Manulife US REIT: Expect Lower Occupancy and Expectations of Its Divestment Plans (Nov 2024)

As expected, the office building in Capitol of Manulife US REIT (MUST) portfolio was sold. One of the main reason why I thought Capitol would go was because it is a good asset with a high occupancy rate relative to other offices in MUST's portfolio.

2024 Divestment Target (108/230)

Based on its 2023 restructuring plan. MUST has to sell US$122 million more in property valuation. While its Tranche 1 buildings are placed on the market, I do feel 02 buildings (which coincides to how many they had placed for sale) would be negotiated for sale close to the agreement deadline; just over the line to achieve US$122 million

Tranche 1 Assets are Weak

Figueroa- Expected sale but a big downward valuation. Figueroa is currently valued at US$139 million for end 2023. However, in its submarket, the sales of its comparables are at US$137-$140 psf. Realistically, Figueroa is worth about US$100 million.

Diablo- Majority of its tenants are vacating end 2024, it is likely occupancy will drop to 30% level. Being an old office building of Class B status, I think further downward revaluation will happen. The building looks like a US$30 million value and likely NPI will turn negative in 2025 Letting it sit on MUST book will be a big negative. Likely this building will be demolished by either MUST or a new buyer.

Penn- Another old building in MUST portfolio. Questions will be raised if the US Treasury will downsize its office space in Penn, which I believe is likely. No doubt refurbishment was done but it is an old building that regularly needs maintenance CAPEX to ensure its lifespan. I  expect it to be worth about US$80 million.

Centrepoint- Has the lowest amount of expiring leases among the 4. In terms of value, it is likely the most resilient and can fetch US$65 million range.

Overall Lower Occupancy, Likely Lower Valuations

Expect another downward valuation come end 2024. "Green shoots" of recovery is not here. It is unlikely the re-valuation will result in a convenant breach of leverage ratio of 80%.

I do not expect the submarkets MUST are in to recover until end 2026. However, the REIT has to complete its divestment plan by mid 2025. It has to sell about US$200 million more in properties.

The need to raise liquidity is putting the REIT in a weak position for sales negotiation. Buyers know it has to sell and during a time when office spaces are still weak.

PRIME US REIT Thoughts: Future Plans in 3Q results and what CEO has to do to Improve Sentiments

Exactly 02 months ago, PRIME REIT's CEO Rahul Rana went for an interview and in the article he explained about how PRIME US REIT plans to convey to investors of where the REIT is today and where it is heading. All these to improve sentiments and bring share prices back.

3Q results came out and in this section of PRIME US REIT's slides, they did tell us the 03 year plans of the REIT:

In it, PRIME REIT listed 06 steps it will take. Step 1 to 4 are indeed sound and what the REIT has been doing. At a leverage ratio of 45.4%, it is indeed sound for PRIME to improve property valuations so that the amount of debt remains the same but leverage will fall mathematically.

Step 6 is something I am definitely looking forward to because, as investors, we are buying a REIT for dividend and for a REIT to resume its dividend, this mean business as usual.

Step 5 is something I have views about.

How to Improve Sentiments and Share Prices

To address the elephant in the room, PRIME US REIT share prices are indeed low. At current 0.3 times of price to book value, investors are indeed pricing the REIT in distress despite the successful refinancing. To me, there could be 02 reasons behind it

High Leverage

PRIME's leverage stands at 45.4%, it is probably too high for many investors liking, If PRIME is able to drive occupancy and in turn improve valuations, pushing the leverage to 40.X% and below, it would do wonders to sentiments. This can be achieved by two ways. 

Firstly, improvement in property values and secondly paying down the debt. What is interesting is that PRIME drew down on its revolving credit this quarter, this intrigues me and I though it was not financially wise to do so. Personally for this half of the year, I feel PRIME should keep to distributing only 90% of taxable income with the rest dedicated to paying down the loans.

The first priority to PRIME is to target 40.X% and below leverage ratio, without the need of diluting existing shareholders via rights issue or share placement. This is very important. The REIT should focus on it and stop drawing down on too much loan from its credit facility.

Paying More Dividend

From 2025, PRIME should resume paying out good dividends. In my view, where the share price is now is because sentiments do not think PRIME will restart a good payout to investors. PRIME has to be forthcoming in its dividend plans for its upcoming year end financial report. It has to guide with a ratio for its dividends such as "90% of DI to be distributed". This is what Unitedhampshire US REIT has done.

If the management wants PRIME to be valued at say 0.6 times book value, it has to consider how much to pay. In my view, from 2025, the market will likely value PRIME at 7-8% dividend yield of what it pays out. Hopefully, the management gets my hint. 

If it wants PRIME to be at say 30 US cents, payout has to be 2.4 US cents. If it cannot achieve it due to its cashflow, management will know share prices will be much lower and their perceived undervaluation will remain.

However, the REIT has to be cognizant its leverage ratio should not be compromised like in the past where it was paying out 100% of distributable income and increasing its leverage to pay for CAPEX. THIS SHOULD NOT HAPPEN AGAIN!

What I am Concerned: "Resuming Acquistions"

While it is indeed true there are bargains out there in the US commercial space, I do not think the REIT should go on an acquistion. Of priority is that it should manage its balance sheet first. PRIME should not be buying US office buildings from its sponsors. Any purchase, utilising leverage without a rights/share placement, will only push the REIT's leverage up.

Shareholders are jaded from collecting little dividend and will not be willing to participate in a rights issue to fund an acquistion. I sincerely hope the management is aware of this. Priority should be given to lower the leverage on the balance sheet, then consider paying a good dividend to improve sentiments so that share prices can go up to 0.6 times book value like what Singapore office REITs have achieved.

Buying more US office commercial buildings should not be done. Yes, many quality US office buildings are now put for sale, but this should not be what PRIME goes after. Furthermore, it should not be a purchase from any of its sponsors. If it's sponsor wants to offload, it should just sell its properties to outside buyers. If it is Keppel Capital, it has its own REIT of KORE to sell to, KORE is holding old assets which is burning so much CAPEX, maybe KORE should just take it to rejuvenate its terrible assets.

Plight of the US Office Market

The amount of US office space vacant is tremendous, many blue democrat states are seeing high vacancy because businesses are leaving due to their high corporate taxes and high number of homelessness which affects security. What makes it worse is that the blue states have much better welfare benefits which are attracting homeless people from other states.

I seriously do not think California will return to its glory days until it cuts its welfare benefits and corporate state tax. If PRIME is successful in driving Tower I occupancy, it should do so and then sell it. One thing i notice in many US office REITs is that the vacancy rates for office buildings in many blue democrat states are higher than that of the Republician states. This is something PRIME should evaluate too. Valuers will be aware of this and abscribe lower values for office buildings in blue states. Sorrento Towers has so far bucked the trend and I think PRIME US REIT too should consider monetising this asset. 

If PRIME REIT starts to incur too much capital expenditures, I do think the REIT should start to offload such buildings as well such as Promende and Tower 909.

Thoughts on Latest BTO Ballotting Result: Singapore has a Severe Housing Problem for Genuine Flat Seekers

The ballotting for the latest BTO exercise and under new housing policy guidelines is almost ending. One prominent measure is the large clawback amount to deter HDB flippers for good BTO estates. For context, the clawback amount is based on the price of the flat sold which greatly hurts any profit motive of flat flippers. Below is an excrept:

"If a buyer purchases a four-room Prime flat at S$650,000 and resells it for S$1.2 million in the future, the 9 per cent subsidy clawback comes up to S$108,000, which is equivalent to gross gains of more than S$400,000"

The link to the BTO application rate can be viewed here. Hence what we are seeing from the application are demand from genuine home buyers. And for the standard sites, those pesky flat flippers who seek to profit from BTO lottery (after all for prime/plus flats, there are 6-9% clawbacks on the selling price and a long minimum occupation period which reduces their IRR returns)

Multiple Sites Across Singapore

As said 9 sites across Singapore to meet aspiring flat owners was put out in this mega exercise. This meant almost all who needed a flat genuinely could ballot because there are sites everywhere

HDB BTO Demand is a Lot

Based on current ratio, it shows Singapore has a severe housing problem. As recap, BTO is open to only the low and middle income Singaporeans. Let's look at it segment by segment. 

Singles Segment

In a nutshell, there are too many low/middle income singles desperately in need of a house in Singapore. Even in the hugely unpopular Taman Jurong estate, there is a sufficient amount of desperate singles such that the 2 room flats allocated to singles is oversubscribed that it can fill up other undersubscribed segments such as senior citizens.

All the pent up demand goes to show how much neglect the PAP government has given to the singles of Singapore, close to treating them as second class citizens in the country. 

First Timer Couples Segment

Ovsersubscription has happened as well with the median application rate for 4 and 5 rooms exceeding 1.5 ratio. It goes to show as well as the number of genuine low/middle income seeking for a home has outstripped the supply in this mega BTO exercise.

Thoughts

The government can give multiple reasons but under the new policy, flat flippers has been severely deterred and those who are ballotting for this exercise are genuine individuals who need a flat. The ballotted ratio is staggering especially in the singles group.

This shows the failure of the government to provide homes for its own citizens. The current problem has helped many developers chanced upon selling expensive housing units to desperate citizens of this country. The market for aspiring home owners in Singapore is utterly dire. 

My view is that either a large amount of housing units has to be put forth in the next 6 months to a year to solve Singapore's housing crisis. Alternatively another approach is to review the population policy. One contributing factor to the HDB demand is that the foreigner population has grown tremendously. Foreigners are only able to rent and their large number are eating up all the excess housing units going into the market; in turn contributing to the booming rental market and allowing flat flippers to profit by marketting HDB flats as rental dividend machines.

One solution is to restrict the foreigner population growth to only about 0.5% -1% similar to the citizenry growth. It will help Singapore citizens a lot but the trade off is that the wealthy of the country will see a slower growth of wealth via real estate.

Leverage in Stock Market is Better Than Singapore Property?

Just a thought process for now, but I am contemplating.

We have often heard about Singapore property agents who tell us to lever up to enjoy appreciation of Singapore stock property and using rental income to cover the property loan expense. For context, many Singapore properties are only selling at about 3% rental yield (after non owner occupied taxes by IRAS and agent commission). This gives me a "what the fuck" moment. Lets delve more into the maths, how property agents tell us this covers our loan bills.

Property Asset- $2 million, (Loan 50%/Equity 50%)

Rental Income- $60,000, Loan expense at 4.1% interest- $41,000.

Before the factor of capital gains, the property asset yields about 2% in equity.

How about Stocks?

Well in many SGX stocks, many companies such as United Hampshire REIT/Asian Pay TV nad HK related stocks such as LINK REIT and Petrochina etc are yielding 8-10%. 

And with margin loans being low at 4.5-5.58% (see POEM margin financing promotion)

Before the factor of capital gains, these companies are yielding about 8-12% on a 50% loan/50% equity modelling.

In short, many dividend stocks can be leveraged on cheap loans in Singapore, with returns better than buying any Singapore property- doing a share financing loan on Asian Pay TV trust will yield a projected 21% annual returns on equity.

This brings me to the question of why should we leverage in singapore properties when so many SGX and even Hong Kong stocks are giving better returns. For context, below are the approximate returns for a few dividend stocks based on a 50% loan/ 50% equity and based on POEMS margin financing rates.

Asian Pay TV Trust (SGX-listed)- Annualised returns on equity (21%)

UtdHampshire REIT (SGX-listed)- Annualised returns on equity (11.5%)

Petrochina (HKEX-listed, which means interest is 5.58%)- Annualised return on equity (10.3%)

LINK REIT (HKEX-listed, which means interest is 5.58%)- Annualised return on equity (8.0%)

<Not doing a sponsored post for POEMS, just an idea that with leverage using Singapore loan on stocks, one could be hitting a gold mine>

60% of Portfolio in China, But I Am Still Holding

 China/the Hang Seng Index has rallied. As of now, the run up has resulted in my 60% of portfolio being in China. However, I still will not sell. There are a few reasons both Macro and Micro

Hang Seng Index is Undervalued relative to Other Indexes

Forward PE wise based on bloomberg - Hang Seng is still lower than the S&P 500 and at a significant difference. If things were to be the same, we are looking at an upside for a further 90% for the Hang Seng Index and China stocks; this despite the rally

Price Earnings of My China Stocks are Low

Alibaba and Petrochina are trading at 14 times and 7 times price earnings respectively. Their peers (Amazon and Exxon) are at 40 times and 14 times price earnings. The China companies are still relatively cheap.

Dividend Yield of My China Stocks are High

Link REIT and Yangzijiang Financial are at 6.5% yield and Petrochina is at 7% yield. Their next best alternative are far apart. It will take a much higher upside for these stocks to be 4% yield before I would consider divesting- that is because that's where their peers are at. Exxon is at 3% yield.

LINK REIT is the largest REIT in Asia with the lowest leverage ratio beating any Singapore REIT. Yet local REITs are at 4% dividend yield while supposedly the best REIT with the lowest leverage ratio is at 6.5% yield. The difference in yield is too stark.

So until a further upside 60% takes place for these stocks, I am not divesting. 

Conclusion

In my view Hong Kong/China stocks are still relatively attractive for investments. Hence, it is unlikely I will divest. Sentiments has changed and China stocks are now favoured.

What makes it ironic is that even at this levels, blue chips stocks of the Hang Seng Index are at 6.5-7% yield. That is better than any Singapore or USA stocks. 

Details of China Stimulus and Why It will Prop Up China Companies' Share Prices

This week, China's Central Bank (the PBOC) has announced a slew of measures. 02 policy measures are of significant importance to investors in China listed companies.

Quoting from the central bank's website, a summary of the policy measures are:

(i) 500 billion yuan swap facility being able to be usef for stocks ETF or China listed CSI300 shares as collateral and importantly;

(ii) the central bank lending to commercial banks 300 billion yuan of loans at 1.75% interest where china banks will then lend out at 2.25% for share buybacks or founders to increase their stake. This strategy mirrors what Japan has done in the past and this should boost China companies' share prices. 

The PBOC has said it will consider injecting more money for the above 02 measures if it is doing well by doubling the amount allocated.

Significance to the Market

Part (ii) to me is good. China companies are known to be high dividend yielders at 6-9% dividend. Now any company can borrow at a low rate of 2.25% and earn the differential from its own dividend. This possibly points to a boost to many China company share prices until they are of 4-5% dividend level. We could be seeing 50-60% upside in share prices for dividend yielders such as Petrochina/Sinopec/ICBC or even companies like Haidilao.

For (i), companies can now purchase financial and insurance companies can now buy companies or even those of high dividend and in the index as collateral with the PBOC. It helps funds and insurance companies to boost their returns and entices them to buy the blue chip companies of China.

The PBOC is doing what other central banks have done - using liquidity injecting approaches to boost sentiments. As investors, this could result in multi year highs for China companies if the trajectory follows what has happened in USA and Japan stock markets, the effects of their central banks injecting liquidity.

This explains why share prices of China companies have moved up 10-20% this week. In my view, if the PBOC continued support and then supplying more cash as a second tranche, China companies will be in a bullish mode. Companies we can put in our radar are the high dividend yielders especially when founders know they can leverage on the dividend differential to make money. I see 50-60% upside from here.

SBS Transit: Good Dividend Stock, Upside with Recent Public Transport Fare Hike

Most of us in Singapore knows SBS Transit (unless of course you are too rich that you drive a car or two in Singapore).

SBS Transit operates bus services, North East MRT Line, LRT Lines and Downtown Line in Singapore. Its revenue is tied to the fares collected. So with the expected 10 cents or 6% rise in fares, SBS transit is expected to report profits increase. What is the expected profit increase?

Expected Profit Increase in Public Transport Services Segment for SBS

In December last year, Singapore saw fare hikes of about an equal magnitude as what was announced a few days ago. As a result, SBS saw a rise of about SGD$8 million in pre-tax profits. Factoring in taxes, SBS Transit could be gaining an addition $6.8 million in profits (EPS 2.16 SG cents). On a full year basis, I am expecting SBS Transit to see an increase of 4.2 SG cents for next year.

Dividend Policy

SBS has a dividend policy of giving at least 50% of earnings ("EPS"). Based on this year's earnings ("EPS"), one can expect a EPS of 21 cents; after factoring the effects on SBS needing to pay more for for advertisement spaces at bus terminals and MRT stations. Adding an expected increase of 4.2 SG cents EPS from the fare hikes, this puts EPS at 25 cents and I expect next year dividend to be 12.5 SG cents.

Cash Cow

Due to its public transport business, SBS is a cash generating business and due to its small 50% payout ratio for dividend, SBS has now amassed a cash balance of $320 million (43% of its market cap) and 4 months worth of its operating expenses. With such a large cash balance and cash generation ability, I would say the company is able to continue paying 50% in earnings as dividend. There is a small chance that a special dividend can be announced but that depends on if it needs to transfer cash to Comfortdelgro (its parent)

Are Shares Worth a Buy Now?

At $2.38 share price, I would say SBS Transit is fairly valued based on the dividend metric. A 5% dividend in current climate is acceptable where a large part of its revenue is dictated by the public transport council.

I view it on par with other strong name REITs. However, with about 12% of fare hikes still required to be adjusted; for next year, I expect another 10 cents increase in fares. So we could be seeing an end state where SBS becomes a 30 cents EPS, 15 cents dividend company at end 2026.

For investors who wishes to take a lower level of risk, SBS transit is a good buy with prospects of seeing growing profits at a faster clip than say Sheng Shiong. So between Sheng Siong (Current yield of 4.3%) vs SBS transit ( Current yield of 4.6%), I would pick SBS Transit.