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Path to prosperity

Had a short writing hiatus as I recently had a reservist recall to be a part of the Forward Assurance and Support Team (FAST) at one of the purpose-built foreign worker dormitories. The role of the FAST officer was to help ensure that the dormitory managers were taking care of the foreign workers' needs during this trying period and also to be a liaison between the dormitory manager and the multi-ministry task force coordinating the overall response. Will give an overview of the work done and before giving some opinions on popular issues.

Work done
For my team, we were working on the standard 4-day shift cycle:

Day 1: Day Shift (8am - 8pm)
Day 2: Night Shift (8pm - 8am)
Day 3: (end night shift) Off
Day 4: Full day Off
This was a good reminder of how much I disliked night shift even though there tends to be less activity. Really am not a night person and struggled to stay alert especially from about 2-5am. Luckily for the 2nd half of the reservist, the Ramadan fasting month started so there was the pre-dawn meal (sahur) distribution to coordinate. The day after night shift isn't exactly a free day in my opinion because I would either be sleeping or feeling groggy for the rest of the day.

The actual work revolved around lots of planning and tracking. We had to plan out which rooms and tentages we would use for different levels of isolation (ie. waiting for the swab test result, negative result, positive result). As the case count rose over the few weeks I was there, we had to make space for more rooms or put more beds in each room. One of the more tedious tasks was movement tracking, to ensure we knew who was in which room and what their status was at any one time. While most of the tasks appear easy on paper, there were many little details to be cognizant about during the execution.

For example, meal distribution. We had to ensure that meals were distributed efficiently to everyone via their room ICs as the meals would have an expiry time. At the same time, we had to ensure there was no overcrowding. To add to the complexity of the situation, different rooms were made up of different types of people who required different types of meals. We had Bangladeshi, Indian and Chinese meals. This required collating a list of thousands of worker meal preferences sorted by rooms, which was a nightmare since the dormitory manager was quite liberal in allowing workers to change rooms so the initial lists we had were usually wrong.

Dormitory conditions
There has been a lot of flak regarding the cramped conditions of many purpose-built dormitories. While this is true for some dormitories, I think the standards vary by dormitory operator. This is where one can tell the difference between a good and bad dormitory operator in my opinion. The dorm operators are responsible for the upkeep of the place and are the ones in control of the cleaning and security contracts. Not sure how much I am allowed to say but generally you get what you pay for.

Post-Covid, I think there would be a comprehensive review of the Foreign Employees Dormitory Act (FEDA), which is an act that regulates the operations of dormitories housing FW. There are certainly many areas which need improvement/refinement and its much harder to overlook such issues now that Covid-19 has thrust the spotlight on them. For example, there could be a cap on the number of FW to be housed within a certain area or more frequent cleaning. While dorm operators are expected to take on some of these increased costs, some of these would also flow down to employers in the form of higher bed rents.

Food
During the lockdown, foreign workers are provided 3 meals (breakfast lunch dinner) by the Singapore government. As earlier mentioned, the meals are split into 3 main types, Bangladeshi, Indian and Chinese. From what I have seen, I think the food is comparable to hawker food standards. While some of them may have been catered from restaurants, there is only so much a restaurant can do to ensure consistent quality when cooking for thousands of people. The key would be to ensure the logistics of delivery and distribution is well planned out such that food doesn't go bad.

Based on feedback collated by the MOM officers, it seems that FWs were generally happy with the food although there was a vocal minority posting their unhappiness on social media. Hopefully, they can understand that we can try to ensure the food quality up to a certain level but anything beyond that is not feasible.

It was also disheartening to see the amount of wastage at each meal. Many boxes of untouched food paid for by SG taxpayers are being thrown away as a result of either over-ordering or FWs not liking the food. Usually, there would be some over-ordering to ensure there is no shortage but for a dorm of ~10k, a 5% buffer means 500 boxes of food could potentially go to waste. Hopefully, as the operations stabilize, we can reduce the amount of wastage and maybe even direct some of the excesses to needy Singaporeans.

Swab test
Before the reservist ends, all of us had to undergo a swab test at the nearest polyclinics. The whole process from the time I entered the polyclinic until I left took <1hr. The staff generally had a sense of what needed to be done and the flow of people was good. For the actual test itself, a long stick would be stuck inside your nasal passage. Initially, only 1-2 inches went in and I thought that was it, but actually it was because the nurse took a while to find the correct passage. Once the whole stick was in, it was quite uncomfortable but thankfully it only lasted for a few seconds. Now I am awaiting the results of the swab test. Fingers crossed!
What the Covid-19 test looks like (Source: MediVisuals)

Overall I think this was one of the more meaningful reservist recalls I have had as I was able to directly contribute to the country's efforts to combat a global emergency. Am also very inspired by the hard work of other FAST officers, dorm operators and security teams to ensure things are running as smoothly as possible. Hoping this whole situation ends soon!
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Earlier today, PM Lee announced that Singapore's circuit breaker measures will be extended by 1 month until 1 June 2020. The measures were supposed to end on 4 May but due to the increasing number of unlinked cases in the community, these measures were extended and will also be tightened to reduce the number of people going out.

In anticipation of this, it appears that the majority of S-REITs retraced gains from last week. REITs with retail exposure will continue to be the most affected as seen from the declines of CMT, MCT and Suntec. With even lower sales volumes, it would be interesting to see how many more essential businesses will decide to voluntarily close to keep costs down.
S-REIT closing prices as at 21 Apr 2020 (Source: SGX)
As the closures drag on, the follow-on impact to the other REIT sectors is also likely to be larger than initially expected. Both office and industrial landlords are likely to experience negative rental reversions and even declines in occupancy if businesses downsize.

During this extended period of uncertainty, investors could see a flight to safety with long WALEs (weighted average lease to expiry) and strong balance sheets being favoured. To this end, we already see Keppel DC REIT outperforming with a WALE of 8.3 years and 32% gearing. The market has rewarded KDCREIT by letting it trade at >2.0x P/B. While this could indicate limited near-term upside, I think investors are more focused on downside protection for now and could continue to support KDCREIT's share price.

While KDCREIT has not disclosed its tenant list, I understand that this includes the likes of large hyperscale cloud players like Amazon Web Services. During this period, I do not foresee any trouble for such tenants in paying rents or requiring substantial rental support from the REIT. For now, KDCREIT continues to tick the right boxes as a sustainable real estate asset class.
KDCREIT 1Q20 outlook slide (Source: KDCREIT announcement)
In related news, KDCREIT's sponsor announced a partnership to study the feasibility of a floating data centre park. If this takes off, this could be an interesting development as the permits for new data centres in Singapore have been drying up. Looking forward to this potentially becoming a new pipeline ROFR (right of first refusal) asset for the REIT and seeing how the market reacts to this new sub-asset class.
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Today, another 2 foreign worker dormitories were gazetted as isolation areas by the Singapore government to curb the spread of Covid-19. This brings the total number of dormitories gazetted to 7 in Singapore. One SGX-listed company in the thick of all this action is Centurion Corporation Ltd. It has 7 dormitories with about 28,000 beds under the Westlite brand, of which, Westlite Toh Guan is one of the affected dormitories.

Westlite Toh Guan (Source: Centurion Corp)

Overview
Centurion derives about 2/3 of its revenue from purpose-built worker accommodation (PBWA) in Singapore and Malaysia with the remaining coming from student accommodation (PBSA) in 5 countries. With lower frills, the PBWA can achieve a higher profit margin than PBSA and contributes about 77% to the group total segment profit as of FY18. According to a Euromonitor report a few years back, Centurion holds the largest market share in Singapore PBWA with >10% of industry revenue and bed capacity. Bed rents are paid by employers and contracts tend to be 12 months with 1-2 months of security deposits.
Centurion's global portfolio of PBWA/PBSA (Source: Centurion Corp)

Impact from Covid-19
With foreign worker dormitories being one of the larger clusters in Singapore, there has been a significant increase in media attention regarding the living conditions of foreign workers in Singapore. To this end I think once this crisis passes, the Foreign Employee Dormitory Act (FEDA), which regulates standards for foreign worker housing, will be reviewed and have its standards raised. This would be positive for Centurion as it could eliminate other sources of accommodation like factory-converted dormitories and lower quality PBWAs. Within the industry, Centurion dormitories have been known to have one of the higher standards of living conditions.

In the short-term, I do not foresee many employers defaulting on their payments for worker accommodation as this tends to be a small proportion of their costs. Having workers shift out of dormitories to alternative sites like army camps also do not release employers from their obligations to Centurion. To date, Centurion has not announced any rental rebates for tenants.

On 2 Apr 2020, Centurion also announced a delay in its redevelopment of Westlite Toh Guan which was slated for April 2020; the delay will be until the Covid-19 situation in Singapore normalizes according to its CEO. I think this is a slight positive as the funds set aside for the asset enhancement capex can now be an additional buffer if cashflow is constrained during this period.

On the PBSA side, rents could be negatively impacted as foreign students return home and vacate their premises. There could also be pressure to provide rental refunds for those students to keep up its reputation as a fair student accommodation provider. In the mid-term (once the virus passes), there could be an uptick in demand for PBSA especially if a global recession ensues. Historically, university enrollment rates see a rise when the economy is in a downturn as the opportunity cost of not working is reduced due to weaker employment prospects in the job market.

Centurion's PBSA properties in Australia (Source: Centurion Corp)

Overall, I think Centurion has a good long term future due to its dominant position in PBWA in Singapore and Malaysia and its foray into an increasingly popular student accommodation asset class. I think the cash generative (positive operating cash flow) and high gross profit margin (~70%) nature of the business gives it a buffer to cushion against any of the abovementioned short-term negatives.  However, investors should expect to bear with near-term volatility due to the impact of Covid-19.
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The enhanced social distancing measures in Singapore kick-started today and will last until 4th May 2020. During this period, Singaporeans are advised to stay at home and all places will be closed apart from essential services.

Observations
For myself, there was not much change to the daily routine as I already started working from home in mid-Feb. Food delivery was prompt as usual, didn't really feel like there was any delay to my order despite the possibly higher number of orders. I noticed that some restaurants on foodpanda extended their opening hours (starting earlier), this could be to help spread out the orders coming in so that restaurants would have sufficient time to prepare them. 

When I went out for my run, I noticed a significantly larger number of people running along my usual route. I'm guessing everyone is bored at home and wants to head out for some fresh air. Also, as I was running past the neighbourhood coffeeshops and hawker centres, I noticed that many stalls were closed (>50% closed). Those that were open did takeaways and deliveries, in compliance with the government's advisory. 

Stock market impact
On Day 1 of the enhanced measures, the STI was up 4.1% with most REITs up at least 5%. This is interesting since the measures imposed by the government are actually somewhat negative for landlords as they compel landlords to give rental deferments and property tax rebates to tenants.

STI movements over the past month
From a macro perspective, the prevailing sentiment towards the virus could be that it is tapering off as we see slowing growth in new cases and deaths, especially in Europe. On a more micro level in Singapore, the market uptick could also be driven by the larger number of people working from home, hence having more time to trade and look at markets. Pretty sure the stock market provides sufficient excitement/entertainment for those stuck at home. 

Granted that we are only seeing shoots of recovery, this could be another dead cat bounce. The slowing growth in cases can be attributed to strict measures taken by governments (ie. lockdowns) but there is still growth. Until a reliable vaccine/cure is found, investors should proceed with caution as many governments have already announced stimulus measures and aren't likely to have many more bullets left. 
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On 3 Apr 2020, the Singapore government announced stricter measures to combat the Covid19 virus. I believe that the measures have been adequately covered by the news media (CNA Report on new measures) so won't be repeating them here. Instead, I will be providing my 2-cents worth on how this might impact the market. 

Firstly, I expect retail sales to continue to suffer the brunt of the advisory to stay home. It was reported yesterday that retail sales in Singapore fell 8.6% yoy as a result of declining sales activity in discretionary items like watches & jewellery. As expected, consumer staples saw a 15.5% improvement due to panic buying when the Singapore government declared DORSCON Orange. 
Y-o-y change in retail sales (Source: The Straits Times)
While Sheng Siong and Dairy Farm could be beneficiaries of larger consumer staples purchases and also rental rebates in the short run, a prolonged outbreak could also drive up costs (ie. manpower, logistics, cost of goods sold). It is unlikely that grocers would be able to increase prices of goods due to the fear of government intervention if they are found to be profiteering off the crisis. Sheng Siong is up ~20% from its 19-Mar low of S$1.02 and should continue to be a resilient stock in my opinion. While Dairy Farm has seen similar improvements in its share price over the same period, it is a much larger entity with operations across the region (especially in HK) and is also currently undergoing a business transformation as a result of new management. Investors with a greater focus on Singapore should go for Sheng Siong due to its single market focus and proven management. 

Second, as most retail outlets will be closed during this period, F&B retailers (and subsequently, retail landlords) would be hit. Listed food retailers like Jumbo, RE&S, Koufu and Japan Food Holdings are likely to be negatively impacted by the lower footfall at malls and prohibitions on eating out. In particular, Jumbo, with a heavier reliance on foreign tourist traffic, could be the worst performer out of all. Retail landlords with assets in prime locations can expect ghost towns in their malls other than the basement where supermarkets tend to be. REITs with prime location exposure include Starhill Global (Ngee Ann City, Wisma Atria), Suntec REIT (Suntec City), SPH REIT (Paragon) and Capitaland Mall Trust (Plaza Sing and Raffles City). REITs with suburban exposure will also be hit badly but to a smaller extent as residents would still patronize malls nearer their homes for essentials. 

Most retail landlords have already committed to giving rental rebates and deferments to tenants affected by the Covid19 virus and this will negatively impact distributions and payout ratios in the near term. We have seen this with SPH REIT recently slashing their payout ratios despite having a higher Distributable Income. The need to conserve cash for the long run for business survival takes precedence over the short term dividends to shareholders. In the longer term (when this blows over), landlords could also find it more difficult to have positive rental reversions as tenants continue to recover from the ill effects of Covid19. 

Thirdly, the closure of office premises could be a bane for office landlords. In the short run, income is unlikely to be significantly impacted as leases tend to be signed for 3-5 years and tenants for Office REITs tend to be larger business entities with greater ability to ride out the crisis. However, in the longer run, many businesses could view flexible working arrangements as a viable option thus reducing the need for office space expansion once their lease terms are up. Additionally, the more tepid economic environment could lead to business contraction, further reducing the need for additional office space. 

Overall, in terms of sector preference for REITs, it would generally be based on average WALEs; sectors with longer WALEs could ride out the storm in better shape than the rest.  
1. Industrial/Healthcare
2. Office
3. Retail
4. Hospitality

Industrial and Healthcare REITs take joint first due to the long WALEs of their tenancies. I do not believe that Healthcare REITs would significantly outperform Industrial due to the fixed master lease structures in place; no significant upside from increased hospital revenues as the REITs are merely landlords collecting fixed rent. 

REITs with data centre exposure like KDCREIT and MINT are getting lots of love in this environment as leases here tend to be ~7 years at least and DCs are also seen as a beneficiary as the virus forces digital transformation upon many firms. Similar to healthcare REITs, DC landlords do not directly benefit from increased revenues of their tenant. In the longer run as leases expire, landlords are likely to be able to achieve positive rental reversions if their tenants do well. 
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The past few trading days have been great for investors as the market rallied and prices surge after the crash on Monday due to the Fed passing a bill for effectively unlimited QE. 

The SGX has followed the US markets moving up strongly. Today, the SGX opened down as investors probably sought to take some profit from the last 2 days of upticks. Post-lunch the SGX started to narrow its losses as investors were waiting in anticipation of the 2nd Covid-19 Budget announced by Singapore DPM Heng Swee Keat. The announcement was a welcomed one as losses for many stocks narrowed and aviation plays like SIA Engineering and SATS were up 12% and 7% respectively; SIA was trade halted today. 

My current take on the markets is that we are not out of the woods yet as the coronavirus still seems to be spreading and death tolls continue to grow. Until we see a decline in actual number of cases, more recoveries, or a vaccine, things will continue to be uncertain. On the flip side, many of the measures governments around the world have instated have set us up for a quick recovery once all this is over, the question is how soon this will be over. 

Key thoughts on the budget to follow, need some time to digest and think about the impact. 
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