Friday, September 20, 2019

Manulife US Reit acquisition of 400 Capitol

The recent announcement seems OK.  Not good, not bad. just OK.

It is a Class A office building in Sacremto downtown (CBD), possibly a "trophy", being the "tallest building in Sacramento...forming an integral part of the city’s skyline. The Property is widely considered the premier building in the market and is downtown Sacramento’s address of choice for premier law, financial service, accounting, and professional service firms."

Average of 2.3% rental escalations per annum.

Committed occupancy is 94.9%, though the small print says that excludes one tenant that has exited since then.

Manulife says that rentals have space to move up:

The 2019 Q2 Cushmand and Wakefield report that I found gives Downtown Sacremto's asking rent as  $3.18 (p3), which would be $38.16 per year.  Maybe the newer report has higher rent.

One of their major tenants is a bit dodgy:

WeWork signed the lease in 2019 Q2 (See p3).  I do not know if the lease length is a long one, adding to the 5.9 year WALE.

The property had a lower occupancy rate of 84% in 2018 - this was before the WeWork lease.  Manulife gave a proforma calculation of how it this acquisition would have affected their results if it had been done in 2018:

Almost no change.  So if WeWork stopped paying rent tomorrow, it is likely that DPU after the acquisition would be unchanged from before it.

Longer term, I think its a good property and I'm surprised they were able to buy another CBD property, rather than suburban.  Shorter term, I don't think its as good as they make it out to be. Vacancies were higher last year, and with WeWork as a tennant, the numbers might not reflect reality.   Perhaps the seller leased to WeWork to increase the valuation before selling.  And perhaps Manulife rushed a bit in order to grow to be included in the Nareit:

Its a valid business strategy to grow bigger to be included in the Index.  Size matters for REITs, and inclusion in the index will boot their valuation, reduce their cost of capital, allowing them to acquire more.

I think Manulife REIT is still decent and, and one of the few SGX-listed REITS not overvalued.  I will be subscribing for the preferential shares, and will continue acquiring it.

Sunday, September 8, 2019

Bought Wharf Reic (HK.1997)

Bought 2000 shares of this company last week, on news of the extradition bill being cancelled.  This action decreases the chance of bloodshed (Tiannamen 2.0) - there's a chance both sides can talk now.

Wharf REIC derives 2/3rds of its profits from Harbour City.  It's a massive shopping complex, with separate buildings for luxury, children, sportswear and dining.   They account for 10% of HK retail sales (excluding F&B).

Their numbers are excellent.  Gearing is below 20%.  Their property's lease is for 800 years.  Its a very simple business where the rental just flows through to the profits.  Its trading at a trailing PE of 7 to 8.  Thats at a payout ratio of 65% (its not a REIT).

This is a cyclical stock.  Leases are short: 1-2 years, which is good in a rising markets, but bad when things go south.  Management is projecting a "high single digit and even "double digit decrease" in retails sales in the second half, which may affect rents that are based on tenants' sales.  This stock can be taken as a proxy for Hong Kong tourism, and Mainland Chinese luxury goods spending.

Why is it so cheap?

  • The global slowdown, and slowdown in China specifically.
  • HK protests

I am buying this stock, hoping that, in one to two years time the protests are forgotten.  Tourism and shopping returns.  Maybe China will stimulate its economy more  stimulus (they have been surprisingly cautions so far), so that more people can travel and buy LVs.

The main risks to this story are:

  • The downturn continues and we get a recession, despite best efforts of the Chinese government.
  • Political risk.  Harbour city avoided a protest, but this may have made mainland Chinese angry.

This is not a buy-and-hold forever stock.  It only forms 2% of my portfolio, and thats as much as I'll buy.  Long term, HK is not a place to park my money.  Unless the government can improve the lives of its citizens (primarily by decreasing property prices), it will remain a powder keg.  And after 2047, the Chinese government does not have to honour any 800-year property lease.

I got this idea from Kyith at Investment Moats.

Saturday, September 7, 2019

My Macro View

I think of macro as a way to explain what can happen, not what will happen.  To see all the possibilities in the future, and make sure you will be OK either way.

The US economy is in a slowdown.  This may or may not turn into a recession.  Previous slowdowns in 2012 and 2015 and did not turn onto a recession and proved to be buying opportunities.

The cyclical downturn started before the trade war in both the US and China.  The trade war is not the cause, just the icing on the cake.  We can get a cyclical upturn without a resolution to the trade war.

Both the US and China will do everything possible to avoid a recession.  Trump to avoid losing the election.  And Xi to avoid a revolution.  Whether the Fed's cutting rates and China's stimulus (for the n-th time) is enough remains to be seen.

No resolution to the trade war.  The differences between China and the US are too big and cannot be negotiated.  This is a cold war.  Longer term, US companies will disengage from China, and there will be two parallel, seperate supply chains.

Long term:

  • I think China's economy will not implode, but will drift downwards as they restructure.  Whenever it looks like it is about to collapse, they will pause restructuring and stimulate.  Stop-start, stop-start.  A glide slope.
  • The Eurozone will a probably break up.  Countries so different should not have a common currency.
  • Theres a small chance of the USD shooting up due to their shortage.  Probably accompanied by emerging market crisis.
Things I think the market is not pricing in now:
  • Oil price recovery
  • For HK/China stocks, a cyclical upturn due to Chinese stimulus.
  • Bank stocks (both SG and US) are low, due to the expectations of low rates foreverrrr.....  If this changes, lets say 6-18 months out, like it did in 2016 after Trump's election, bank shares are worth a look.
  • A crash, due to the market being too high combined with political risk, maybe exacerbated by systematic traders.
In general, markets are high now, I would not buy into "the market" (the indexes).

I am looking at REITS and dividend stocks, but there's not much out there thats reasonably priced.

Stopped the Systematic Strategies

Last week I stopped following these strategies, both the momentum and The Acquirer's multiple.

Returns have been quite bad since starting in February:

  • 2% for the momentum strategy.  Its been a choppy market.
  • -28% for The Acquirers Multiple.  Value investing has done badly compared to momentum, since 2009 (1) (2).  I'm sure it will come back, I just don't know when.
On a daily basis, both strategies are high beta, and follow/magnify the movement of the Russel 3000 index.  If the index is up 1%, they're usually up 2-3%.  Same for down.  Holding 'value' - at least this kind of 'deep value' - meaning companies that are nearly dead - does not protect you.  On down days, they do worse than the market.

The reasons for stopping:

  • Its hard to stick with when it goes wrong for long periods.  When you manually analyse and select own value stocks one-by-one, if a stock goes down, you can try to see why.  Has something changed with the fundamentals, or the macro environment?  Or have perceptions changed?  Has the whole market dropped?  Did you make a mistake?  You can (at least) try to look at the stock with a level head and see if you should cut losses or hold.  With a portfolio of non-discretionary stocks, theres nothing to do except to have blind faith,
  • Manually analysing stocks takes more time and effort, but I can choose when to do it.  In most cases my long term investments won't be affected by missing a few weeks of work.  The exceptions are if results are unexpectedly bad, or for sudden crises (eg: HK protests) - though even these take weeks or months to play out.
  • It was a pain in the ass to stay up trading 9:30-10:30 Monday nights.  I found Interactive Brokers pretty hard to use, sometimes I sold the wrong amount and accidentally ended up short.  It was only one hour a week, but it was a chore, and I didn't like doing it at nights.
I think the main advantage of the non-discretionary strategies is that it keeps you in the market, so you avoid FOMO.  However they get whipsawed in a trendless market, and will not protect you agains a 1987 style crash.

In the end, I decided hold cash, while building up a dividend portfolio.  I think this suite my personality better, and I can measure progress by dividends collected, instead basing it on stock price fluctuations.

Right now I'm 2/3rds in cash.

Like a diet, the best investment strategy is one you can stick with.