United Hampshire US REIT Announced Another Set of Resilient Results for FY2023- 10.76% Distribution Yield.

Like clockwork, the management team of United Hampshire US REIT (“UHREIT”) delivered another set of splendid 2nd half and full year 2023 results. It’s the only US Commercial REIT to deliver improved market valuation of its investment properties relative to the disastrous drop in valuation of the US office REITs due to higher capitalization rate and discount rate from higher interest rate. Its overall aggregate leverage ratio improved slightly to 41.7% relative to FY2022 of 41.8%. Unfortunately, UHREIT seems to have been impacted by the recent crash in US office REITs market prices. Its unit price has declined -10% from its peak price of US$0.52 per unit attained earlier during the 1st week of February 2024.

1. Quick Results Highlight

Gross revenue grew +7.1% to US$72.2Mil relative to US$67.6Mil  in FY2022 while Net Property Income increased by +7.6% to US$50.6Mil relative to US$47.1Mil for FY2022. However, distributable income declined from US$33.1Mil to US$30.4Mil (-3.6% drop) in FY2023 mainly due to (i) higher interest expense and (ii) the paid out of 2H 2023 Management base fee in cash to preserve unit-holder value and minimise unit base dilution.

The 63,000sqft of new Academy sports + Outdoors store at St. Lucie West commenced operations in November 2023 which was way ahead of original schedule in 2024. Its opening was just in time for the year end festive shopping season and was a contributor to the growth in gross revenue.

2. Capital Management

Aggregate leverage is at a healthy 41.7% due to spike in valuation of its investment properties. There are also no refinancing requirements until November 2026. While UHREIT is also under the general category of commercial property REIT, it is way different from US office REITs. 

As we can see above, office commercial property valuation has declined by <-32%> since June 2020 while Strip Center commercial property valuation (such as those owned by UHREIT) increased by +14% since June 2020. We know the tragic fate that had befallen Manulife US REIT, Prime US REIT and Keppel Pacific Oak US REIT all of which are struggling from or close to breach of aggregate leverage ratio due to the drastic decline in property valuation. UHREIT currently possesses the most resilient class of commercial properties that have survived the COVID crisis as well as the current high interest rate environment crisis resulting from inflationary control measures.

3. Admirable High Distribution Yield from UHREIT.

At 5.54 cents and US$0.445 market price per unit as at 24 February 2024, UHREIT is giving out an annualised 12.45% distribution yield.

If we stripped out the amount reserved for further AEI or capital expenditure as well as management fee in cash, UHREIT is still giving out an impressive distribution of 4.79 cents and an awe-inspiring yield of 10.76%.

Parting Thoughts

UHREIT has been delivering a consistent and splendid results yearly since its IPO. So far, it has proven itself to be exceptional well run and resilient despite the COVID crisis and escalating interest rate plight faced by its business operations. Keeping my fingers crossed that it continued to perform well and that its investors gradually realise the value proposition its business and that they sky high risk premium demanded from UHREIT will decline over time. 

Prime US REIT On Survival Mode And Signs of Green Shoots For Entire US Office Segment.

Prime US REIT ("Prime") has amazingly announced a better than expected results. I was expecting it to have breached its banking covenants after valuation decline. However, its aggregate leverage ratio is still within 50% and that it is giving out bonus units and 10% of its distributable income as dividends while retaining the rest for CAPEX and refinancing. Not surprisingly, its languishing unit price rebounded sharply on 22 February 2024. There are a few very interesting announcements by the management of Prime that is worth highlighting and which gives some idea on whether things are starting to turn around for US office commercial sector.

1. Prime US REIT seems to be confident to refinance the US$600Mil that is due in July 2024.

Prime plan to pay down US$100Mil of debt in 2024. It is also already in constructive refinancing discussions with the lenders of its US$600Mil credit facilities due in July 2024. From the optimism and upbeat tone displayed by its press release and public relations, I reckoned that their management team is confident of clearing the upcoming financial loan extension hurdle. This is a good sign.  

2. Pipeline of new office supply has dwindled and continued to fall.

This seems to be a major turning point that is being prominently highlighted by the management of Prime. There are 2 main factors which I will briefly elaborate on below:

2(a) Office ground-breakings and deliveries fell to an over 20-year low in 4Q2023.

Deliveries of new office space has fallen from 85Mil sqft 4 years ago to 46Mil sqft in 2023.

2(b) There are quite a number of conversion of excess commercial office building supply into residential buildings.

The US federal government and major US cities have been introducing incentives for building owners to convert their office buildings into residential buildings to address the excess supply in commercial and excess demand in residential apartments. Incentives of up to 75% discount on future tax assessments for buildings that convert commercial space into residential space are being dangled. 

2021-2023 has seen such offer soaring and being taken up by building owners. There were conversion activities of a 10 year high of 18.8Mil sqft of office space in 2023.

Parting thoughts

While I am impressed by the growth in leasing momentum and the brightly painted picture of record reduction in US office space supplies by the management of Prime, I am still apprehensive on whether we have seen the rock bottom of the US office sector. Ultimately, the high gearing ratio of 48.4% of Prime is just 1 small step away from a fire-sales of its office properties. 

(Note: On 5 February 2024, I had already disposed all my current holdings of Prime US REIT at US$0.16 per unit in order to mitigate my risk exposure to US office REITs. It was a lucky move as Prime US REIT has plunged by another whopping <-19%> to US$0.130 per unit as at noon of 23 Feb 2024. I have since redeployed the proceeds to other growth stocks instead of REITs.)

3 Points on Keppel Pacific Oak REIT To Watch Out- Finally Some Light At The End of The Tunnel.

I am just back Singapore today from my overseas business trip. During this past 1 week where I was super busy with work, it looks like a lot had happened in Singapore with the (i) sudden bombshell released by the management of Keppel Pacific Oak REIT (“KORE”) that they will halt all dividends payout for 2 years and (ii) the removal of CPF special account at the age of 55 by Mr Lawrence Wong, our deputy Prime Minister during his 2024 budget speech. The focus of this post will be on the disastrous announcement by KORE management that had sent shockwave among all of its unit-holders (as for the CPF Special and Retirement Accounts changes one can easily find many posts and comments on existing social media hence I will not be adding on to it). 

1. Unexpected total halt in KORE dividends distribution.

To be honest, I was expecting a 50% reduction in dividend payout in order to have adequate funds on hand to pay off CAPEX and expiring bank loans. The 100% halt in distributions caught me totally off guard as I think that its latest year end financial results is actually decent with no breach in banking covenants and a respectable aggregate leverage ratio of 43.2% despite the turmoil facing US office REITs. 

Nevertheless, I think that the tough measure seems to be the best option currently. At least KORE is not forced into selling off office buildings at a mammoth discounts to their current valuations (this is what happened to Manulife US REIT). Rights issuance at this juncture also will not work due to the rapidly spiralling downwards of unit price. The 9.8% maximum unit-holdings per unit-holder will also be an issue as it will be virtually impossible to get the sponsor to underwrite unsubscribed rights during an equity fund raising exercise from unit-holders. 3rd party bankers even if willing to take part will demand an exorbitant fees to take up unsubscribed rights. 

2. Is the worst over or more bad news to come?

As alluded to point 1, the drastic rescue plan seems to be preparing for a dooms day scenario. There could be more bad news such as losing of key tenants or worsening occupancy due to the work from home trend and macro-economic recession risks. We have seen the REIT pricing collapsed by over 40% in a single day since the announcement of the recapitalisation plan. 

If one cannot stomach the risks, then it is best to exit all office REITs including KORE.

3. Is it a good time to buy more of KORE? 

The hard truth is that KORE has lost its economic moat with the move towards work from home by US businesses and its employees- this is most likely a permanent change.

Although I  think that the current US$0.135 per unit as at 19 February 2024 is severely undervalued relative to its net asset value per unit of US$0.69 (this is an absurd market valuation at only 0.2 times of KORE's net asset value per unit), I will not be making any further long term placement into KORE or any US office REITs.

Parting thoughts

While I will not be making any further long term investments into KORE, I may be taking up a small short term speculative position towards the end of this week as I anticipated more irrational selling pressure and bloodbath when Prime US REIT released its results after the close of trading on 21 February (Wednesday).  With the long delay in results announcement by Prime US REIT relative to prior year, I reckon that their management team are busy drawing up more drastic measures-rather than a simple dividend halt- to save itself from financial ruin. KORE and other office REITs will most likely be adversely affected by the extreme pessimistic market sentiment about to be unleased by Prime US REIT. 

Do brace yourself for the impact and good luck to all existing retail investors of KORE.

Investment Portfolios Updates (2 Feb 2024) - S$613K and Projected Annualised Passive Income of S$46K.

While the valuation of my net investments had gone up relative to 2 months ago, my projected passive income has declined from S$50K to S$46K. Interest expenses from margin financing has gone up. In addition, I have revised downwards the projected yield from StocksCafe for Keppel Pacific Oak REIT as well as Prime REIT- the latter I have amended the expected dividend yield to be zero as it is in "deep shieet" from the looks of it still not releasing its financial results compared to its previous year end announcement date.

(Note: Please also refer to my other Family Portfolio which is projected to yield +S$20K of passive income per annum).

 1. Portfolio 1- Stocks held in SGX Central Depository 

(Note: This portfolio is designed to provide immediate dividends for use as it is under my own CDP account and the dividends credited goes directly to my bank account.)

I have taken up additional shares in Haw Par Corporation as well as entered a small position into CapitaLand Investment Limited. 

2. Portfolio 2- Margin purchased securities

(Note: My margin purchased securities has grown to a sufficient scale to sustain itself and can pay off annual financing charges as well as to gradually pay down the margin loan through dividends generated.) 

I have taken up new position in another REIT using margin financing. US Office REITs that I am holding (Keppel Oak and Prime REIT) are expected to perform badly this year given their weak financial position and close to breach of banking covenants. The only consolation for me is that their current pathetic valuation has now become immaterial to my overall gross portfolios.

3. Portfolio 3 (with Tiger Brokers)- Venture into higher risk as well as capital growth stocks here

(i) Keppel Corp share prices shot up with the announcement of a record year of profits as well as a good amount of final dividends. I had taken profit when its share price hit over S$7 and redeployed it into Ping An Insurance Group.

(ii) I continued to add in additional 200 shares into Alibaba as Jack Ma and Joe Tsai had also buy in US200Mil of shares. The million dollar question is will 7th Feb 2024 results announcement be a catalyst to break the death spiral of Alibaba stocks?

(iii) During this 2 months period, I have also added a position into Thai Beverage as it was trading near its 52 weeks low. Please refer to this video on why I added a position into Thai Beverage. 

(iv) I have continued to accumulate additional stakes into United Hampshire US REIT during the downturn when its price was hovering at US$0.37 per unit.

4. Portfolio 4 (Endowus & Other Investments)

I have added in a new self created balanced growth funds that is 50% equities (Fidelity Global Dividend Fund + Fidelity Asia Pacific Dividend Fund) and 50% bonds (PIMCO fixed income+ Allianz Global High Yield Fund) which will give an expected passive income yield of 4.8% per annum. 

I plan to continue building up my investments using Endowus as it enables diversification into bond funds.

Summary

I think that 2024 looks set to be another bad year for REITs due to the high interest rate environment which will affect most REITS and their distributions when their loans are due for renewal. Gone are the days of dirt cheap close to zero interest rates. Nonetheless, I am optimistic that the yearly rental escalation clauses should eventually negate the effects of higher financing costs for REITs. 

Know your own Employee Rights- Is Non-Compete Clause Forced Onto You Even Valid in Singapore?

I read with amusement on the most recent civil suit case brought upon by Shopee against its ex-senior employee to stop him from working for its Competitor ByteDance using the "Non-compete clause". So far I did not recall seeing any employer succeed in the State Courts of Singapore for such draconian request. Restraint of trade is generally frowned upon by our Judges in Singapore and rarely granted. 

1. How prevalent is non-compete clause in employment contract?

Well, it seems to be rather prevalent and forced especially onto management level staff when they sign the employment contract. Sometimes, even for junior level staff hiring, some HR departments will use a "standard template" which will strangely contain this. Perhaps the principle of these Employers will be to put in as much restriction to protect the company rights even if the clause cannot be uphold in court. Bottom-line is, it gives the company employer a basis to go after and hustle a staff who may join its competitor in future. 

2. So should you be worried if one resign and join one's competitor with such a clause in employment contract?

My personal thoughts to this is that generally, one should not be too worried as restraint of trade is something that our justice system really frowned upon. We are talking about the bread and butter of a human being. The Employer can put it there and craft as much black and white as they want but it is going to take a lot more than this clause to succeed in obtaining an injunction or other legal action that your ex-employer will want to put you through. 

Nevertheless, such clause maybe enforceable in certain circumstances. For example, if your Employer pay you say S$100K in terms of special separation bonus after you resign and clearly highlighted this in one's contract for you to rest at home and shake leg for one year, then the court may lean towards the employer in its enforceability of temporary restrain of trade for a year.

Parting thoughts

Anyway, above are just my personal thoughts. One needs to go to consult a professional law firm to go through your employment contract if one is worried that it may become a potential issue in future or prospective resignation to join a rival company. It is a small price to pay for a legal opinion and ease of mind. The best approach I reckon is to have an amicable discussion with one's current employer on separation issues such that it does not go down the path of a lawsuit which is a lose-lose for all parties.