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.
Hi Choon Yuan, good day. Nice blog...always enjoy reading your postings.
ReplyDeletePersonally, I don't think share/unit buyback in the case of US REITs will work. Digital Core REIT has been buying back its unit since 1st Dec 2022 when its unit price is at US$0.610 per unit. However, its unit price has plunged to US$0.515 per unit as at 28 Dec 2022 (yesterday) and may continue to go down further below US$0.50 per unit.
On the other hand, Manulife US REIT Manager has been rather pro-active in trying to stop the flow. It has began a strategic review via the appointment of Citigroup. It may sell some of its properties to realize its fair value. It may also ditched its Office only asset investment mandate and moved on to acquire other type of US property assets. Prime US REIT and Keppel Oak will benefit if they also follow a strategic review footstep since office space in US is under pressure from extremely low physical occupation since the COVID pandemic which is way unlike the situation in Singapore.
My thoughts are the US REITs are pricing in a deep recession in the US macroeconomic. I do agree with your thoughts that fair value of the investment properties may plunge- not just by 20% but up to 30% or even more. Be ready to have sufficient cash on hand for extremely dilutive rights issue for the REITs to comply with MAS requirement of 50% debt equity ratio. It happened in 2008 and it can happen in 2023. Winter is coming!
Thanks Blade Knight, in terms of down performance due to share buyback, Digital Core has only fallen by about 15% as compared to the other 2 which are down 19%. Hence there is some outperformance.
DeleteAs for the impairment and potential dilutive rights issue, yes you are right, a writedown of 20% will require ManuLife to do a rights while it is about 25% for PRIME and Keppel.
* What happend in 2009, was the GFC. There were world wide bank rans esp on the US banks. The short term libor rate shoot through the roof. The REITs had difficult to roll over their debts, as they cannot issue bonds in the market at outrageous yeilds......... and the banks also got problem to le the reits roll over the loan. These result the REITs that were highly gear with no alternative but to issue rights to reduce the debt that REITs unable to roll over.
Delete* Dun think 2023 will be that bad that there will be another GFC result these REITs to be unable to roll over their debt. and their debt 70-80% are hedged........ thus probabilities for a major dilutive rights are low.
* Just selling begets selling.
I am just curious why only US Reit has been impacted by interested hike, recession, etc. But not to the local Singapore Reit like Keppel Reit, Suntec Reit. SORA has been increased significantly for the past 5 months. Furthermore, US has a low emloyement rate and the economy was still growing compared to SG.
DeleteIf we are projecting US will go into recession next year, i believe SG will be in recession as well next year.
xsw05, Manulife US REIT on verge of self implosion. Theoretically, the other 2 office REITs also may end up in similar predicament given the low physical office occupancy. Digicore REIT as mentioned by Choon Yuan seems to be doing slightly better with sufficient financial resources plus a lower leverage ratio to do share buy-back.
DeleteHi Choon Yuan and YoloWisely, Manulife US REIT is in deep trouble and just announced a 10.9% sharp drop in its fair valuation of properties. Its leverage ratio has shot up from historical 42% to 49% and just within a 1% breach of MAS imposed 50% ceiling regulatory limit. Think dilutive rights issue is on the table unless they managed to sell off their properties upon the completion of their "strategic review". I do see similarities to 2008/2009 GFC where valuation plunge on top of squeeze of credit.
ReplyDeleteBtw, I am vested in Manulife US REIT....I just hope that the situation does not degenerate into a fire sales of their properties. Upcoming 2nd half 2022 distributions in 2023 most likely will be cut to pare back on loans....haiz.
Hi BladeKnight, yes US reits are facing difficulties now. There are two areas of risk for them: 1) The first risk that applies to all US REITs is the rise in the cap rate. Due to the US interest hike, the cap rate they use will be higher and lowers all property values, 2) The second risk is sector specific where the implied property value is affected by the vacancy rates. 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
Delete