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Cannot 4X money with MUST but what about a 70% growth?

Sunday, May 21, 2023

This is the transcript of my most recent video on Manulife US REIT and how we could possibly grow our money 70% if we should invest in the REIT?

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In one of my recent YouTube videos, I talked about an analysis which suggested the possibility to grow your money 4 times by investing in Manulife US Real Estate Investment Trust.

However, I said that the real estate investment trust would probably have to do an equity fund raising exercise which would make that claim untenable.

Today, I read another analysis but by DBS Research House this time.

In the report, DBS said that with gearing at 49.5%, just a little below the 50% limit by the Monetary Authority of Singapore, the need and urgency for a capital injection becomes more apparent.

I like to remind myself that the 50% limit was allowed because of the pandemic.

Could we see the limit going back to 45% regardless, since the stresses caused by the pandemic are eventually going away?

This is another reason why we want to invest in real estate investment trusts with stronger balance sheets.

The proposed sale to Mirae which would result in the creation of almost 10% more in new units to help recapitalize the real estate investment trust would dilute the current shareholders' interests.

Still, it is unlikely to be enough.

More unlikely still is the possibility to 4 times our money.



To be sure, Mirae is doing this deal not because it is altruistic.

It isn't a charitable organization.

It is acquiring a stake in the real estate investment trust and the REIT manager because it thinks it will make money from this deal.

It will heavily dilute current investors' interests.

It is also buying the REIT manager at what DBS research house estimates to be 6 times PE ratio which sounds like a pretty good deal.

If it plays its cards right, Mirae should be able to recover its investments in just a few years.

Post acquisition, DBS Research estimates Manulife US REIT should see gearing level reduce to 42.8%, all else being equal.

In economics, we always like to say this.

All else being equal.

That phrase encompasses everything else that could change the picture.

In this case, the gearing level could change because the value of the properties held by Manulife US REIT could see significant declines.

I remind myself that the average physical occupancy in many of its properties is under 40%.

This suggests more tenants downsizing their space requirements when their leases eventually expire.



DBS research is cognizant of this as they said, "gearing may be stretched if capital values continue to fall again by end of 2023."

"This may turn out to be true, depending on how the current turmoil pans out with the US commercial real estate space."

So, we could see things worsen as soon as end of 2023.

Due to this, DBS research also says that while a gearing level of 42.8% which is below 45% which is what Monetary Authority of Singapore allows if interest cover ratio is below 2.5x, this is still not a comfortable level for investors.

"As such, we take a step further to evaluate if a rights issue should be considered to bring the gearing level a notch lower."

"With new equity capital raised to bring gearing to a more palatable level of 40%, we believe this will provide sufficient flexibility to defend against further asset declines in the future, which will need an assumed further 20% decline in asset values to bring gearing back to 50%."



Taking all this into consideration, DBS research revised their target price lower to 24 cents a unit.

If we go with this projection, we might not be able to 4 times our money, but we could see it grow some 70%.

However, if we want to try our luck here, be prepared for a rights issue which I have said many times before is to be expected.

It is almost like Hobson's choice.

Not too hard to understand.

If AK can talk to himself, so can you!

Related post:
4X your money with MUST!



4 comments:

zhenling said...

yeesh, it's going to take time for the office industry to right-size. even if the us economy escapes a recession.

I'm of the opinion that interest rates will stay at current levels for the mid term at least and i don't believe the market has priced that in. Was hoping to buy something in the us office reit space to hold for yield but decided to sit out of this one.

Maybe if free money lands in my lap, can tikam. For now, my hard earned money is earmarked for other purposes.

AK71 said...

Hi zhenling,

The "work from home" culture seems to be very strong in the USA despite what bosses like Elon Musk say.

If the labor market remains tight in the USA, then, employees should have stronger bargaining power and bosses might have to bow to their demands.

You are probably right to say that to invest in MUST is like "tikam" because the (speculative) Force seems strong in this one. ;p

S A said...

Hi AK, would u talk more about CapLand Ascendas REIT? Are u vested and is it worth to look into investing into this reit?

AK71 said...

Hi S A,

My plate is quite full when it comes to industrial S-REITs.

Don't plan on adding exposure to the sector especially with a REIT that is offering a distribution yield of around 5.5%.

This is especially when risk free rates are relatively high.


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