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: