Monday, February 15, 2021

California and New York: Selling Manulife REIT

Manulife REIT is one of my few losing stocks.  I bought before covid and its been a laggard in the recovery.  There's a lot of bad news coming out of California and New York.  Are they in a long term decline, or just a blip from covid?

What We Know

Manulife REIT's exposure to California/NY

2/3rds of Manulife REIT's assets by AUM are in California or New Jersey (NJ could be considered part of NY city):

Source: Manulife REIT Corporate Presentation Sep 2020

Are California/NY in Decline?

The news out of New York and California is bad.  Companies leaving: HP, Oracle, Schwab. People leaving: Elon Musk, Joe Rogan, Kayne West.  Crime, homelessness and tent cities in the city centers. 

The news is emotional and politically slanted, so I need numbers.

U-Haul (a self-moving company), ranks states by net migration.  Their Jan 2021 report has New York and NY and California ranked 48 and 50 out of 50.  They were 44 and 49 in 2019.

The 2020 US Census estimate says:

  • New Jersey's and New York's populations have dropped for the last 2 and 5 years respectively.
  • California's dropped in 2020.  For the first time in ten years.  Even when it was growing before, it has been growing lower than the national rate since 2016.

So the numbers say that NY/NJ have been dropping for a while.  California has been growing more slowly that the rest of the country from 2016 to 2019, and had its first drop last year.

One counterpoint: Tech firms moving in to rent out NY offices.

Operating leverage

From their 2019 & 2020 results, fixed costs are around 55% of their revenue:
  • Property operating expenses (mostly fixed, p155): 37%
  • Other Trust Expenses (audits, paperwork): 1-2%
  • Finance Expenses: 14-15%
So a 5% decrease in revenue - still assuming full occupancy - leads to a decrease in PBT around 6-9% (depends if property taxes also drop).  A 10% decrease drops PBT by 19-24%.

Financial leverage

Their property values fell by single digit percentages in 2020:

The result is that Manulife REIT now has 41% gearing, approaching MAS' 50% limit.

This small valuation drop does not seem to take into account covid.  In July, the US Bank Tower (near Figueroa) sold off for 34% less than its valuation.

What I Don't Know

Is California's 2020 population drop the start of a trend, or just a covid-19 blip?

Long term, how will WFM affect office space usage?

What I Think

The good things about Manulife US REIT:
  • Good properties and tenants.  Grade A or trophy offices, with a high number of 'blue chip' or government tenants.  They have held out through the covid crisis well.
  • Good management.  Management is incentivised to increase DPU, not make acquisitions or increase AUM.  They had a plan to grow by acquisition to be included in NAREIT, and they succeeded.
The bad things:
  • A 100% payout ratio means they will have to raise capital again if they want to expand.  If property values drop by 20%, they will have to raise capital anyway.  Bad when they are paying an 8% dividend.
  • NY and California are declining.  NY/NJ is losing population.  California has declined relative to US as a whole since 2015, and may starting to decline in absolute terms. So if you own property there, you are swimming against the tide.

Where Could I be Wrong?

The bad news may already priced into the stock.  With an 8% yield.

California and New York may decline relatively, but still survive.  As long as their cities do not turn back into crime infested shitholes, even if they stagnate and rents stay the same, the stock would be worth it.

And within these declining states, there may still be areas of growth.

Does all the bad news magically disappear after covid goes away? Or is the decline part of a long term trend?  And even if it is, is it already priced in?

So what happens from here?
  • If things recover after covid, rents and valuations rise, the dividend yield goes down to 6%,  the stock may rises 20% and they can raise capital to carry on expanding.  The happy recovery scenario.
  • If California and New York are in a long decline, rents slowly decrease after 3-5 year lease expiries, the dividend and stock price slowly drops, so do building valuations, and they have to raise money by issuing very expensive stock.  The bleed-to-death scenario.


Hard to say what will happen.  Both scenarios are plausible.  Its the population growth rate chart that convinced me.  I think the trend of US re-industrialisation will favour Texas/Florida against California/NY, and industrial properties against offices.  And I think its a long term trend, not a cycle.  The problem for investors is to tell how much is priced into the market.

I sold my Manulife USD REIT at USD 72c today.  Loss of ~ USD 9000, which includes dividends received.

Saturday, February 13, 2021

SNAM - Italian Gas Transmission

 Italy imports most of its gas:

Which comes through 5 pipelines:

The gas pipelines inside Italy are all owned by SNAM, an ENI spin-off.  They provide infrastructure so Italians can enjoy a stable and diversified supply of gas.  For example, the TAG pipeline (on the right of the map) has just been completed - it was built to address previous problems obtaining transport capacity during peak seasons.

Long term gas usage is expected to decline in the future due to higher energy efficiency and higher renewables.  But they still plan to use gas in 2040:

Source: Italian National Trend Scenario - Jan 20201

In 2019, 76% of SNAM's revenue was from gas transmission, with the remainder from storage.  A negligible amount was from re-gasification.  

The numbers

Predictable revenues and high margins:

The main factor affecting business is regulation.  Regulatory review for gas transportation is every 4 years, the current one ends in 2023.  A real rate-of-return of 5.3% is predicted (p17).  

Their long term growth is expected to be 1% (I lost the reference).


Debt is 13bn, or just under 6X EBIDTA.  A bit high, but OK considering the debt.  EBIDTA covers interest payments 16 times.

Most of their debts is through bonds.  Maturities are well spread out over the next 15 years.  We can see the effects of the Eurozone crisis on the bonds issued in 2012 and 2013.  Since then, rates have gone down to 1% or lower.  Money for nothing:

Three quarters of their debt is fixed rate.

SNAM has a higher credit rating than Italy.


This type of company has little business risk.  The risks are 'black swan' events.

Biggest risk is Italy leaving the Eurozone.  Although its fallen off the radar, I think it will return.  The effects would be:

  • SNAM's revenues convert to lira, which means a drop of lets say 30%.  Their bonds remain denominated in Euros (no one is receiving sub-1% interest for lira bond - holders will expect it to remain in Euros).
  • New debt (bonds being rolled over) in lira cost more.  Maybe 5%.  

If that happened, I estimate they'd still be making 1.3bn in EBITDA a year in 'newly depreciated' Lira -  or 1bn current-day Euros.  After (unchanged) interest, it would be over 850m..  Thats an FFO (before tax) of 0.25 current-day Euros per share.  The stock price would probably drop around 35%.

The second risk is regulatory change.


Gas deposits in the Mediterranean (eg: Israel's Leviathan) could make Italy a transshipment hub for Gas.  Through TAG.

The gas pipes may be used to transport hydrogen.  They have already tested 5% and 10% hydrogen mix as part of a trial.  Italy may become a hub for hydrogen produced int he hot regions of North Africa.  I don't care about ESG hype, but its interesting that they've done trials in the real world.  And the ESG funds may lap it up.


In 2019, 70%of earnings were paid out as dividends.  In 2018 it was 76%.  This is decent, though probably not much room for upside.


Steady, boring company, more like a bond.  It's a nice 5% earner in a yield starved world.    With the Sword of Damocles (Eurozone breakup) constantly hanging over its head (although the fallout from this risk is quantifiable).   If I bought it, I would limit it to 5% of my portfolio.

Or wait till Italy leaves the EU.