ManuLife Valuation Loss, How about PRIME and Keppel Pac REIT?

Shortly after I had posted my previous write up, ManuLife announced a dreaded news that it has written down 10.9% of its asset value and is now at 49% leverage ratio, just shy of breaching the MAS regulatory limit of 50%.

The other 2 who has not announced the dreaded news are PRIME and Keppel (KORE). On context, the gearing for PRIME and KORE are 38.7% and 37.5% respectively. In my view, KORE is likely to report the larger of the writedowns and PRIME will become the least leveraged (and probably the safest US office REIT). Below is the main reason

Keppel has higher concentration risk in one city that is not doing well

Source: KORE AR (see page 65)

49% of KORE's asset value are concentrated in the city of Seattle. Among the cities, Seattle is not part of the sunbelt cities witnessing a resumption of return to office and increase in demand of office space (see Keppel Slides's page 17). What Keppel has omitted to present is that due to its property concentration in Seattle, their overall property valuation is affected adversely and probably to a larger extent than PRIME's.

Source: PRIME AR (see page 15)

Prime's portfoilo is more geographically diversified across USA with no city having a concentration of more than 20%. 

Hence I expect in the rounds of revaluation to come, barring any equity raising or private placement, PRIME REIT will become the lowest leveraged among the 3 US office REITs. All 3 REITs including ManuLife will be at the 43-50% leverage limit. As long as they don't buy more properties, PRIME and KORE unitholders should not see further equity raising. I reiterate among the 3, the risk of unitholders needing to fork out cash is as follows (from highest to lowest):

ManuLife > Keppel (KORE) > PRIME

What is Keppel's Advantage?

One thing advantegous to KORE is that its earliest debt maturity is end 2024 with only 13% of loans to renew by end 2024. PRIME on the other hand has 67% due in July 2024. Hence PRIME will have to pay a higher interest financing about 3 year earlier than KORE, assuming interest rates stay elevated in end July 2024 

This would affect the dividends unitholders receive but does not affect the event of requiring equity raising or private placement, which would dilute unitholders

<Author is vested in PRIME REIT>

Why buying US Reits like PRIME and ManuLife Could Be Dangerous

Currently, the SGX listed US REITs have been sold down terribly. In terms of dividends and price book, they are trading at very low valuations. Just look at the dividends and price to book ratio of PRIME and Manulife as of today (28 Dec 2022), these are distressed level pricing:

Prime REIT- P/B 0.47, Dividend Yield 17%

ManuLife REIT- P/B 0.43, Dividend Yield 15%

In the US exchange listed REITs, many are trading at price to book ratios of 0.9-1 times. This makes it baffling for the above 2 to be selling at such low values.... unless we retail investors are kept in the dark about some things.

Potential Red Flag of the REIT Managers

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.

REITs are generally asset-heavy, financially engineered and pay out most of their earnings, leaving little cash on the balance sheet. So it is interesting to see a REIT using precious cash to start a share buyback. It demonstrates the capbility of Digital Core REIT manager unlike PRIME and ManuLife who have been silent on the scene. 

I am particularly worried about the actions of both PRIME and ManuLife. The US REIT space was recently hit by a bad egg in 'Eagle Hospitality Trust' and people are afraid to invest in the space; yet these 2 REIT managers are not doing constructive actions to improve the sentiments, despite having better reputation and experience than the demised REIT manager.

The Magic Rate to use your CPF OA for Singapore T bills even if the Rates are Falling

As many people will know, T bills interest is falling due to its attractive returns and its bidding mechanism. People will say that below 4% is not good, but in fact it is still good. As long as T bills offer 3.45% and above, it is better than CPF OA rates.

Therefore, Singaporeans should put the maximum sum of their CPF OA avalaible into T bills because of its higher interest than OA and are backed by the same entity - the Singapore Government (CPF OA is only 2.5%). Readers may point out that the first 20k of CPF OA earns 3.5% but this point is moot because the first 20k of your CPF OA cannot be used for T bills (so this point is covered). 

Cut Off Point of T bills being Attractive

The magic number is 3.45%. This is because of the mechanism where CPF does not give you interest for the month you withdraw the amount for T bill application and the month which it is deposited. Hence, I have assumed the worst case scenario where you dont earn interest for a total of 8 months. 

In short, T bills which yields 3.45% or more is more attractive than CPF OA.

Therefore for those who are putting in under the competitive allocation for T bills, 3.45% is the lowest number you should key in; any lower, CPF OA is slightly ahead. However, the good thing is that if the cut off rate for T bills is higher, you enjoy the higher interest as well. So there is nothing to lose!

As a reminder, the current tranche of T bills is open for application. To make your CPF retirement work for you, remember to bid as much T bills as possible; for those who are bidding under the competitive allotment, the magic number is 3.45%. For those bidding under the non competitive allotment, put as much of your CPF OA as possible.

December Singapore Savings Bond Interest Falls!

While we hear about an environment of increasing interest rate, the surprise is that the Singapore Savings Bond (SSB) and pherhaps, T-bills interest are falling!

Just look at this month's SSB yield offer (3.26%) vs the previous month's (3.47%):

December SSB

November SSB

The magnitude of decrease is similar to what we saw in T bills in which it has fallen from 4% to 3.9%. For those who are still cash rich and have not been successful in T bills application, my personal feel is that we can try applying for the upcoming December T bills application; if bidding under the competitive allocation, the advice is to bid at about 3.5% (my gut feel is that the cut off rate for the December tranche of T bills will be at 3.8%)

After which whatever amount it fails, the fall back plan is to apply for December's SSB.

Will SSB and T bills rate continue to fall?

My suspicion is that most of the application we are observing for T bills are from CPF OA balance. As long as CPF OA maintains at 2.5%-3.0% interest, CPF members will continue to apply T bills. Due to the abritage, I suspect T bills rate will eventually be at 0.6% above the CPF OA rate (hence if CPF OA = 2.5%, T bills will be at 3.1%)

For SSB, as they are not CPF OA eligible, their rates are dependent on the excess cash that people have. Hence I suppose we will not see a much further decline in SSB rate. The Dec SSB rate is probably the equilibrium.

Portfolio Update Dec 2022

To maintain exposure to the Chinese economy but yet diversifing across various industries, I have reduced my stakes in Wei Yuan/YZJ Finance/ICBC and spread across more companies due to a deep discount scenario during Nov arising from the communist party blunder in their management of lockdowns.

Added Xiaomi, Nanofilm, ISDN, Huya & PRIME US REIT. The first 4 had experienced a sell down due to the Communist Party Congress bearing bad market sentiments with the Poliburto promotions and China's strict lockdowns despite citizens protest.

I am banking on China to reopen and with that an uptick in its manufacturing capacity. Nanofilm and ISDN are companies I think that will benefit. Xiaomi's investment is due to anticipation that China consumers will spend more on electronics and lifestyle products once their disposable income returns. Huya is for its advertising revenue and exposure to the younger China demographic segment who have been hard hit with youth unemployment at 19.9%. The antiicpation is that a reopening will reduce youth unemployment and increase in their dispoable income.

PRIME US Reit is unique as it is the only stock with US exposure to my otherwise heavily China focused portfoilo. Prime was picked because of an anticipated dividend yield of 12%. Below is my portfoilo composition:

SATS is Running the Risk of Overpaying for its WFS Purchase

Recently, in forums, there has been a mockery over Singapore entities (such as Temasek) overpaying for their purchases and then delivering low to negative returns (purchase of FTX, TSMC etc). Unfortunately, it seems another Singapore company, this time SATS, is likely to be overpaying for its purchase

$1.82 billion purchase of WFS

WFS is a air cargo company. Due to the e commerce boom arising from the need to stay at home during COVID,many air cargo firms experienced an increase in profit margins as the boom in e commerce was constrained by airline slots. Even Singapore Airlines (SIA) experienced a boom in air cargo business. However, in recent quarters, SIA is now reporting a decreasing air cargo volume. Given that SATS and SIA are closely linked, I am surprised that SATS still went on for the pruchase of WFS.

From WFS's financial reports, EBITDA profits is falling and this is due to margins reverting to the norm because the COVID boom has declined. I will not be surprised if SATS had waited a little longer, WFS's margin will fall from 13% to even lower in the single digits. Before COVID, its margins were at 5%, so its definite there is a reversion of the mean going on from the highs of 15%. I strongly believe, WFS's EBITDA has plateaued and EURO$200 mil EBITDA is the cap for now. Seen in this light, SATS is paying for 6.5 times EBITDA which is painfully expensive, I am not sure who is adivsing the SATS mangement but they are buying WFS at the wrong cycle.

WFS is coming down from a Peak (Boom) and SATS is recovering from a Bottom

One thing SATS has been touting is that the purchase is EPS accretive. Considering that SATS is recovering from a COVID bottom while WFS is coming down from peak earnings, it is quite stupid to pitch it as EPS accretive. When things normalise, will WFS be accretive? Based on its finanical results and SATS normalcy, I will say it is a definite no

During normalcy, SATS EPS is about 15-20 cents per shares. Assuming WFS is purchased at S$1.82 billion and net profits is approximately EURO$150 million (S$213 million) deriving from its current EBITDA figures, the expected earnings per share of WFS is only about 11.7 cents per share. It is not earnings accretive at all if we assume SATS business as usual scenario In fact, a simple metrics of 15 cents per share (this was when SATS suffered from 3 months of COVID effect in early 2020) indicates that SATS might be paying 25%. 

My gut feel is that SATS should go back to WFS and renegotiate for a lower purchase fee of SGD $1.365-1.4 billion; in terms of Euro coversion, that is about a EURO $1 billion price to acquire WFS. Anything more, it is a bad deal to SATS

From the purchase, my sensing is that the SATS investment team were only looking at recent data and were not considering the changing of trends as the world moves on from COVID. This is pretty poor decision making by the SATS board.

Reaching the point where majority of the United States Tech Sector is 'Defrauding' the World

In recent week, there is one recurring theme among the US Tech companies guidance- they are lowering revenue growth guidance. For example, Twilio/Palantir had been forecasting 25%-30% revenue growth, however due to the expected recession and crypto collapse, forward revenue guidance has been revised downwards.

This means growing their way out of losses into profits have been delayed and share prices have fallen. As these companies pay their Tech employees with a large propotion of share based compensation, the falling share prices means more shares are issued to US Tech workers and existing shareholders worldwide are being diluted faster and faster. For example, Twilio's issuance to its Tech workers for share based compensation is expected to increase to 6% of share base each year. This means for current investors, they are being diluted the worth of their shares 6% each year. 

US Practice of Generous Share Based Compensation will Make Investors Outside US Poorer

It is unlikely US will cut the pay of their tech workers by reducing the share based compensation while maintaining the amount paid in cash. US tech companies are unable to increase the cash payout as their operations are still cash burning and will be prolonged given the weaker economic conditions. Conversely, a lower wages paid to US tech workers will result in reduced consumption and in turn a localised recession to US. This is not palatable.

Therefore, global investors will subsidise the wealth effect of US society by being diluted of their investment values while US tech workers get a larger amount of shares and encash it so as to maintain their pay. Hence US will benefit while the rest of the world suffers.

It has not helped where even the retrenched workers are getting their share vestments and are getting a large amount of retrenchment benefits which are eating into the PnL of US Tech companies.

Growth Story No Longer There

It has not helped where US Tech companies revenue has slowed and they are unable to grow into profits in time. Rightfully, due to the declining share prices, US tech companies should move to paying their workers in cash. In the US property and REIT industries, the remueration of their workers has moved to almost a full cash payment so as not to dilute existing shareholders. This was evident when 2 out of the 3 SGX listed US REITs announced they would not be paid in shares but in cash so as to avoid dilution effect to existing shareholders. It happpened too in US listed REITs.

In short, the US Tech industry are still maintining their share compensation package because their promised growth story has not materialised and they prefer having their cash buffer to continue burning. Their Tech workers are highly paid individuals earning a 6 digit annual package. On average, each Twilio employee earns US$82,000 in shares per year and with part of their salary also paid in cash, it is conceivable that an average Twilio employee is earning a 6 digit USD annual salary.

In a way, the US Tech Industry is like a Ponzi scheme where the wealth/cash pumped in by investors are being dispensed out to its workers and early founders and employees by issuing more shares. These shares are then encashed by their workers and more shares are circulated (evident based on the earnings report of many US tech companies). Unfortuntately, as the world has already plonked the cash into these companies, it is impossible to stop it as Tech companies have an unfair structure where founders are given outsized voting rights relative to their stake. In the end, the world has been defrauded by the US Tech sector and a death spiral is looming with value destruction occuring. It is probably the fraud of the decade which may rival that of cryptos.