Saturday, 31 December 2022

Is DigiCore REIT a Good Buy Now Since its 41% Decline in Unit Price From IPO?

This will be a short post with regard to DigiCore REIT. The last week of December 2022 has not been a pretty sight for DigiCore REIT unit prices. Its price sank to U$0.515 per unit at one point in time. I have invested my excess fund of approximately SGD10K over 2 tranches of 7,000 units each at prices of US$0.540 and US$0.520 respectively during this last week of December 2022. In fact, I have been gradually building back my stakes in DigiCore REIT since I sold off all my DigiCore REIT units at US$0.865 per unit to take profit during the mini-rally in August 2022.

To be honest, I do not really like Digicore REIT since its IPO days as it does not have a strong sponsor affiliated with Temasek Holdings and also due to the fact that one of its major tenant started to sink into bankruptcy soon after its IPO debut (not exactly helpful with building up trust and confidence in the sponsor when such "bad news" suddenly materialised after IPO). Nevertheless, its current unit price performance has been in the doldrum- despite its management commencing share buyback from 1st December 2022- and thus gives one a golden opportunity to be vested in new economy assets.

My recent additional investment of DigiCore REIT at an average entry price of US$0.530 per unit gives around an attractive distribution yield of +7.78% (some more this is before the recent M&A completion). As long as its fair valuation of investment properties do not decline to the poignant state of Manulife US REIT to affect the MAS imposed aggregate leverage level (maximum 50% for SREIT), I shall be able to wait till its price recovery before selling it off again.

Friday, 30 December 2022

Manulife US REIT Spectacular Self Implosion- Risk of Firesales of Office Properties Or Dilutive Rights Issue.

Manulife US REIT ("MUST") just dropped a bomb shell this morning (30 Dec 2022, 6.48am) on SGX that its fair valuation of investment properties dropped by a whopping <10.9%> (US$237.4Mil) and that its leverage level went up to 49% which is just 1% shy of Monetary Authority of Singapore ("MAS") aggregate leverage limit of 50%. It is fortunate that back in April 2020, MAS had announced that it had raised the leverage limit for S-REITs from 45% to 50%, else MUST would have been in blatant default of regulatory limit already and this may lead to further breaches of financial covenants. Still the current 1% buffer is not at all reassuring. No wonder its unit price has plunged <20%> since 1st December 2022 from US$0.375 to as low as US$0.300 per unit despite no news being announced publicly beforehand- I reckon that some insider news got leaked out way beforehand. What ever lead to this sudden self-implosion that has an ominous and potentially fatal consequence?

1. MUST Own Disaster in the Making?
Note that I am vested in MUST and I was shocked by this announcement as the REIT itself is now hanging by a cliff in terms of its survival. In previous years, MUST had embarked on a path of rapid M&A to build up its properties portfolio and income for distribution. Personally, I do not like the numerous occasions that MUST proceed to issue rights in private placement tranche at a discounted price without making such rights available to existing unit-holders by pointing to the need for urgent completion of the M&A deal. Another consequence of the rapid and aggressive pursuance of M&A deals resulted in its aggregate leverage level becoming one of the highest among US Office REITs at over 40%, thus leaving it with little leeway in the event of major economic downturn which can lead to a drastic fall in the fair valuation of its investment properties. 

2. Potential Red Flag of the US Office REIT Managers
I thought that Choon Yuan who runs the Investmoolah blog summed it up beautifully in his posting on US REITs (Why buying US Reits like PRIME and ManuLife Could Be Dangerous) on 29th December 2022, just one day before the disastrous announcement by MUST, on this:
"One thing that worries me is how both managements are not doing a share buyback when they are valued at a 50% discount to their property valuations. The REITs are afterall a portfoilo of properties and at such a discount, REIT managers would have deemed it attractive to be a good buy.

The lack of action by the management shows that either the REITs are short on cash or that they are anticipating a large writedown in property value of a magnitude greater than 20%. These would be terrible situations that the managers are not revealing. For context, a smilar US REIT called Digital Core is buying back its shares during this sell down at the 0.6-0.7 Price book value. Hence, it is no surprise this particular REIT has outperformed the other 2."
3. Why Did the Fair Value of MUST Properties Plunged So Drastically?
The bulk of the decline in fair valuation actually come from Figueroa which dropped US$104Mil (or -33% from prior year). The reason cited by MUST is that in the case of Figueroa, , the valuation as at year end 2022 is reflective of the occupancy plans of the property’s two largest tenants, Quinn Emmanuel and TCW Group, with the former executing a renewal and downsize while the latter plans to vacate at the end of their lease term (31 December 2023). Figueroa makes up 44% of the portfolio valuation decline as at year end 2022.
Personally, I thought that the valuer may have been too conservative in their projection on the replacement of vacated space after the exit of major tenants of Figueroa in 2023.

Parting thoughts
While I was initially optimistic on the future prospect of MUST given that their management is rather pro-active and has commenced its strategic review in early December 2022, the current development is extremely worrying. MUST is coming close to a breach of statutory requirement as well as breaches of banking covenants. We thus cannot rule out a fire sales of its properties or a dilutive rights issuance coming up for MUST. I thought that there is some similarities to the 2008 and 2009 Global Financial Crisis in terms of plunging property valuation of REITs and possible credit squeeze if the US economy continues to spiral downwards.

Choon Yuan (Investmoolah) put up another insightful thoughts of his regarding the current predicament faced by US REITs of risks arising from (i) higher discount rates and capitalisation rates of properties as well as (ii) high vacancy rates. Before ending this post, I will just put up some food for thoughts-I have extracted and placed here his exact words in the comments section of his post during our interaction at his blog:

"The first risk mentioned will affect all US reits from Digicore, Utdhampshire, PRIME, Keppelpac, Manulife; while the second risk has varying degree, I expect all 5 REITs leverage ratio to increase in 2023 and it depends on who will bust the 50% limit first".

Friday, 16 December 2022

Last December 2022 Government Treasury Bill Tranche Coming- Will it Yield Over 4.4% Again?

With the last T-Bill issuance at an all time high of 4.4% cut off yield, my friends and colleagues were all rushing down to banks to apply for the latest hotcake in town using their CPF Ordinary Account. The excitement in office was overwhelming and feels just like buying the Toto! The frenzy over T-Bills is absolute madness indeed. 

Crazy yield relative to the low 1%-2% at beginning of the year.
Those interested can start applying. Auction date is on 21 December 2022. Check with your bank on the last date to apply using electronic banking so that you do not miss it. For those who want to take out CPF ordinary account, well.....too have to go down to bank to queue to apply. CPF Board for some reason does not allow electronic application online. Guess CPF Board frown upon the outflow of cash from their agency. 

Happy application and Merry Christmas folks!

Tuesday, 6 December 2022

Is the UOB One Account at Attractive 7.8% interest Income Per Annum Just A Marketing Gimmick?

I was utterly shocked beyond words when my wife told me that she had found an almost risk-free way to earn 7.8% interest income using a saving accounts that would beat my equity investment portfolio. Apparently, United Overseas Bank (UOB) is launching its UOB One Account which offers a highest interest rate ever on one's savings. Too good to be true right and what is the catch here?

2 Steps to earn "7.8%" interest rate per annum

Effective interest rates is just 5% for up to S$100K and definitely not 7.8%
(1) Well, the actual effective interest rate is just 5% for up to S$100K. Yes, the 7.8% is just a gimmick as it applies only to amount higher than S$75K but less than S$100K banding. If you have only S$30K or less in your balances, then you will at most earn a 3.85% per annum rate- please see below illustrative table.
(2) Another important point to note is that UOB website did not indicate that this interest rate will be guaranteed for 1 years or 2 years. There is a high probability that UOB will not be able to maintain such high interest rates perpetually. It will probably be wiser to place money into either fixed deposits or Singapore Savings Bond to have any higher interest rate on offer to be locked in for at least 1 year.

Parting thoughts
The extremely high 7.8% interest rate in the "invitation to treat" is just a marketing gimmick to gain attention and interest to try to get retail customers to place their deposit with UOB. While the actual effective interest rate of up to 5% per annum is still very attractive (and some more with the deposits guaranteed by the Singapore Deposit Insurance Corporation), this rate on offer may only be for a short term duration. Personally, I will rather place excess cash into either Treasury Bills or the Singapore Saving Bonds which offers more certainty to the duration of the higher rates.