Monday 28 November 2022

Manulife US REIT Upcoming Strategic Review- Will Unit Price Shoot Up Substantially Like Singapore Press Holdings Post Its Review?

Great news! Manulife US REIT ("MUST") just announced on 25th Nov 2022 (Friday) that Citigroup Global Market Singapore has been appointed as its financial advisor to conduct the much anticipated strategic review of its business. Please also refer to my previous post:  "Is Manulife US REIT A Good Buy at over 14% Distribution Yield Or A Dividend Trap?". I am pleasantly surprised that the CEO of MUST's Manager, Mr Tripp Gantt,  took such rapid action coming off the 2nd Nov 2022 announcement that MUST will be launching self-introspection on its mandate as an only office REIT. Based on the current unit price, MUST is giving out a high distribution yield of around 13%-14%. I will further elaborate on 3 major implications of this upcoming strategic review exercise as well as touch on the possibility of the worst case scenario (as well as other possibilities) that will leave existing unitholders in a lurch.    

MUST unit prices has been pulverised by almost 50% over the past 12mths due to weak structural demand  issues post COVID lockdown & rising interest rates

1. Signs that the drop in US physical office demand maybe perpetual in nature hence the strategic review.
The extremely low physical occupancy rate actually indicate that demand may never return to pre-COVID levels. Currently 33.33% to 50% in different states are back to office. The only question now is how much is the magnitude of this permanent drop. 

2. What other sector for its new business to venture into given the expertise among current management team?
Will MUST acquire warehouses or industrial buildings like Frasers Logistics & Commercial Trust ("FLCT") ? Or will it be venturing into Data Centres? If so, does its senior management team have the right expertise and proficiency given they have been managing only office buildings ? This bold move thus embolden certain business risk.

3. Even if the REIT ventured into other sectors, how would it finance and execute this transformation?
Now, this is the million dollar question. Will MUST start to sell off some of its freehold office buildings and then switch to acquiring new properties in other sector? Or will it spell a rights issue at the current pathetic unit price of US$0.385 and dilute all existing unitholders?
4. What are the other types of possibilities from this Strategic Review?
Due to the drastic sell-down, MUST unit price of US$0.385 as at 25 Nov 2022 is at a ridiculously low level compared to its net asset value of US$0.70 per unit as at 30 June 2022 (Mid year financial announcement). Besides the option of change in mandate to diversify into other sectors, there can also be 2 other options/scenarios:

4.1- Sell off some office buildings to realise its fair value of US$0.70
MUST can simply choose to sell off some of its freehold office buildings to realise its fair value. Since this is not a fire-sales, MUST will be in a strong position to negotiate with prospective buyers on a package deal. This has the potential to unlock value up to 82% with such realised sales. This can then be distributed out to unit-holders as a return of capital and an immediate catalyst to support the ridiculously current low unit price.

4.2- Buyout existing unit-holders at 20%-30% premium to current market price with investment firms and privatise immediately and subsequently seek to re-list at US$0.70 in another 2-3 years with some changes to assets mix.
Now, MUST can play punk and use a notorious method to take advantage of the current low unit price by offering a 20%-30% premium price to unit holders (by working with a few well-heeled partners) for them to privatize the REIT.  They could offer US$0.462 per unit to US$0.501 per unit to rally enough support from existing disgruntled investors waiting for a quick bailout.

After fine-tuning the properties mix with some add on, they can relist the REIT publicly at its fair value to earn big bucks for its partners.  However, many unit-holders will most probably be cursing and swearing at MUST management for short-changing them as many would have invested when price were hovering between US$0.70 to US$1.00 range 2-3 years back.

Parting thoughts
Personally, I thought that the conclusion of the strategic review would most likely lead to a huge rally in unit price of the currently badly battered MUST. The former Singapore Press Holdings share price is a good example of the eventual sharp rebound from its strategic review exercise. I have invested another 18,000 units of MUST (@US$0.385) per unit over the past week upon the appointment of the financial advisor. 

(Note: There is no guarantee that MUST will implement any of the options identified through the strategic review. Also, MUST management reminded unitholders to exercise caution when dealing in the units of Manulife US REIT and to refrain from taking any action in respect of their investments which may be prejudicial to their interests. In the event unitholders wish to deal in the units of Manulife US REIT, they are advised to seek their own professional advice and consult with their stockbrokers, bank managers, solicitors, accountants and other professional advisers if they are in doubt as to the actions they should take.)

Saturday 26 November 2022

PSLE Results Does Not Determine Our Kids Future- look beyond that!

I am sure by now many parents of their primary 6 kids would have "chilled down" after the Primary School leaving Examination (PSLE) results were released on 23rd November 2022 (Wednesday). Like most parents, my wife and I have butterflies in our stomach while the school principle was addressing the school on overall results. The 98.4% news header of PSLE students progressing to secondary school looks impressive but underneath this glamorous front, there is a big can of worms festering in our education system. 

1. How the new Achievement Level System Works?
The Ministry of Education made a deliberate shift away from the old T-score system in 2021 so that students do not chase the last mark. An obsessive overemphasis on examination results is not healthy for the development of our children. 2022 is the second batch of kids sent to the butcher embarking on this fantastic new grading system.

Under the new scoring system, each standard-level PSLE subject is scored using eight bands known as Achievement Levels ("ALs").

Each pupil is given AL scores from one to eight for each subject, instead of grades like A* to E.

Instead of the previous T-scores, a pupil's total PSLE score is now the sum of the AL of each of the four subjects, with the best possible total score being 4 points.

A key feature of this new system, first announced in 2016, is that pupils will be graded based on their individual performance in the subjects, regardless of how their peers have done.

2. Why it still sucks?
Basically, this new scoring system sucks big time still and I don't see how it reduces the stress level. In fact, it worsen the situation in particularly if a student is weak in Mother tongue and keeps failing it but excel in English, Maths or Science. No longer can he or she rely on the total score to plug the deficit in one subject. 90 for Maths or 100 marks for Maths still constitute an AL1 score only.   

The numerous tuition and book mugging continues under the new AL system.

3. Failure of the primary school system
I was shocked beyond words that only 51% of students scored 65 marks and above for English and Maths respectively for my kid's primary school. This means that the rest of the 49% of student population will score below 65 marks and I thought Singapore pride itself on its maths programme. When I check with my friends/colleagues with kids in other school, I was told that the statistics is almost the same. I think that our MOE need to seriously re-look at improving these numbers to help more students. 

4. Does PSLE results really show your child's aptitude?
I was speaking to other parents whose child has been doing well for say Maths or their Mother tongue consistently (AL1 to AL2) for past 2-3 years but screwed up in PSLE and their grade dropped 2 bands lower. So does this mean that the child cannot make it in these subject? Unfortunately, exam stress does happen.

For my own kid, the school principal exerted considerable influence on my kid who has a flair for his mother tongue to drop his Higher Mother Tongue subject as he did not do as well for other subjects during Primary 5 final exam (so that have more time to concentrate on scoring better for other subjects in following year PSLE). It is sad that our education system is no longer geared towards developing what the child excels in but instead became a tool for the school to look better statistically for the PSLE.  

Parting thoughts
If we want to really stop the current PSLE madness and stress, I have this extreme thought that perhaps we need to stop having PSLE at the young age of 12 years old and focus more on delivering a more holistic education and with more resources and time devoted to kids who are weaker in a particular subject. Why waste so much time on PSLE preparation? I have seen and heard of major disappointments and kids breaking down in tears over their PSLE results. Is it really worth it to put our kids through this? Anyway, above are just my personal thoughts. Wishing fellow parents in the same predicament all the best in their school open houses visit to finalize the secondary school application exercise. 

Tuesday 22 November 2022

Digicore REIT Self Implosion- 58% Plunge In Market Valuation Within 1 Year And Is It A Star Buy Now?

Digicore REIT is one of the worst performing SREITs over the past 1 year. From its peak of US$1.20 per unit during Jan 2022, its unit price dropped to US$0.50 as at 31 October 2022. This is a shocking plunge of <58%> of its market valuation, all in less than 1 year. If one had subscribed to its IPO in December 2021 at US$0.88 per unit, the loss would still have been a mind-boggling  <43%> decline in original investment cost. Current market price of Digicore REIT is languishing between US$0.50 to US$0.60 per unit. As at 22 November 2022, its unit price of S$0.555 means that it is at an annualised distribution yield of 7.42% which is way higher than what Mapletree Industrial Trust (6% yield) and Keppel DC REIT (5.6% yield) are offering. In addition, its future distribution is expected to grow 2% with the upcoming partial acquisition of Frankfurt data centre. So whatever happened to Digicore REIT for the market to punish it so severely? Is Digicore REIT a starbuy currently or is it a dividend value trap? 

1. Investors are very worried that the Tech Industry woes will spill over to Data Centres.
The main concern for investors seems to be that the current crisis faced by the Tech Industry will lead to many default in rental as well as lowered demand for data centres. It probably does not help that Digicore REIT had earlier announced that one of its major tenants, Sungard Availability Services, had filed for bankruptcy protection. 

In response to questions from unitholders, Digicore REIT disclosed on 17 November 2022 that it has reached an agreement with Sungard to amend the lease to allow for an orderly exit of the premises by 31 December 2022.

Digicore REIT also have in hand a surety bond or essentially a security deposit for two months rent. Moreover, the space in question is only 37,000 sqft and the REIT is confident of backfilling this space quickly. 

2. Interesting potential upsides of 25% increase in rental rate due to high demand for data centres and low supply.
Based on the heads up provided by the Senior Management of Digicore REIT on 17 November 2022, I thought that it is interesting that rental rates in future maybe renewed at a double digit rental reversion. Moreover, the data centre sector has historically remained stable even in the face of a changing macro environment, including the 2007/2008 Global Financial Crisis.   

Parting thoughts
Personally, I think that Digicore REIT is a starbuy at the incredulous 7.4% distribution yield on offer given the market expectation of an eventual 5% terminal borrowing rates by the US Federal Reserve. The huge decline in its price does offer one a relatively safer margin of error and to wait out the catch up in its market valuation.  I reckon that a 20% increase in future market valuation is certainly possible and will collect the high distribution yield while waiting. I have slowly been accumulating additional units of Digicore REIT during this down period. Saying that, I plan to keep my investment cost in Digicore REIT to less than S$50K.   

Tuesday 15 November 2022

FTX Crypto Collapse A Good Parallel On How To Make Up Stories and Shift Blame At Workplace.

FTX's founder Sam Bankman-Fried is a genius. He has mentioned that for the billions of dollars being transferred from customer accounts at FTX to his own trading firm Alameda Research, is actually a "margin loan". Hence indirectly saying that it is not an illegal fund transfer. It is really amazing how FTX financial controls and internal governance actually allows a margin loan to single party to grow till so large. Even more puzzling is the fact that stakeholders such as customers, investors, employees and auditors themselves were not aware that the deposits in custody at FTX were being used for trading at Alameda Research. Who dare wins indeed! 

Maybe Bankman-Fried is now busy preparing a lot of documents to backdate them to cover his backside. We can probably employ the same tactic as Bankman-Fried in the real commercial workplace to make up story to cover up screw ups (this will make us similarly deplorable). 

The FTX crypto implosion is unfortunate and reflects the dark side of the promise of "decentralization" governance away from central authorities. I feel sorry for investors who were caught under the latest FTX collapse and I say this without any trace of schadenfreude. The inherent peril in investing in any assets is always there. It is just not possible to easily predict and prevent such collapse. Even Temasek Holdings poured US$200Mil of investments into funding FTX along with Blackrock. 

(Note: I lament at the complete loss of US$200Mil- imagine if the government had given out this to all Singaporeans instead and we can have $40 to S$50 per person to spend on an awesome meal at Din Tai Fung).     

Saturday 12 November 2022

Is Manulife US REIT A Good Buy at over 14% Distribution Yield Or A Dividend Trap?

Manulife US REIT ("MUST") has seen its unit price diving from US$0.708 to US$0.375 in over a year. This is a whopping <47%> slump in its market price. US office REITS (MUST, Keppel Pacific Oak & Prime REIT) had all previously held up extremely well during the COVID 2020-2021 lock-down crisis but lately, their unit price had all plummeted and is offering an enticing 14% high distribution yield (as per StocksCafe). What is happening to US commercial office sector? While today's higher interest rate environment as well as concerns over implication of new withholding tax rule played a part in contributing to its downfall, there is another critical unresolved issue on hand which I should elaborate further below. 
1. Physical occupancy is well below 50% and at some US offices, just 33% had returned to office
While MUST reported that its overall occupancy for the recent period is 88.1% (down from 90% recorded as at end of 1H 2022), another more interesting indicator is the "physical office occupancy". The office scene in US is in stark contrast to the state in Singapore-it was reported that in some states, only 33%+ workers are physically back office with most still working remotely from home. In Singapore, most workers are already back office and you can tell from the many folks squeezing onto our MRT and buses rushing to work in the morning and the large crowd making their way home after work on public transport in the evening.

Just to side track, I saw that a number of folks use positive rental reversion as an indicator to justify that things are still looking well for US office REITs. I am skeptical on this as the positive rental reversion seems more of to do with inflation rather than directly linking to improved take up rate of office space hence not a direct reflection of the dire state of office rental market.

As at 12 October 2022, it seems that this number has gone up to 47.8 percent in places like New York. The numbers would probably go up further as CEOs of US companies are increasing their mandatory return to office mandate. Nonetheless, it appears that some form of hybrid working arrangement is here to stay post-covid lockdowns in US hence the demand for working space will no longer be as robust as 3-4 years ago. Apparently, this is a permanent shift in US office usage trending.

2. MUST launching hotelisation initiative of their office
Tripp Gantt, CEO of MUST’s manager, had announced in Aug 2022 that MUST will join the bandwagon of "hotelisation" of some of its office assets to adapt to the new realities that have arisen at the workplace, especially post COVID-19. What this means is that MUST will give options for more flexible use of its office space as well as provide curated experiences like having gyms for office tenants.

Personally, I am not sure how this hotelisation strategy will turn out. I can only conclude that in US, there is a drop in physical office space required and this trend seems permanent in nature, hence MUST and other US office REITs are definitely fighting headwinds. 

3.  MUST launches self introspection over its mandate as an office only REIT
In November 2022, Mr Tripp Gantt disclosed that MUST has commenced an introspection process within MUST as part of its efforts to rejuvenate its business operations. This provides strong hint that MUST management may soon diversify into other asset types besides office buildings acquisition. 
Parting thoughts
With over 14% high distribution yield at its current market pricing, I am wondering how MUST is going to do any yield accretive M&A deals. It maybe a good idea to sell off some of its office buildings and diversify into other asset classes in order to unlock intrinsic value for unit-holders. Despite the prevailing headwinds from market conditions as well as the high gearing ratio (over 40%), I think that MUST maybe in a better state than the other 2 US office REITs (Keppel Pacific Oak & Prime REIT) by virtue that their management team, led by Mr Tripp Gantt, have already kicked off an introspection process as alluded to point 3 above to rejuvenate their business and to re-position it for future growth.   

Please also see latest update announced by MUST on its strategic review on 25th November 2022: