Thursday 30 November 2023

What is the Value of Manulife US REIT - Magic number Value is US$0.075 cents

Manulife US REIT (MUST) has announced a plan for its survivial till beyond 2025. There is no doubt that MUST will survive given the plan. But it is a very damaging plan.

Loans and then Building Sales to Repay

Much has been written about how Manulife US has given a "loan-shark loan" of effective interest rate of 10.7% to Manulife US REIT. It is no doubt a loan shark loan because it is 5.3% + SOFR, that is a very wide spread and given that MUST occupancy is still at a healthy above 75%, Manulife is indeed taking the opportunity to attract benefits from MUST shareholders.

Personally I would have preferred a dilutive rights issue which will then let shareholders decide if they want to participate or sell off their entitlement. The current plan leaves shareholders with no choice and the possibility of incurring US withholding tax for halting distributions based on the percentage of shareholders who do not submit their tax forms. It is an inferior plan in my view which protects the stake of the sponsor Manulife Insurance and to extract a high benefit at the expense of shareholders. I have personally proposed a better plan.

Building Sales

Manulife has to sell about US$328 million in buildings over the next 2 years to ensure it goes below leverage requirements. To me, that is a big jump. Lets look at its tranche of sales it planned. In addition, the value of the buildings are found here

From the looks of it and applying a 25% discount because buyers will know MUST is desperate, the entire tranche 1 portfolio will have to be sold. Capitol might have to go as well and MUST will then be left with 05 buildings to function as a REIT. In my view, the remaining portfolio has a value of US$680 million and with 49% leverage. This means equity of US$333 million will be left in MUST. 

Taking a 0.4 times B/V in consideration that the 5 remaining buildings are the most recent completed with lower CAPEX, that leaves about US$133 million fair value. Hence the fair value of MUST is $0.075 cents (at current share price that is about 50% in upside given the crazy sell down today)

Shareholders Can Benefit More, but REIT Manager Loses Out

However, in my view, there is a better option and that is for MUST to do an equity rights raising of up to $150 (or $135) million (in lieu of the sponsor loan), while reinstating the distributions to shareholders (who then can use the dividends to fund their rights entitlement if they want).

Getting the cash from shareholders prevents the assets to be sold within a timeline at the trough of a US property downcycle and prospective office building buyers will not be able to put MUST on the line knowing that its desperate. An equity raising of 2 for 1 at US$0.05 should put the resulting fair value of MUST at about US$0.11 (which allows for MUST shareholders to gain a further 46% in upside as compared to the inferior plan proposed by MUST REIT manager)

Rights Issue

In theory, MUST can just do a rights issue. The problem is that for the REIT distributions to remain tax-free, the sponsor (Manulife) cannot own more than 10%. But any undersubscription by Manulife would cause other participating unitholders to increase their stake.

If Manulife ends up with over 10% (very easy as it is already at 9.1%) they would need to sell off their units, probably at a discount. They would lose money trying to save MUST, throwing good money after bad. T
herefore diluting their stake in MUST and enjoying less of the future upside. However, the benefits is that (i) MUST keeps most of its buildings intact, (ii) pay its debt down without being subjected to high interest rates and (iii) prevent any US withholding tax liability from halting distributions.

The current proposal put forth by MUST is not the optimal solution in my view. It is because MUST reit manager and its sponsor do not want to enjoy less of the future upside; hence it proposed the less optimal route which carries the possibility of attracting a small amount of withholding tax that hurts all stakeholders. There is a better solution but it involves Manulife being diluted or, if it has good foresight, to subscribe for a proportion of its allocated rights to maintain just below 10% stake.

2nd Alternative- Diablo + Park Place to Sponsor and Equity Raising

Alternatively, the sponsor could have volunteered to continue its planned purchase of "Park Place" and purchase 1 more building of "Diablo", plus conduct a less dilutive rights raising given these 2 buildings were the least revised downwards in the latest round of valuation. Diablo is in the tranche 1 list and likely will be sold off. I do not think it can fetch its expected valuation if buyers know it is going to have to be sold off within 2 years. Manulife US could have bought it as well while having justifications of its sale to its own parent company shareholders that it had bought at the latest valued figures of US$58.6 million. After which a US$100 million in rights would only be needed.

MUST Investor Relations could feel free to approach me to discuss and dissaude why its plan is the best approach to save the REIT and not because it does not want to be shortchanged. Given the countless times the REIT has bought properties from Manulife US, I felt it is justified for them to be diluted given the decision mistakes.

I am not an investor of Manulife US REIT, therefore I would not be able to participate in the SIAS dialogue nor the EGM and hence why I have penned my thoughts online.

Wednesday 29 November 2023

Clarification Required by Manulife US REIT Management and its Board On its Recapitalisation Plan

 Manulife US REIT(MUST) has announced its recapitalisation plan. There are 3 parts to it:

(i) The sale of Park Place at US$98.7 Million to the sponsor;

(ii) A sponsor granted 6 year US$137 million loan of 7.25% interest + exit fee (total equivalent of 10.7% eir)

(iii) Halting of Distribution until 2025


I have a few clarifications that MUST Management and Board could clarify.

(A) Will the halting of distribution for 2023 and 2024 attract a withholding tax on MUST?

(B) If (A) is true, why has the board decided to forego 30% of profits each year which creates a permanent loss to shareholders. The board could instead opt for the following scenario:

(B1) Announce a 90% payout ratio as dividends;                                                                        (B2) Concurrently announce a non-underwriting rights issue for the amount of US$150 million, pricing Manulife US REIT rights at a large discount; 2 rights for every 1 share at US$0.05;        (B3) Any shortfall south of US$137 Million will then be covered by the sponsor loan according to the terms as stated in (ii).

My Thoughts

Everything hinges if (A) is true. 

If (A) is true, the current proposal issued by MUST creates a loss via taxes to all unitholders and is not the optimal solution. 

If (A) is false and no tax has to be paid due to the halting of distribution for 2023 and 2024, the current proposal by MUST is optimal.

If (A) is true, my proposed solution from B1 to B3 sidesteps the need to pay a 30% tax and unitholders get a chance to participate in the recapitalisaion. The stock market's function is to act as a conduit to raise funds if needed. Companies in need of money can always do a corporate action of issuing rights giving shareholders the chance to decide if they want to participate or encash their rights to allow non shareholders to participate. Pricing the rights at a large discount to the price of US$0.05 will attract a high subscription rate which meets the cash needs of US$137 million. The REIT manager need not underwrite it and will be able to subscribe to its allocated rights to maintain a 9.8% shareholding.

I am a non-investor of MUST. Hence, I will not be able to participate in the EGM. Neverthless, I will be forwarding the above to SIAS for their attention and hopefully MUST can clarify. 

Sunday 26 November 2023

How DBS Takes Advantage of Naive Singapore Consumers to Earn the Largest Profits

Looking at the first half of each of our local bank's financial statements, one thing stands out and that is DBS gives the lowest deposit rates to its depositers. This explains why DBS has been able to generate the largest annual profits each year among the 3 local banks. Evidence as below:

DBS Pays Depositers Average of 1.92%

OCBC Pays Depositers Average of 2.51%

UOB Pays Depositers Average of 2.51%

DBS Pays Depositors 0.59% less in Interest

Based on the above, it is obvious DBS pays about 0.6% less in deposit rates compared to OCBC and UOB. It is common knowledge that both OCBC's 360 account and UOB one account gives a better effective interest rate than DBS's multipler account as well. Somehow both OCBC and UOB pay the same amount of 2.51% interest rate while DBS is paying 1.92% interest rate.

Hence, it baffles me to why so many consumers still choose to bank their money with DBS, that is giving inferior deposit rates.

How Much is DBS Profitting more from Consumers?

This is not a made up number; DBS has $517 billion in customer's deposits. Giving 0.59% less in deposit means DBS saves $3.05 billion in interest to be paid.

That is equivalent to 4 months of its net profits. Partly due to its low deposit rates, DBS has been able to provide the lowest loan rates among loans. 

Sensible Financial Move- Shift your money to Minimally OCBC and UOB

If you still prefer your money to be kept in a local bank, the financially wise move is to move your deposits to OCBC and UOB. Both banks are giving better rates than DBS. Even among the high yield saving accounts, OCBC and UOB is better than DBS.

For individuals who are depositing large amounts with DBS - Have fun Staying Poor

DBS is giving the worst rates among the local banks (and people know it). DBS shareholders and people who are taking low interest loan from DBS are profitting well from your lack of financial knowledge. I will like to take this opportunity to thank those who are banking a large chunk of money with DBS for contributing to DBS's dividends and building our Temasek's reserve!

Monday 20 November 2023

Sea Group: Prepare for Another Quarter of Large Losses in Shopee

Despite the terrible results in Shopee, Sea Group has maintained the attractivness of Shopee by continuing its incentives to consumers. As of now, the games are generating $0.15 in free cash for shopee users per day. To add to that, cashback vouchers are still attractive going at 10% cashback.

Shopee- Low Margin Segment, Discount Abound

We all know the e commerce segment is a low margin high volume model averaging at about 1-2% of GMV as profits. Hence with shopee dishing out incentive such as 10% cashback or huge amount of shopee coins which can be used for 33% discount etc, it is definite Shopee is going to post another loss making quarter for Oct- Dec 2023.

I do not doubt this will stop. Sea Group plans to ensure self sufficiency and losses at Shopee will be offset by gains at its digital finance group and Garena. In summary, Shopee is likely going be loss making and cash burning for a few more quarters. This will drag the entire group profits

Garena- Growth Slowing

Garena is now clocking profits in the US$250-US$300 million per quarter. However what worries me is that some of this revenue clocked were from its "Deferred revenue". Basically, these are pre paid game items which may have expired or been utilised by Garena users. All this means cash flow wise, Garena result is lower than expected.

Eventually Sea Group will burn through its entire pile of Deferred Revenue and we will see an increased decline of revenue and profit. Stripping the accounting tricks, Garena is likely a US$600 million per year profit machine. Barely enough to cover 2 quarters of Shopee losses.

Prediction for Q4 results

Given the performance of the 3 segments, I am predicting an overall loss of US$30 million for Sea. The group will report a small accounting profit for the full year. But the question is it's current high market cap justifiable?

Shopee is fighting tiktok shop aggressively and Bytedance has a high amount of cash to burn. As consumers, it is a definite benefit; but those who own and invest in Sea (including I), it is painful and cash burning. I feel a US$21 billion market cap (US$37) fully values Sea at the moment. 

However, for it to justify a higher market cap, it has to beat Bytedance. That is going to be a very long and ardous battle. For me, I am contemplating selling off Sea should it hit US$50, my view is that the business has no more moat. The alternative is that Sea adopts the same approach as Lazada by ignoring tik tok price cutting tactics 

Lazada has been quietly not giving incentives while seeing the No 1 and No 3 fight. Its a benefit to Alibaba but not to Sea

Friday 17 November 2023

What Can Alibaba Do to Improve Its Share Price

Long term Alibaba shareholders have suffered. Those who had bought it 3 years ago have seen the value shrank by 70%, while those who have held since its IPO are up 10% after holding for 9 years (a paltry 1% return). It was not fundamentals that destroyed because Alibaba's earnings have went up many folds since its IPO

So what went wrong with Alibaba? Knowing this could be the root to solving the problem.

Problem: Negative Investor Perception

Before 2020, investors were keenly aware of how much Alibaba grew its earnings and abscribed a fair value to it in the region of US$200 for about 30-40 times P/E. That was fair considering Alibaba was growing its profits at a CAGR in its teens annually. 

We knew what happened next - President Xi imposed tough regulations and clip Alibaba Wings. End state today, Alibaba is now only valued at 10 times its GAAP earnings, this despite growing earnings by 5-8% annually. Investors are wary of Alibaba's prospects and value it at very cheap valuations. The answer is simple, Alibaba is earning money but investors are scared of investing because they run the risk of Alibaba being hampered by more regulations. They may not be getting their capital back

Returning Value to Shareholders

After the regulatory crackdown on Chinese Tech, many including Alibaba announced a share buyback program, which seems revolutionary because they were following the Berkshire Hathaway playbook, buy back shares at below book value and it will improve the value for all shareholders. Berkshire Hathaway successfully did it and has since gained good investor sentiments. Chinese Tech unforuntately were not. There were 2 reasons why Alibaba didnt succeed

Share Buyback Was Painfully Small

Alibaba sharebuyback was grand with plans to buy back US$1.5-US$2 billion per quarter. While the figure looks big, Alibaba was a US$300 billion company when the buybacks were announced. Relative to its market cap, this meant only planning to buy 2-3% of its share base then. In the grand scheme of things, that was paltry. Berkshire's share buyback was limitless as long as share prices went below 140% of its reported NAV, Alibaba restricted the amount of buybacks authorised.

In Singapore, blue chip companies had authorised themselves to buy back 10% of their company share base and when executing, they bought back 4-6% of their share base per year to show they were undervalued. Seen in this light, Alibaba Management is downright stingy. 

Alibaba is a cash cow which generates US$26 billion in cash annually. With a growing cash pile, the investing community felt Alibaba was not treating shareholders well. If the Chinese Government was affecting sentiments, Alibaba management was not returning a fair amount of shareholder value; that could only mean a downward trajectory of Alibaba's share price to match perceptions.

It is not as if Alibaba had used its free cash generated for investments and acquistions. From end of FY20201 (March 2021) to present day, its cash hoard and short term investments grew from US$72 billion to US$85 billion; it showed an inefficient deployment of capital. Alibaba could have deployed another US$8 billion per year as returns to shareholders.

Well They Listened (partly)

Sensing they are generating too much cash, Alibaba announced a US$2.5 billion in dividends for FY23 in its most recent November results. It was a backdated dividends to reward shareholders for its good work done from April 2022 to March 2023. This looks like a good start; but frankly, i felt this is only "them listening 1/3". Based on their excess cash generated, Alibaba could have returned USD$3/share as dividends and still add cash to its growing cash hoard.

This demonstrates the investor unfriendliness of Alibaba. Yes it earns big money but is unwilling to share its riches with shareholders.

What Should Alibaba Do (the solution)?

Taking on the hat of "Investor Relations", given the situation where it has a large cash hoard, great cashflow generating ability even after accounting for CAPEX, Alibaba should announce a fixed dividend/share buyback policy.

Companies with good investor relations announce such policies and stick to them. Given how much it generates, Alibaba can announce a 50% payout ratio as dividends on top of its current share buyback policy, This is remotely fair (borderlining on unfairness). At its current earnings, this means a USD$4 dividend per share (USD$10 billion/46% of free cash generated) at current earnings. Even then, Alibaba will still grow its cash hoard annually. Should Alibaba earnings deflate, it should be fair then that dividends fall as well in line with the dividend policy.

In my view, an outright 50% payout ratio on GAAP earnings is the solution. Existing investors get the money and decide for themselves if they wish to buy more shares for income or deploy it for other uses. Secondly, with the knowledge of an annual dividend, investors are assured they will not lose 100% of their capital should the communist govenrment turns evil and strangle Alibaba; after all they had been receving annual dividends. This simple action of a dividend policy will improve investor perception of Alibaba.

In conclusion, a 50% payout ratio would boost share price because it manages and improves investor perception. It is fiscally sustainable for Alibaba to do it, but the question is will the mangement change its stingy ways. Alibaba is now a matured company and should act like it.  

Portfolio Update: Adding of Alibaba to Boost my Dividend Payout.

A simple update of all my transactions since my last update this month. Alibaba threw a spanner in its spin off works and as a result, there was a 10% sell down and I added 500 HK shares to my portfolio. The decision to pick HK over US ADS is because Hk has a lower withholding tax and Alibaba has recently started to announce annual dividends. So holding in HK makes it a more ideal dividend stock. Earnings wise, there was nothing much surprising. The surprise was the shelving of Alicloud IPO which explained why a 10% selldown in share price occurred.

At current earnings per ADS of 8 times and strong cashflow, Alibaba should be able to dish out at least US$2 per ADS dividends. Management could consider raising its dividends to reward shareholders. The conglomerate is now a matured state company and returning value to shareholder should be one of its priority. Its cash rich and cash generative, hence even a 40% payout ratio (USD$3.20/share) is justified.

Due to the dramatic sell down and increase in US REIT, Alibaba has drop to less than 50% of my portfolio.

Thursday 16 November 2023

Manulife, PRIME, Keppel US: Run Up in Share Price

With the likelihood of no further interest rates hiks, the 3 US Office REITs have risen in prices. Below were the magnitude in their price rise:

Manulife: 95% gain
Prime: 68% gain
Keppel US: 40% gain

Interestingly the magnitude of the rise in stock prices mirrored how dire the balance sheet situation was for each REIT. Manulife carried the highest risk. This no doubt shows the ageless adege "High Risk High Gains"

Will the Share Price Increase Continue?

I had avoided Manulife because it carried the highest risk among the 3 and was the weakest; I am not a hardcore gambler. However, in my view, now that we know the status of each REIT's Interest Rate Coverage ratio in addiiton to their tenancy, their future is much clearer.

So I would say "yes" that these 3 REITs would continue to rise but I am not able to vouch for the magnitude in increase. I believe until end June 2024 and including their dividends, all 3 REITs would nett a positive return. For Keppel US (KORE), I would say the REIT is on the strongest footing with a balance sheet that is even stronger than Suntec REIT and Keppel Singapore REIT. The market will take time to discover this, but I am confident KORE can re-rate to be a 50-60 US cent stocks. 

PRIME too should see an upward rating with a 40-60% chance of it needing a small capital raising. A 22.5 cent share price + 2.4 cents dividend is where I expect it to be by end June 2024.

Of course, all the above depends on no further sudden rate hikes. A rising interest rates affect both the expected cap rate and the required rate of returns. In a way, REITs behave like bonds. Higher interest rates means lower prices and vice versa