04/2020
This time, it is different! This sell down, in terms of the speed and magnitude, was indeed Fast & Furious, probably the best sequel to the Hollywood’s Fast & Furious 10.
For the first-time ever, S-REITs collapsed 341 points a humongous 35.13% as the FTSE REIT Index crashed from 970.62 on Wed 19 Feb 2020 to 629.61 on Thu 19 Mar 2020, over a period of just 20 market days!
As a comparison, S-REITs sold off 22.5% over a period of 77 market days (about 4x longer than 20 days) during the 2015 Taper Tantrum sell-off. Of course, the worst-ever sell-off in S-REITs was during the Global Financial Crisis, GFC where the FTSE REIT Index collapsed 74.67%, but it was over 13 months or 266 market days.
The ferociousness of the sell-off is very much attributed to known unknowns. In this case, it is the coronavirus that is the known factor, but the unknown effects ranged from how long will this pandemic last, when will infections peak and how many deaths will subsequently follow. Investors do not like uncertainly and will certainly sell first and ask questions later. This sell-off is akin to “throwing the baby out with the bath water”, not dissimilar to previous sell-offs though.
How the Smart REIT investor position his or her portfolio is this crisis times is key in making a fortune. After-all, S-REITs 37.91% fall to 602.64 on Mon 23rd Mar is already entering history as the 2nd Largest fall in S-REITs 19-history since the S-REIT market started in 2002.
Personally, I have navigated many crises like the 1987 and 1989 stock market crashes, 1998 Asian Financial Crisis and 2008 Global Financial Crisis. Crisis are times when fundamentals and technical take a back seat and Experience take the front seat. Investors and traders have to content with swings from Fear to Greed and vice-versa, sometimes in seconds.
What I have learned from past crisis is – Crisis are best learning experiences for the Smart investor. These are some of the invaluable lessons that I have learned so far from the current crisis –
1. YOU REAP WHAT YOU SOW
The local media reported that “the manager for Manulife US REIT blamed the REIT’s horrific price drop ,which wiped out four years of work, on mass selling by index funds and exchange traded funds, margin calls from private banks, and funds redemption and switching to other counters amid rising volatility due to the US Covid-19 situation” on Tue 24 Mar 2020.
Manulife REIT was certainly one of the Worst-10 REITs in this crisis, together with the other US-listed REITs like Keppel Oak Pacific REIT and Prime REIT. We had warned our student investors to AVOID these US REITs in our investment classes. Our high level of conviction to AVOID Manulife REIT, which we had explained in detail (we spend up to 45 mins per class to analyze rigorously individual REITs), in our classes included –
1. A lackadaisical growth in DPU despite a near 100% growth in AUM to US$2.5 billion at end-2019.
2. Manulife REIT’s ultra-aggressive growth at the expense of its older properties, namely Figueroa and Michelson, both of which suffered lower NPI in FY2019. Even its newly-acquired The Exchange suffered negative NPI growth despite guidance of a strong office market.
3. Separating its newly-acquired properties from the properties in which it IPO with, the latter actually has suffered negative growth in NPI.
4. Despite an ultra-aggressive acquisition strategy, NAV, like its DPU has not grown. Instead, it has sputtered at US$79 cents as at end-2019.
5. Despite guidance that the office rental market in the various areas where its asses are located have NIL deliveries, ie NIL supply growth, the rental growth of its various properties hardly seem to reflect such a phenomenon.
6. Were its ultra-aggressive acquisitions driven more by its motivation to enter into the FTSE EPRA/NAREIT Index or were they truly beneficial to minority shareholders?
The Sell-Down
In its teleconference call, Manulife REIT “tried to inspire confidence in the REIT by affirming that its leases are secure despite tenants working from home temporarily and some tenants downsizing. The REIT is nowhere near breaking any financial covenants either”.
Did its ultra-aggressive growth come at the expense of its older properties, namely Figueroa and Michelson, both of which suffered lower NPI in FY2019?
Students Investors of GCP Global who have been attending our REITs Quarterly Classes since 2010 will know that we have repeatedly warned on Manulife REIT. The REIT IPO at US$0.83 on 20 May 2016 with an asset-under-management, AUM of US$857.5 million comprising just three office assets in the US, namely the Figueroa, Michelson and Peachtree.
Ultra-Aggressive Acquisitions
Manulife REIT indicated that it wanted to double its AUM to US$1.6 billion.
It then acquired The Plaza at Secaucus in New Jersey for US$116 million and 10 Exchange Place at Jersey City for US$333 million in 2017. We had highlighted in our classes that –
1. The acquisitions were funded by deeply discounted rights of 28% to shareholders. Most good REITs that undertake acquisitions, financed by rights issue at a substantial discount, will not do well at DPU growth level. Over the decade, we have always emphasized that the most important factor in picking good REITs is its steady and consistent growth at DPU level.
2. Manulife initiated its quarterly reporting of Adjusted DPU.
It then acquired 1,750 Penn Ave in Washington DC for US$182 million and Phipps Tower in Atlanta in 2018 for US$205 million. Both acquisitions increased its AUM to US$1,695.5 million.
Again, shareholders have had to bear the burden with another heavily discounted rights issue to raise $265 million to pay for the acquisitions.
We had continued to highlight in our classes that –
a. These four acquisitions so far had failed to raise DPU growth on a consistent and steady basis. Not surprisingly, Manulife REIT price had continued to crawl through 2018.
Its Adjusted DPU interpretation has now caused much confusion among investors as investors grapple if each quarter’s DPU was adjusted for rights issue or NPI from new asset acquisitions.Which is which?Simplicity, not confusion is what investors seek for in REITs.
It then mentioned that it wanted to double its AUM to US$2.5 billion to enter the FTSE EPRA/NAREIT Index.
Manulife REIT then went on to acquire The Centrepointe in Virginia, Washington for US$122 million in Apr 2019 and 400 Capitol in Sacramento, California for US$198.8 million in Sep 2019. This time round, both acquisitions were financed by private placements, at sharp discounts to the market price, to the “index funds and exchange traded funds” and institutions which the manager now blames in the sell-down.
REIT managers can and should exercise discretion in who they can place out their shares to in a private placement. Perhaps if there was careful discretion and scrutiny, the sell-down in the shares by the same “index funds, exchange traded funds” and institutions, would not have been so severe? It may sound nice to say that your REIT is backed by institutional investors, but do they really have your back in times of crisis? Or should the REIT manager have spent more time with other loyal and stable investors?
Cheap Price is What you Pay in a Crisis, Value is What you Get
Manulife REIT share price plunged to as low as US$ 55.5 cents as at Mon 23 Mar 2020, a huge 46.64% drop.It is a historic low in the history of Manulife REIT.In our classes, we have taught our Investor Students where and how to look for bargains in the market. Manulife REIT, despite its various shortcomings and our reservations highlighted above, would fit into the bargain zone at its recent low of US$ 55.5 cents. Years of avoidance and patience are what the Smart REIT investor have been waiting for to buy on the cheap that crisis markets throw up.
1. THE PSYCHOLOGY OF FEAR
Understanding the psychology of Fear is as important as knowing your fundamentals or technical well going into a crisis market. This has been the hallmark of our Quarterly REITs and Masterclasses that we have been teaching for the past 31 years.
This evolved from my experience navigating the 1987 and 1989 stock market crashes, 1988 Asian Financial Crisis and 2008 Global Financial Crisis. This round of crisis re-affirmed that –
a. Investors are ill-prepared to understand and imbue the mathematics of uncertainty, statistical probabilities and Monte Carlo statistical modelling in their Risk-Return investment projections. It is strange that top schools and colleges teach the mathematics of certainty like trigonometry, differentiation and geometry, but not the mathematics of uncertainty that help investors crystallize their fears and uncertainty. Thus, it is not surprising that investors and traders will over-react, like they did in the four consecutive weeks of sell-downs before the 3-day magnificent rebound on Tue 24 Mar 2020.
b. In a crisis market, investors fear uncertainty, but a crisis is a situation of maximum uncertainty. This creates a sense of lostness, desperation and danger. It is in situations like this that investors want firm answer, but it is precisely in such situations where firm answers don’t really exist, only the probability bet of certain situations getting worst or worse and the extend where the market has priced that in, that determines profit and loss.
For sure, I will have greater material now to teach The Psychology of Fear in our Quarterly investment classes in the next 31 years, at least.
2. NIGHT IS DARKEST BEFORE DAWN
In our Facebook Live on Thu 19 Mar 2020 entitled “Navigating the Crisis Market” which have Reached more than 30,000 and surpassed 15,000 Views, we have guided that markets are always the darkest before dawn as it will be hit by one bad news after another.
Two days later, the market subsequently rebounded on Tue 24 Mar 2020 with the Dow Jones closing up 2,112.98 points or 11.37% jump, a historic feat. It was the Dow Jones best day since 15 Mar 1933.
Nonetheless, we are cognizant that rebounds do not equate recovery. In instances where markets have fallen so much in so short a period of time, it is clear that recent lows may be tested again, while bearing in mind that the high hurdle for markets to clear are that signs that the coronavirus is contained or we have passed the inflexion point of infections.
The bottoms of bear markets always look irrational on hindsight. But in real time markets like now, fear and greed are the main stay. As we have taught in our various investment classes, the Smart Investor need to ferret the gap between a REIT’s potential, endure the current volatility which is creating the opportunity to be exploited and ride the wave.
What I do learn from past crisis also, is the fact that markets discount ahead, so the day of reckoning when we can put our cash to great use is nearing. It may look bad today, it may be horrible tomorrow or next week, but the Smart Investor should recognize that –
TIMES LIKE THIS ARE WHEN FORTUNES ARE MADE
Our Weekly Facebook Live Sessions which has Reached more than 30,000 and surpassed more than 15,000 Views –
Thu 26 Mar 2020, 8 pm
We covered –
1. Our predictions the week before when we were correct in calling for a rebound.
2. However, rebounds do not equate to recoveries.
3. Recent lows are likely to be retested, as in past market crisis like 1998 and 2008 that I went through first as Head of Research, then Head of Institutional Sales.
4. Why US-listed REITs like Manulife REIT has been smashed far more than the other REITs and why we had warned on them earlier in our REITs Quarterly classes.
Thu 19 Mar 2020, 8 pm
Thu 12 Mar 2020, 8 pm
Do join us on our next Facebook Live on Thu 2 Apr 2020, 8 pm.
Many topics were covered and due to limited time, I just like to point you to a few articles in our library on our website for you to look further if you would like more details on: -
1. Picking your REITs
2. Market Timing & Necessary Psychographics to navigate the crisis/correction
3. Retail REITs and the impact of e-commerce – how real or perceived
4. Profit-taking and Picking market turning points
https://gcpglobalsg.wixsite.com/gcpglobal/post/preparing-for-winter-after-a-fantastic-winning-streak
Gabriel & Carmen
TIMES LIKE THIS ARE WHEN FORTUNES ARE MADE
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