing on such 'deep-value bargains'. The problem with this approach is that the discount usually does not close. The management and majority shareholders are simply not interested in closing the discount. You will remain stuck in these poorly performing conglomerate shares until management changes its priorities and reorganises the company's structure and activities, if ever. 

This is not a concern for the six conglomerates mentioned in the title. I gladly hold them for the long term, even if they remain conglomerates. Saha Pathana, Associated British Foods (ABF), and LG H&H are primarily active in consumer staples which is my portfolio focus. The same goes for Fraser and Neave Ltd (F&N), which also has a printing and publishing division, but it is only responsible for 11% of the total revenues within F&N.

CK Hutchison has consumer staples operations through their retail activities (A.S. Watson) and infrastructure-related assets with their ports and mobile telecom operators. This fits within my 'consumer staples and infrastructure' philosophy, although CK Hutchison also has investments in sectors such as utilities, pharmaceuticals, media, and energy, of which I have no knowledge. 

The same goes for Boustead Singapore Ltd, which is active in software, energy, and medical services, besides developing business parks through the listed Boustead Projects subsidiary. This share is also a relic of my deep-value investing days, long gone. The share price has been going nowhere for the last ten years, but the dividend yield is reasonable, and I trust the management. Because of the Boustead Projects activities, the stock fits in my infrastructure bucket. Although Boustead's other activities do not fit my philosophy, they seem stable.

Ho Bee Land and Boustead are developers.

Adding to my Boustead objections: its most significant subsidiary Boustead Projects, is a developer, not a REIT. I typically prefer a REIT over a developer because developers tend to have very cyclical earnings, and it is difficult to get reliable profit projections on the properties still under construction. In contrast, properties in a REIT portfolio are already operational and easier to value. In addition, the various regulations governing a REIT limit the opportunities to abuse minority investors. In fact, Boustead Projects recently initiated a REIT (Boustead Industrial Fund), but unfortunately, it is not publicly listed. 

Ho Bee Land is also a developer, but most revenues come from renting out its existing investment properties. It owns an impressive portfolio of offices in London and Singapore. Shareholders have repeatedly pressured management to divest this portfolio into a REIT. At a minimum, this will yield tax benefits, but it might also benefit the share performance. However, management has yet to honour this request. Ho Bee Land does not have many development projects compared to its portfolio of investment properties, so the company is safe enough for me to keep holding. The company seems significantly undervalued too.

DFI retail group and Imperial Brands have more debt than equity.

Two companies in my current portfolio violate the debt/equity < 1 rule. However, the Interest Coverage ratio in both cases is more than sufficient. Dairy Farm (DFI) runs supermarkets and restaurants. Most of its debt is the liability for its future store leases. According to current account rules, DFI has to list these under 'debt', but store lease liabilities are much safer than actual debts resulting from loans. When a company takes out a regular loan, it is to finance a new factory or some new business activity where the ultimate payoffs can only be guesstimated. In contrast, the expected yields on long-existing retail store rentals are much more certain than a new factory or a new business activity. I don't worry much about these store leases for existing restaurants, convenience stores, and supermarkets.

Imperial Brands is a tobacco company. The balance sheet seems weak at a quick glance, but incoming cash flows from smoking-addicted customers seem reliable and will relieve the debt burden over time. The management sets a "target leverage towards the lower end of our net debt to EBITDA range of 2-2.5 times." They are at 2.4 now and still reducing debt. If they indeed reach a net-debt/EBITDA = 2, that looks pretty safe. Fitch rates their debt as BBB. I am not worried but will keep an eye on debt repayments.

Luckin Coffee pays no dividends.

I prefer my holdings to pay dividends, but it is not a strict requirement. For growing companies, it usually makes sense to skip dividend payments and re-invest profits into the business instead. Luckin Coffee invests in the fast expansion of its coffee shop chain. 

Luckin Coffee is listed as an over-the-counter (OTC) stock.

OTC and Pink Sheet stocks are hardly regulated. I had never bought an OTC stock before Luckin, and I don't plan to do that again. There is a high chance of running into fraudulent companies in these markets. Luckin Coffee had also admitted to committing fraud when I started looking at the stock. My research mainly focussed on whether the fraud could be even bigger, as was exposed already. So far, that has not proven true, and the stock price has been going upward throughout 2022.

When I bought my Luckin stock in May 2022, the fraud-committing people were already removed from management positions. Luckin was entering arrangements to compensate the defrauded parties. My thesis is that Luckin can successfully move on from this dark era. It was a gamble when I took my position, but I considered that the most prominent Chinese coffee shop chain should be in a portfolio called The Coffee Can APAC. As I am writing this in December 2022, we can witness Luckin Coffee solving its legacy fraud issues while growing its operations quickly. I hope Luckin can re-list soon on the Nasdaq, preferably with a secondary listing in Hong Kong.

ABF's Primark is a fashion brand. 

Even worse than being listed as an OTC stock is running a fashion brand. I am not a follower of fashion myself, but I am aware that brands come and go, sometimes very quickly. It is impossible to assess those cycles in advance. Hence, I usually avoid investing in fashion retail companies. Nevertheless, in the case of Associated British Foods (ABF), I got comfortable with their Primark business, which delivers about half the profits for the overall conglomerate.

ABF started the Primark clothing stores initially in Ireland, then Great Brittain, then Europe, and recently jumped over to the United States. I visited several stores myself. Primark sells cheap clothes, packed to the brim in large stores at city-centre, triple-A locations. Customers love it, judging from the Google Map reviews and the consistent queues to pay at the cashier registers. The Primark brand signals a low price level and straightforward buying process rather than style and fashionability. I am confident that Primark customers will keep going to its stores as long as Primark sticks to its approach. It may be successful in Asia and South America too.

Daiwa House Logistics REIT is active in Japan. 

I am still contemplating whether I want to invest in Japanese companies. The demographics in this country predict a terrible economic future. Japanese company managements are often not shareholder friendly at all. Dividend payments are low and charged with a steep 20.42% withholding tax. Japanese stocks are generally priced relatively high from a value-investing perspective.

Daiwa House Logistics REIT seemed reasonably priced at its IPO and has an impressive portfolio of large, modern warehouses. Despite all properties being located in Japan, the REIT is a Singaporean entity. This means there is no dividend withholding tax for individual investors. Also, the Singaporean REIT regime requires the REIT manager to pay out at least 90% of earnings. This restricts the REIT manager from hoarding excessive cash on the balance sheet as many Japanese companies tend to do. For these reasons, I bought the REIT a few months after its IPO. My doubts about Japan's demographics and economic future still stand. Is this a Coffee Can REIT that I can hold for decades while sleeping well?  

Dairy Farm and Hutchison Port have sizeable operations in Hong Kong.

I reduce my portfolio exposure to companies that generate a lot of their profits from within Hong Kong. The city's future has been clouded for a few years already. Let's not get into the political details here, but it looks like the role of Hong Kong as a gateway into China is diminishing. Currently, Hong Kong is still ranked very high on surveys that estimate the cost of living. However, measured over the medium and long term, I wonder if much of this wealth may disappear. 

My holding Dairy Farm derives a lot of income from Hong Kong consumers. The management does not disclose the exact amount, but by combining other metrics, I estimate it to be about a quarter of total earnings. On the other hand, Dairy Farm is also exposed to many retail opportunities in China and South-East Asia. These could balance out deterioration in the Hong Kong market.

Hutchison Port Holdings Trust derives a lot of income from its Hong Kong port. This is obviously based on the geographical location as a deep-sea port which will remain unchanged. Different demographical and political circumstances are unlikely to affect these port operations.

Conclusion

I do not use my checklist blindly. As illustrated in this article, I break my rules when there are good reasons to do so. It is more important to keep an eye on the underlying concerns behind the rules. I felt some of these concerns while preparing and writing this article, for example, in the case of my last remaining Japanese stock, Daiwa House Logistics REIT. In addition, I feel uncomfortable around companies where several rules are broken simultaneously, as with Camellia and Dairy Farm.