Devastating Recapitalisation Exercise for Manulife US REIT- Sponsor Raided Shareholders Via Loan-Shark Loan.

The much anticipated rescue plan was announced by the Manager of Manulife US REIT ("MUST") on 29 November 2023. First and foremost, let me address the elephant in the room in the current MUST fiasco. Personally, I think that all unit-holders have not much of a choice but will need to vote for this at the upcoming EGM to approve the loan-shark loan from the sponsor. There is currently no other viable alternatives-MUST had previously explored and exhausted various alternatives to address the breach of financial covenant and the sharp decline in the real estate valuation but to no avail. Failure to do so will mean an immediate liquidation or firesales of all office assets at this worst possible juncture which is the trough bottom of the US commercial office market.   

1. Loan-Shark Loan (US$137Mil)- Interest of 7.25% per annum and also additional 21.16% extra of the capital return at year end- total  64.66% financing cost over 6 years!

For a sponsor loan of US$137Mil from The Manufacturers Life Insurance Company, all unit-holders need to pay an overall whopping financing cost of S$89 Mil at the end of 6 years. This is actually an interest rate of 10.7% per annum- this is an additional financing expenses of US$14.7Mil per annum.

2. Halting of all distributions until 2025.

Half-yearly distributions to Unitholders are to be halted till 31 December 2025. The distributions may resume during such period if the "Early Reinstatement Conditions" are achieved. For 2024 to 2025, note that because distributions are halted, the current tax savings vehicle built into place has collapsed. There will be additional corporate tax imposed on MUST.

"Early Reinstatement Conditions" definition (Pt 15 of Appendix A announcement):

(i) Consolidated Total Liabilities to Consolidated Deposited Properties is no more than 45%; or

(ii) Consolidated Total Liabilities to Consolidated Deposited Properties is more than 45% but not more than 50%, and Interest Coverage Ratio is more than 2.5 times,

3. Additional corporate withholding tax

As alluded to point 2, tax as high as 43% maybe imposed on the retained distributions in particularly for failure of unit-holders to supply the United States withholding forms and certificates. I will be using a 30% withholding rate as the average for quantification of the impact. Considering the yearly distribution of US$76Mil using an annualization of 1H 2023 results. This is an additional needless cash burnt up of US$22.8Mil per annum.

Parting thoughts

This is really a nightmarish outcome. A breach of banking covenant due to declining property valuation led to additional financing and tax expenses of US$37.5Mil per annum (as aforesaid mentioned in point 1 and point 3) being imposed on MUST which is equivalent to a mind boggling 50% of the yearly distributions being wasted. 

Netlink Trust Disappointing Results From IMDA Pricing Review.

Netlink Trust ("NLT") announced on 27 November 2023 that the Infocomm Media Development Authority (“IMDA”) has completed their pricing review. I was shocked that the chargeable tariff has not increased at all despite inflationary pressures on labour costs, CAPEX and escalating financing charges. What was even more surprising was that the chargeable tariffs for Residential Connection and Non-Building Address Point got adjusted downwards (please click here for the YouTube Video version).

Basically, over the past 5 years, residential connections have grown from 1.2Mil to 1.5Mil which gives an compound annual growth rate ("CAGR") of 4.5% in terms of volume. Non-Building Address Points ("NBAP") has grown at an impressive 26.5%. Hence due to surge in volume economies of scale over total cost of operating the fibre network, this leads to a regulatory reduction in prices per connection.

Distribution yield of 6.43% not sustainable over longer term

At the price of S$0.815 per unit, this represented a distribution yield of 6.43%. However, note that part of the distribution is being financed from bank borrowings which is not ideal. From a free cashflow perspective, the sustainable distribution yield will be at a lower 4.95%. Given that money market funds with online brokers hover around 4% to 5%, a mere 4.95% distribution yield from investing in NLT equity is beginning to look like a really bad choice. 

Parting thoughts

As aforesaid mentioned, I am extremely disappointed by the outcome of the IMDA pricing review. If one is sure of the continued compound annual growth story of new connections in driving revenue, then NLT seems to be still a good investment. Personally, I will not be adding on to my stakes in NLT as I think that the IMDA wants the shareholders to do charity work and the borrowings to fund dividend distribution is a strange concept to me. Nevertheless, I will still be keeping my minor stake in NLT for now. 

Alibaba Giving Out Dividends To Reward Long Suffering Shareholders.

This is going to be a short post. Alibaba had just announced its September 2023 quarter results. Cloud segment growth at 2% fell a bit short and the management has also decided not to spin off this particular business unit for IPO. As a result, Alibaba share price dropped 10%. Well, the good news out of all this is that the management of Alibaba has declared its first ever annual dividend for the year ending 31 March 2023. 

The dividend declaration is definitely a step in the right direction. The share repurchase programme of Alibaba has not much effect in boosting its share price and as a matter of fact, its share price has been languishing and spiraling downwards for a few years. If Alibaba has no better business or other investments, it should give back more of its earnings as dividends back to reward loyal investors. Management of Alibaba has announced that it will review this annually subject to its capital requirement. The current US$0.125 per share declaration is approximately a 1.3% annual dividend yield based on its HK$73.25 per share as at 17 November 2023. Perhaps Alibaba management should stop the share buy-back white elephant and then increase the dividend payouts to loyal shareholders.

Note-Key Highlights:

1. The Ex-dividend date is 20 December 2023 

2. Payment date is on 11 January 2024.

Tesla Breakthrough In Automated Full Self Driving With Use of Artificial Intelligence.

Tesla is set to release its latest version 12 of Full Self Driving ("FSD") technology using the revolutionary Artificial Intelligence ("AI") learning. According to Elon Musk, this will be released in another 2 weeks time (end November 2023 or early December 2023). The use of AI presents a paradigm shift in Tesla's approach to self driving technology which will rely on car cameras and AI learning. 

According to Elon Musk, FSD version 12 no longer rely on the traditional pre-defined code for routine driving decisions like stopping at signs or slowing down for speed bumps. Instead, it uses vast amounts of video data from Tesla vehicles worldwide to learn and adapt, which is an incredulous stark contrast to the 300,000 lines of C++ code in its predecessor.

I am not sure how good will be the released product as it was reported that Elon's vast optimism may still have some hiccups as during a live drive demonstration by Musk, he still had to intervene at one point to prevent his vehicle from running a red light. 

My personal overall sensing is that Elon Musk and Tesla are probably on their way to succeed in something that was once thought to be a virtually impossible feat. 

Sadly, it looks like my backup plan to become a Taxi/Grab Driver in event that I am retrenched maybe in jeopardy if Tesla really managed to resolve all kinks and leapfrog autonomous driving.     

Please see details from the below technology posts: 

1. How Tesla Is Using Artificial Intelligence to Create The Autonomous Cars Of The Future

2. Tesla's upcoming FSD V12 is two weeks away according to Musk

Endowus Income Portfolio- How Come Singapore Passive Income Portfolio Differs From The Solution in Hong Kong?

In view of the higher interest rate environment, bonds have been giving out attractive high yields relative to the past few years. I have thus been putting more than half of my recent extra cash on hand into the Endowus curated Passive Income Portfolio. This is a 20%-80% portfolio split (into equity and bonds respectively) that aims to provide passive income of 5.5% to 6.5% distribution per annum. The strange thing is that Endowus Hong Kong has another deployed solution that pays a higher 6.5% to 7.5% using a 100% bond strategy.

Singapore Passive Income Plus

Endowus Hong Kong Passive Income-Plus

Anyway, I will be dropping a note to Endowus Singapore to check with them on the enigmatic differences in configuration of Income Portfolios for Singapore and Hong Kong when both are under the Endowus branding. Good thing about bond fund is that they provided sufficient diversification for one to invest in risky high yield debts.

Updates on 15 Nov 2023- Response from Endowus Client Advisor on the differences:

<QUOTE>

Thank you for reaching out to us. 

 

(1) To share, the portfolios are designed differently as the audiences/investor markets in Singapore and Hong Kong are quite different. Additionally, the fund offerings (investible universe and currency denominations) between the two countries differ as well. 

 

(2) One more thing to note would be that in Singapore, the advised portfolios are pre-set and thus any investors in the portfolio would be subscribing to that exact allocation; on the other hand, in Hong Kong, the Passive Income Portfolios are model/template portfolios that client may refer to and modify. 

</QUOTE>

United Hampshire US REIT Still Badly Beaten Down Despite Q3 Operations Updates-Incredulous 14.8% Distribution Yield.

United Hampshire US REIT ("UHREIT") has been badly bruised for the past year. From its 52 week high of US$0.535 per unit to the recent US$0.380 per unit as at 9 November 2023, this is an extremely worrisome and disappointing plunge of <-29%> . This translates into an absurdly high 14.8% distribution yield and an insanely low Price to Book Ratio of almost 0.5 times. UHREIT is thus currently providing a +10% yield above the 10 year US Treasury rate of 4.6%. 

1. Stable results and continued good news from Q3 Ops Updates

Gross revenue and Net Property Income for the 9mth of 2023 has increased 11.7% and 12.2% year on year respectively. UHREIT also continued to maintain its high committed occupancy of 97.2%. This is a far cry from other US Commercial REIT such as Manulife US REIT, Keppel Pacific Oak and Prime US REIT. 

The best news from this update is that the Academy Sports Building in Port St.Lucie has been completed way ahead of schedule (originally, I thought that this extension building will only complete in mid 2024). The new 63,000 sqft store opening is projected to commence by end of November 2023 which will mean that a new stream of rental income for the full month of December 2023.

2. Attractive high yield and price to book ratio.

This one really OMG- price crashed till so low and distribution yield now expanded to approximately 14.8%. Maybe many investors staying away from UHREIT due to its 40% plus leverage ratio which is not ideal considering year end revaluation of all properties required by IFR. The other possibility is the sad fate of the US Commercial Office REITs leads to fear of breaching the current banking covenants and distribution suspension akin to Manulife US REIT.

3. How is UHREIT different from other US commercial properties?

The above points depicts the unique nature of UHREIT business whereby its tenants are considered economic cycle agnostic and recession resistant. This also explains why its physical occupancy rate of properties is always so high throughout the past 3 years since its IPO.

4. The hidden dark side of UHREIT and risks of holding on to it

By the way, UHREIT is not entirely an angel and there are some grave risks that even their CEO does not want to address directly:

1. Leverage ratio of 40% plus is a tad too high albeit the recession resistant storyline. In extreme scenario, it will end up similar to the fate of Manulife US REIT once an unforeseen event lead to a breach in its banking covenants and the disastrous chain effect or death spiral might result. The leverage ratio is simply too high for comfort. 

2. Change of US tax rule and imposition of withholding tax. The requirements on the current tax planning structure crafted out can change overnight. This already happened a few years back before where US Office REITs valuation plunged due to the then concern over newly announced tax rule interpretation.

3. Forex risk as the operations are all in USD. If USD were to further weaken, Singaporean investors will see their investment value being eroded eventually.

4. In event that UHREIT needs financial support, equity fund raising via rights issuance will be virtually impossible for a US SREIT due to the group tax structure in place which is closely tied to the 9.8% restriction in ownership. Any change in the trust structure is highly complex which requires tax professional re-design and also US Tax authorities clearance.  Manulife US REIT has led the pack in examining this challenge which it has not been able to resolve even till this date. So, no matter how financially strong are the sponsors, the 9.8% restriction in individual entity/individual shareholding is an unbreakable curse that renders the backstop of equity fund raising exercise by the sponsors as good as useless.

Parting thoughts

Personally, I have been adding some minor stakes into UHREIT in view of the sudden plunge of unit pricing to below US$0.40 per unit as I think it is very undervalued. Nevertheless, I will not be able to add on additional significant stakes into UHREIT as that will further over-concentrate my already large exposure to UHREIT. The economic cycle agnostic and recession resistant storyline marketed by UHREIT is certainly compelling from its historical performance. The problem with investment is that one can never know what they don't know. Diversification is still the only way to prevent one's carefully built up investment portfolios from sinking into oblivion. 

Keppel Corp Owners-Have You Checked Your “Free” Keppel Office REIT Units Have Been Correctly Credited To Your Accounts?

Today is 7th November 2023 which is the much anticipated dividend in specie disbursement of Keppel REIT units for Keppel Corp shareholders. For those holding their Keppel Corp shares in nominee beneficiary accounts in trust and not their own CDP account, do check with your respective stockbroker in case of administrative screw up. I would also like to touch base on a dry topic of how should one record the cost of these free Keppel Office REITs unit- those who are not interested can just skipped point 2 below. 

1. Shares held in Trust (Non-CDP trading account).

I was rather impressed with Tiger Brokers which has an impressive digital platform that immediately allocated the Keppel REIT units in the morning to the sub-account holders. For my shares held in custody with Maybank Trading, they apparently have either (i) screwed up & missed out on this special dividend distribution or (ii) their administrative trust team are doing things too manually and need another few more working days to sort out the allocation of the Keppel REIT units to their sub-account holders.   

2. Cost of the Keppel Office REITs units given out is not zero cost or free of cost.

I was a bit puzzled when Tiger Brokers allocated my Keppel Office REITs units to me and display my cost of purchase as “zero” which means I am sitting on a profit of current market valuation less “zero” cost. This is not correct. 

2(a) Strange concept of “freehold” investment into stocks/REITs

Technically, the disbursed Keppel Office REIT is not a “freehold”. (Btw: I borrowed this term “freehold” from Master Leong when he disputed such a concept of measurement of profits with another fellow investment blogger- freehold means free of cost after taking into account historical dividends paid out that has accumulated over the years and adding that to the current market valuation of one’s investment whereby this total effect becomes easily greater to the original cost of investment). I do not want to dwell into details on who is right or wrong with regard to this concept of one’s investment becoming “freehold” as it really depends on the perspective of whether (i) one is looking at measurement associated with unrealized gain/loss or (ii) just looking at a higher level of realized plus unrealized gains/losses from an investment.  

2(b) What is the cost to assign to Keppel Office REITs one gained from the dividend in specie exercise?

Anyway, back to the costing of this exercise.  Personally, I will neither be be taking dividend cum date nor the ex-dividend date to record the cost of the Keppel office REIT as a retail investor. Despite having absolute certainty that I have a legal right to the asset (via this special dividend exercise) on the as aforesaid dates, the problem is that I am unable to do anything at this particular stage as a retail investor as the units have not been transferred into my CDP or trust account with other brokerages. This is similar to a normal dividend being declared, you can only use the cash given out to buy new shares/units when it has been credited into your bank account on the payment date being declared.

The keppel Office REIT should be valued at S$0.83 per unit which is the opening trade price as at 7th November 2023. This is also the date whereby the units are given to all direct shareholders thus one has the rights to trade or hold the Keppel REIT units on the secondary market. Substance over form, this special dividend exercise is still a dividend income in terms of one’s own P&L and a recording of long term investment instead of cash in one’s Statement of Financial Position. 

I think it is extremely silly to view this as a zero dollar cost investment for future measurement which give rise to a very useless and impractical situation whereby whatever is the market price fluctuation, the percentage profits is always 100% profit even when the market price dropped by half as the cost of holding is “freehold”. How does this perpetual non moving 100% profit margin help one in making sell or hold decision?

Parting thoughts

Anyway, the above is just the accountant in me making a big fuss over the zero cost of purchase of Keppel REITs being assigned by Tiger Brokers. For my own Stocks Cafe recording, I will be imputing a cost to the Keppel Office REITs being disbursed to my CDP and brokerage trust sub-accounts.

Keppel DC REIT Recovery of 7% Within A Week.

This will be a short post. The SGX and SREITS rallied over the last 2 days’ trading session. So I decided to sell off a just acquired small tranche of 1,500 units of Keppel DC REIT (“KDC”) to take a quick realized tiny profit at 7.1%. I am a pessimist. I do not think that SREITs is out of the woods yet with Powell’s announcement that the Fed will not do another hike in November 2023.  Neither am I convinced that there will be any material rate cuts in 2024 and 2025. It will take a while to keep the active money supply (from excessive printing over the past decade) from running amok. 

So for SREITs, the pertinent question is whether the effect of positive rental reversion or increased occupancy will outweigh  the grave negative downsides from ever higher interest rates for bank loans refinancing exercise over the next 2 years. I have redeployed the proceeds from KDC as well as excess funds into US renewable energy stock and also bond funds from Endowus to lessen the high concentration in SREITs.