Tuesday, 19 January 2021

Results of FIRST REIT EGM Held on 19 Jan 2021- Overwhelming Unitholders Support On New Restructuring Deal.

This was a huge surprise. Despite all related parties such as the Lippo Group abstaining from voting, over 90% of unit-holders voted in favour of the restructuring deal. Also, the rights issue in resolution 2 enjoy overwhelming support of over 90%. Hence the rights issue exercise will proceed immediately to complete the new operating model for First REIT. 
With all unit-holders demonstrating such strong support and being one heart one mind with Lippo Karawaci, there is a high likelihood things will go well from this point onwards especially in view that Indonesia has also started its vaccination programme and the Indonesian economy is slowly mending itself.

Saturday, 16 January 2021

Are The Distributions From Manulife US REIT (MUST) Sustainable? Clarifications from MUST's Investor Relation Team

This is a follow up to my last post on "Are The Distribution From Manulife US REIT Sustainable? Payouts Seems Greater Than Free Cashflow for Past Two Years". As mentioned previously, I have sent out an email to seek the comments of the management team of Manulife US REIT ("MUST"). I was surprised at the quick response within 2 working days by their Investor Relation team which is an excellent reflection of the dynamic culture and tone at the top. I should summarize and share the key comments by the MUST Investor Relation team here.

1. MUST Comments on 1H 2020 Income Statement Net Losses
Accounting recognition of fair valuation through P&L does create volatility in the P&L. In the case of 1H 2020 results, the accounting loss is due mainly to fair value loss of investment properties and derivatives - itself does not create a cashflow issue.

For the purpose of distribution computation, certain adjustments has to be made to the accounting numbers to derive what should be paid out to Unitholders i.e. non-cash items such as unrealised fair valuation losses and fees paid in units (no impact on operational cashflow generated from the properties net of expenses). Refer to note (g) on page 6 of 1H 2020 results announcement – reconciliation of accounting to distributable income.

The derived distribution to Unitholder is sustainable and supported by net cash from operating activities, refer to page 10 of 1H 2020 results announcement. Its higher than what was distributed in 1H 2020.

2. MUST Comments on classification of distribution to Unitholders in the form of  (i)Tax-exempt Dividends and (ii) Capital
The "Capital" component of the payout isn’t distribution in excess of earnings. It’s a result of tax structuring. Both elements are in fact supported by the underlying net property income.  

In terms of capital structure into US, it’s in the form of equity and shareholder loan. The shareholder loan carries a higher interest cost providing effective tax shield in addition to other onshore deductions to neutralise US taxable income to nil. The shareholder loan interest paid to Manulife US REIT is free of 30% withholding tax due to the portfolio interest rate exemption rule, upon receipt in Singapore is classified as Tax-exempt. The balance of earnings in US is extracted through shareholder loan redemption, upon receipt in Singapore is classified as "Capital". 

MUST Structure

2A. Additional query to MUST Investor Relation arising from the comments on Pt 2 as aforesaid mentioned above- Is the distribution sustainable if the shareholder loan is fully redeemed in future and part of the earnings thus get exposed to additional US taxes? 
One very interesting thing to note from the above comment is that the capital distribution of the half yearly payout is actually from property income and is actually part of recurring earnings. The only reason why it is deemed "Capital" in distribution nature is due to tax transparency planning to mitigate tax leakages. MUST extract this back via half yearly partial redemption of the shareholder loan given to the Parent REIT setup in the USA. 

This naturally give rise to another grave concern, which is, what if the shareholder loan is eventually exhausted due to constant redemption? Does it mean then that the tax shield setup will breakdown and the distribution will be subject to additional taxation hence eventually lowering it in future?

The investor relation team gave further insights into the MUST organizational structure being setup with regard to the above query:

"It will take a long while before the existing shareholder loans are exhausted. This will be further extended when we acquire more properties. 

For example, 
a) We acquire a property in US for $100, we inject capital into US in the form of $40 equity and $60 shareholder loan;

b) The property yield 6% which mean there is $6 annually (6%*$100) to be paid out from US to Manulife US REIT (“MUST”);

c) Say shareholder loan interest rate is 7%, 7%*$60=$4.2 out of the $6 will be repatriated to MUST via this route; 

d) Balance of $1.8 will be extracted via repayment of shareholder loan each year. $60/$1.8 = 33.33 years. It will take 33+years for this to be exhausted.

On (c) above, effectiveness of the tax shield should reduce over time as the shareholder loan reduces but it’s a long while. To reiterate, this will be replenished with further acquisitions. 

New shareholder loan can also be created when we refinance our loan as well".

3. Clarification with regard to the sustainability of the distribution going forward if we consider it from the perspective of the more stringent Free Cashflow assessment methodology? I noticed that in FY2019, the free cashflow (Operating CF net off CAPEX) less distribution to unitholders is negative of around <USD44MIl> and this is financed through bank borrowings and rights issues proceeds.
The reply from MUST Investor Relation is that " On capital expenditure, the response would still be to fund it via borrowings, which is a more efficient use of capital and that we have managed gearing prudently, well within MAS gearing cap of 50%."

Summary and personal thoughts:
The 1H total distribution pay out of 3.05 cents (dividends + "Capital") will give an annualised 6.10 cents payout from its recurring earnings. This is an 8.2% dividend yield based on the last 5 trading days average price of US$0.746 per unit. 

The question of sustainability of this 8.2% will depend on how fast MUST grow its earnings organically such as positive rental reversion of renewed tenancy agreements in order to get sufficient additional future returns on the use of borrowings to fund office capital expenditure, if we adopt the stricter free cashflow perspective. Growth can also be via inorganic M&A. 

In addition, any additional unrealized fair valuation losses will lead to the gearing hitting the MAS allowed maximum of 50% which will lead to the inability of the REIT to drawdown any further borrowings to finance capital expenditure. The aggregate leverage ratio of MUST at group level as at 1H 2020 is around 40%. Will be keeping a close look at this ratio for the upcoming year end results that will be released on 8th Feb 2021. 

Based on the current known conditions and historical track record of MUST, their performance has been remarkable and growth focus with M&A being carried out. This should mitigate the downside business risks and ensure sustainability of the distribution of 8.2% yield.   

Sunday, 10 January 2021

Are The Distribution From Manulife US REIT Sustainable? Payouts Seems Greater Than Free Cashflow for Past Two Years.

Recently, I decided to take a closer look at the financials of Manulife US REIT as I was rather confused by some analysts asserting that Manulife US REIT has a dividend yield of 8% but when one check the SGX dividend announcements, the annualised dividend yield is only around 5.4%. Apparently, there is a "missing block of dividends". Upon closer examination, the missing block of dividends is actually the capital distribution component of the half yearly distribution. The next question would be why is Manulife US REIT paying out distribution from its capital? Most importantly, is the future distribution sustainable? Also, is there a fundamental deteroriation in the results of the REIT?

1. FY2020-Manulife US REIT Making Losses
Yes. This is not a typo. Manulife US REIT results for the first half of 2020 is a loss making one and the entire FY2020 is also expected to be a loss. But why are so many analysts still painting Manulife US REIT as a resilient REIT during this COVID induced recession?
Summary Income Statement
If one is a long term investor, then this set of loss making results as at the first half of 2020 is not something to be too worried about. The main reason for the unrealised loss is due to the flamboyant fair valuation concept in accounting that creates the volatility. Basically, the investment properties fair value went down by <US$77Mil> during the economic crisis. Since the tenants are locked in for a long WALE and are of good quality, this fair valuation yoyo is not exactly a major concern. When the recovery comes over the next 2-3 years, the independent valuer will become more optimistic and relaxed their assumptions and one will find the fair valuation goes up again. 
Fair Valuation Losses From Derivatives and Investment Properties-US$92Mil
Also, since our topic is on distribution sustainability, I would like to point out that fair valuation losses does not impact the cashflow.

2. Free Cashflow Analysis

Free Cashflow Computation
Based on extrapolation of the 1st half FY2020 results, the entire FY2020 is expected to deliver a free cashflow of US$74.6Mil. However, distribution payout is US$96.6Mil. There is thus an apparent over-distribution of  <US$22Mil> which is not sustainable and is being financed via either bank borrowings or previous rights issue. 
Extract from 1H FY2020 Cashflow Statement Manulife US REIT
As per the cashflow statement, note that US Manulife is actually borrowing to finance its capital expenditure and leasing costs. I am currently not a fan of the use of leverage as a tool to keep on financing the distribution to unitholders as it adds on to the interest cost and weakens the financial position of the REIT. A more sustainable payout would be to reduce it by around 23% which gives a dividend yield of 6.37%. 

Parting Thoughts:
I have sent out an email to the management of Manulife US REIT to seek clarification on the rationale of using borrowings to finance additional distribution not just for FY2020 but also prior FY2019 (yes, the free cashflow is also negative in prior year). I reckon that the reply would be this is to take advantage of lower borrowing cost as there are still ample debt headroom to optimize the capital structure.  However, this argument will be Deja Vu to me as I recalled the episode of Asian Pay TV Trust which delivered fantastic payout before the music stops and the price crash.

Anyway, Manulife US REIT does have a number of strengths such as having having grade A offices, diversified and good quality tenants with long WALE. Interestingly, Manulife US REIT had raised US$142Mil in FY2019 at a pricing of US$0.876 per unit. So, new investors who decided to be vested actually enjoy a free US$0.136 per unit contribution by previous unit-holders based on the last market trading price as at 8 Jan 2021.

Updated 16 Jan 2021: Please refer to this latest post on comments from Manulife US REIT Investor Relations.

Thursday, 7 January 2021

Organisational Behaviour: The meaning of "Sinecures"

The recent reporting of the saga revolving around the continuous resignation of more directors of City Development Limited ("CDL") since the acquisition of a 51% stake in a Chinese real estate developer, Sincere Property Group, lead to a very rare word being utilized in writing these days.

The investment into the loss making Sincere Property Group in FY2020 has cost CDL a total of S$1.9 billion as at Oct 2020 which included S$895Mil for its 51% stake , S$303Mil for subscription of bonds and another S$133Mil in working capital loan. CDL will need to take into the account the loss given its 51% controlling stake to its consolidated accounts. In October last year, CDL shocked the market when it announced that a long standing director, Mr Kwek Leng Peck had resigned from the board mainly due to disagreements with regard to CDL's investment in Sincere Property Group.

It was also reported that Mr Kwek Leng Peck's resignation may have pressured the other non-executive directors of CDL who had expressed misgivings about the Chinese property group to make an exit lest they be accused of treating their board positions as "sinecures".

What is "Sinecure"?

Sinecure basically means holding on to one's position in an organisation but doing almost nothing other than holding on to the associated status or financial benefits. In every organisation, you will be able to identify a small group of people whose jobscope fits the sinecure definition. I reckon this is more common than one thought. 

In your own work place, are there also people who are merely pretending to work but are actually holding on to their job as sinecure? Chances are also such that you cannot do anything about such folks as they tend to be in a position of substantial power or influence in the organization......really nothing much one can do except maybe gossiping and complaining during break time with your fellow colleagues. Unfortunately life can often appear unfair, so achieve financial independence fast and get out of the rat race as soon as you can.  :)

Sunday, 3 January 2021

Reflection for 2020 and Equity Portfolio Updates (31 Dec 20)

1. Friend of StocksCafe
I finally decided to subscribe to become a "friend" of StocksCafe and gave up on my attempt to track dividends manually on Excel spreadsheet which is causing too much grief over the years. Time to fall in along with modern times. It turns out that StocksCafe is extremely easy to use and allows one to keep many different portfolios. The dividends feature also ease the mammoth effort to track it manually as well as give a projected dividend forecast for the next 12 months in it.

While StocksCafe allows data import, I decided to take the easy way out for this migration and just key all equities at the high level by assigning an average cost as the first transaction for the respective purchases. So effectively from 1 January 2021, my profit and losses with dividends will be tracked on board by StocksCafe.  

Highly recommended to all as the more I use it the more I love it. Thanks Dr Evan Koh for starting StocksCafe and sharing the intellectual work for this great site/App. 

2. Purpose of posting Portfolio updates is more for own references as well as sharing.
Sometimes, I find it easier to refer back to the internet for summary snippets of my historical portfolios especially during lunch break or travelling on the public transport rather than booting up my laptop to access the information. Hence the information is more tailored for my own reference. I have no intention to show the detailed profit and loss for each of my own holdings as I think it is overall meaningless given my main investment philosophy is to hold long term and have sustainable passive income from dividends - please also refer to pt 3 below.

3. Weird that folks on HardwareZone Forum are criticizing bloggers using Margin Financing
One day, I was looking through my blog statistics and surprised to see a surge in traffic from HardwareZone forum. It turns out that some folks are bashing bloggers who are using margin financing and as a matter of fact, passing condescending remarks in their posts.  

First and foremost, I am sure everyone knows that using leverage is a double edged sword. For me, I remain mostly invested throughout the March'20 market crash COVID mayhem- I do not own a magic crystal ball unlike the folks on HardwareZone forum who can time the market perfectly and then proudly proclaiming that bloggers with margin financing are unable to take advantage of the March'20 low. But I did deploy and divert additional cash into the market during Feb'20 to June'20 period as well as did partial sell off to buy into blue chip banking stocks and other stronger REIT such as Mapletree Commercial Trust. I see another 20%-30% upsides over my existing portfolios over the medium term once the market recovery plays out. 

For those who are not comfortable with the use of leverage, then simply stay far far away from it. For those who wanted to know more, then I will personally recommend the Early Retirement Masterclass by Christopher Ng. 2 years back, I attended a seminar by Chris. Employment of leverage is not a gamble as many folks on HardwareZone believes. Chris's methodology has been backed up with back-testing and personally tested during the 2008 GFC and he is constantly refining his techniques and system. In fact, one of the very intellectual and smartest people I have ever met. I say it and I say again, if you think that leverage is akin to "playing with Russian roulette", then just stay away from it- there is no need to be very upset at what others are doing. 

4. Eagle Hospitality Trust- Saga continues and no progress.
This is one of my worst investments to date. Apparently, there were already unpaid local taxes issue even before the IPO. Coupled with fraudulent authorization by non-executive directors to pick up liabilities on behalf of lessee that were unauthorized by the Board of Directors and also wasted lead time by the 2 main ex-directors locking in a special deal with only 1 potential rescuer in the initial stage (not open to public for tender of proposal), there is just too much conflict of interest by these 2 ex-directors who owns the REIT Manager. The breaches of the Securities and Future Act also lead to the eventual removal of the REIT Manager by MAS.

After the last EGM on 30 December 2020, it is back to square one for stapled securities owners of Eagle Hospitality Trust. I can understand the frustration of all owners....but rationality needs to prevail. Either choose to resume operations with a new REIT Manager or liquidate.  But to choose neither is very strange indeed.

5. Sold off most of my equity holdings in Suntec REIT
I have sold off most of my holdings in both cash and margin portfolios for Suntec REIT (average cost around S$1.17 per unit) and retained only a small stake of 3,000 units for diversification purpose & future upsides. I am worried over the office rental reversion for Singapore office as well as the convention centre MICE businesses. The retail component is also inextricably intertwined with the office and MICE traffic. 

The main difference between Singapore and US commercial offices is that US has already adopted work from home a decade back whereas the many bosses of Singapore Companies only realized through this COVID period that their workers can still meet deliverables from home and this represented cost savings in hefty office space rental in commercial buildings. As I am already building up stakes in CapitaLand Integrated Commercial Trust (CICT), I decided to pare my stake down in Suntec REIT. 

6. New REITs purchased in December 2020.
Added United Hamsphire US REIT for its tenants that deals mostly with groceries and has long WALE as well as Manulife US REIT which has proven itself resilient in the face of COVID in US.

Parting thoughts:
Well, that's all the updates and thoughts for now. HAppy New Year folks! Best wishes for the new year and good health always to all!  

Wednesday, 30 December 2020

Results of EGM Of Eagle Hospitality Trust- Disastrous EGM and Back To Square One

Well, this is a complete waste of time and efforts for all stakeholders of Eagle Hospitality Trust ("EHT"). All resolutions were defeated by the stapled security holders as Resolution 1 to Resolution 4 are inter-dependent. Stapled security holders neither wanted a new REIT Manager & their rescue plan nor wanted to liquidate the Trust which is already running out of working capital. 88.39% do not want to liquidate the Trust even thought they rejected the rescue plan. However, this brought the Trust closer to creditors' winding up due to funding issue.

On closer examination, resolution 2 on proposed REIT Manager base fee, which required an extraordinary support of 75%, caused the downfall of the entire EGM to appoint the new manager. My thoughts are that unit-holders are not being rational here. EHT is a trust in distress and there is no painless business solution to get out of this mess.  Results of the EGM as below:

Resolution 1 (Ordinary): To approve the proposed appointment of SCCPRE Hospitality REIT Management Pte. Ltd. as the new manager of EH-REIT (Conditional upon Resolution 2, Resolution 3 and Resolution 4)
For-56.64%; Against-43.36%
Results: Carried but since resolution 2 failed, proposed new REIT Manager will not be appointed.

Resolution 2 (Extraordinary-need 75% to pass): To approve the Proposed Base Fee Supplement (EH-REIT) to reflect the proposed base fee structure of the New REIT Manager as an Interested Person Transaction (Conditional upon Resolution 1, Resolution 3 and Resolution 4).
For-56.25%; Against- 43.75%
Results: Defeated as unable to get 75% support. Proposed new REIT Manager will not be appointed

Resolution 3 (Ordinary): To approve the proposed appointment of SCCPRE Hospitality Business Trust Management Pte. Ltd. as the new trustee manager of EH-BT and waiver of the 14-days’ notice period required under Regulation 14(3)(b) of the BTR (Conditional upon Resolution 1, Resolution 2 and Resolution 4).
For-56.63%; Against- 43.37%
Results: Carried but since resolution 2 failed, proposed new REIT Manager will not be appointed.

Resolution 4 (Ordinary):  To approve the proposed authority for the issuance of up to 140,000,000 new Stapled Securities at the Issue Price per Stapled Security for payment of the New Managers’ Base Fees for the financial years ending 31 December 2021 and 2022 (Conditional upon Resolution 1, Resolution 2 and Resolution 3).
For-56.21%; Against- 43.79%
Results: Carried but since resolution 2 failed, proposed new REIT Manager will not be appointed.

Resolution 5 (Extraordinary-need 75% to pass): To approve the proposed (a) voluntary delisting of EHT, (b) voluntary termination and winding-up of EH-REIT, and (c) voluntary winding-up of EH-BT, in the event that any of Resolution 1, Resolution 2, Resolution 3 and Resolution 4 is not passed and/or carried.
For-11.61%; Against-88.39%
Results: Defeated

Parting Thoughts:
Stapled security owners are just digging their own grave by delaying the appointment of a new REIT manager to open up the hotels for business. A forced liquidation by the bankers may well be on the table soon despite a massive 88.39% of stapled security holders who want EHT to continue operations instead of choosing a voluntary winding up. The saga continues for now.....

Monday, 28 December 2020

First REIT Twisted The Knife Further Into The Heart Of All Unitholders- Nightmare of Nightmares Right Issues Announced At More Than 50% Discount Off Last Market Price.

Unitholders still holding on to First REIT got hit with a double whammy shock today (28 Dec 2020) when the REIT Manager announced a rights issue on top of the previous released of rental restructuring of all hospital contracts news the previous month (29 Nov 2020). The sponsors of First REIT wasted no time to twist the knife further into the hearts of all retail unitholders by announcing a rights issue at more than 50% discount off the last traded price of S$ 0.405 per unit on 24 Dec 2020. The price of S$0.20 per unit is also 60% off the projected NAV of S$0.51 per unit after the rental restructuring. Investors who do not subscribe to the rights issue will be severely diluted by this latest move, which to me personally, is a massive destruction of value for all unit-holders. Right after this latest announcement (even before the EGM approval), the price of First REIT went down by a whopping 33% to trade between S$0.26 to S$0.27 per unit.

Potential Consequences of a Sponsor Default

S$140Mil from the 20cents Rights Issue To Repay Loan Facilities 

Financial Effects Of Proposed Corporate Actions

There are 3 main questions that both the Sponsors (Lippo Karawaci and OUE Healthcare) and their REIT manager need to answer:

1. Why is the potential breach of bank covenants not previously highlighted prominently in the rental restructuring agreement with Lippo Karawaci on 29 Nov 2020?
My own thoughts on this is that the management is taking way too long to announce this. They should have analyzed and released such pertinent financial information on 29 Nov 2020 during the rental restructuring agreement and organized a townhall with all unitholders to brainstorm instead of adopting such high handed manner in the short time frame to the upcoming EGM. 

In addition, using proceeds of rights issue to repay part of expiring bank loans means that the REIT is unable to leverage on the lower cost of borrowings to finance itself. This is detrimental to the entire business and investors and I am surprised that this vital information is not released earlier in the announced rental restructuring proposal as well as the potential rights issue which would have reduced the NAV further from S$0.51 per unit to S$0.36 per unit.

2. Why is the rights issue not priced at 25% or 30% discount instead to last 45 days trading average and the sponsors & REIT manager took such a drastic haircut of 50% for additional rights issue?
The projected NAV is S$0.51 per unit after the rental restructuring agreement. The rights issue represents a 60% discount to projected NAV and a 50% discount to last traded market price. This seems like hitting retail investors below the belt to buy-over unsubscribed rights issuance units  at a massive discount and is extremely prejudicial to retail investors who either do not have cash on hand to subscribe for it or who do not want to undertake additional risk in their investments into First REIT.

3. Why not sell some of the hospital properties back to Lippo Karawaci or other potential buyers to raise proceed for loan repayment instead of proposing such dilutive rights issue corporate action? 
My personal thought is that Lippo Karawaci should be the one to do a rights issue to fund their own operations instead of downloading all cashflow problems to the investors of First REIT. If they refused to buy their own hospitals based on the latest fair valuation report, then First REIT should sell it off to rival competitors by launching a public tender or asking Siloam hospitals to get ready to exit their operations. As alluded to point 2 above, the heavily discounted rights issue is a heavy handed way to deal with retail investors.

Parting thoughts
Personally, I think that this is an exploitation of retail investors. This seems like a deal that is more beneficial to Lippo Karawaci. The sponsors are holding on to retail investors by their neck. I would rather choose to liquidate the entire First REIT to scare off the sponsors into offering something better value for money instead of trying to milk the existing retail investors dry. 

Ultimately, Lippo Karawaci will the one that gets the most damage if there is a default in paying of rent to First REIT, across all their businesses. Based on the valuation report of the investment properties netting off liabilities after the proposed restructuring agreements, the NAV is S$0.51 per unit. It thus makes sense to just go for liquidation unless Lippo Karawaci offers a better deal rather than letting the share price drop to S$0.26-S$0.27 with the detrimental rights issue proposal. Lippo Karawaci should come back with a better deal for retail investors instead of taking the easy way out.

Last but not least, my other personal thought is that breaking lease agreements once means that the senior management of Lippo Karawaci group will simply repeat the same act of default and another rights issue again if there is another economic crisis. Toss a coin Head or Tail but Lippo Karawaci wins either way....strange isn't it? 

(P.S: Please also see my last posting on First REIT below