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.

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".

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 bad....you 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!

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.

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.)

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. 

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.