Investment Moats

DBS Multiplier Bonus Interest on First $25,000 Reduces Slightly By 0.08% to 0.25%

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A quarter after DBS announced that they will change how they handle the bonus interest to their popular DBS Multiplier accounts, they announce a reduction in Bonus interest rates for the first S$25,000 deposits.

This morning, DBS published an important revision notice for the interest rate for Income + 1 transactions in 1 category with effect from 1st May 2020:

DBS Multiplier bonus interest changes

The changes are smaller this time around, and it affects your bonus interest earned on the first S$25,000. If you managed to hit the higher tiers, you should be less affected.

In any case the reduction is about 0.08% to 0.15%. In absolute amount its $20 to $37.50 a year.

Something does not add up if you are going to cry over this.

The risk free curve have shifted downwards at least by 1%. Due to Covid-19, MAS have allowed home loans and insurance premiums to be deferred. This affects the supply of loans and the interest they charge on the loans.

Naturally, they have to control their costs, which is the interest on deposits.

Nevertheless, I think the risk and reward proposition shifts to greater risk taking then being in deposits. So you should be less affected by this.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

What is the S$NEER? How MAS Manages Singapore’s Monetary Policy with IT

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I received an email from Chuin Ting, CEO of MoneyOwl a few days ago.

It was an internal education sharing by their head of Corporate Business, David Yap on how we should look at MAS upcoming monetary policy posture. Before coming to MoneyOwl, David used to work in the trading of market instruments and foreign exchange in large international banks.

I always know that unlike many countries, we manage monetary policy through our currency rather than the interest rate. However, I did not pay attention to how it is actually done.

Until I saw David’s explanation. He eventually re-penned his thoughts here: Technical Note: Understanding The Upcoming MAS Monetary Policy Statement On The Singapore Dollar

If readers are not too aware of the S$NEER, I hope this short education piece would be useful to you.

Next time, when you come across a Business Times or Straits Times article on MAS’s policy changes, you can relate to it better.

So what is the S$NEER?

The S$NEER is the framework that MAS use to manage the strength of the Singapore Currency.

The main purpose is to balance between keeping the currency strong, but not too strong that it affects the competitive edge of the country in global trade.

It is also to rein in inflation.

While the majority of the economies around the world manage monetary policy through interest rates, Singapore manages this through our currency versus the value of the currencies of some of our biggest trading partners.

Singapore has always been a small and open economy where 40% of what we spend domestically goes to imports. So the rationale is that we have imported inflation and hence the effectiveness of using the value of SGD to implement monetary policy.

Mas will

  1. Strengthen SGD when inflation is high
  2. Weaken when the economy is weak

How MAS Manages the S$NEER in 3 Ways

At each monetary policy review in April and October, the MAS also decides whether it will make adjustments to the band’s slope, width or center.

Here’s David’s explanation:

“Imagine this band to be made up of two upward sloping parallel lines. The policy band is always upward sloping with the x-axis representing time and the y-axis representing the value of SGD (not USDSGD but just SGD).

MAS ensures USDSGD stays within this permissible trading band by intervening each time USDSGD trades close its bounds.”

1. The Slope of the Band

“MAS will steepen this slope to fight inflation and reduce the slope when our economy weakens.

Credit: Channel News Asia

This means that MAS will allow a certain percentage of SGD appreciation every year to fight imported inflation (positive slope). “

2. The Center of the Band

“This is used when there is a more significant change to the outlook for growth and inflation.

Credit: Channel News Asia

This is a de facto SGD devaluation used when confronted with difficult economic challenges. “

Kyith: MAS decide to center the band downwards in April 2009 during the GFC to make our currency more competitive in global trade. They center the curve back in April 2010 when the situation looked better.

3. The Width of the Band

“The band widens to accommodate increased volatility in the FX market.

Credit: Channel News Asia

It is basically ‘to save MAS bullets’ on intervention when markets turn extremely choppy due to events. “

Here is What David Expects MAS to Do

Given the economic challenges we have now, here is David’s analysis of how MAS may do, with respect to the 3 ways that was explained previously:

The slope of the band

“I believe it has to be reduced significantly to flat (no slope) as the economic picture is fast unraveling, faster than the Global Financial Crisis.

And if the mega fiscal packages announced by DPM Heng is anything to go by, expect an aggressive move by MAS. The market has certainly priced in this possibility. So USDSGD may not move much if this is announced.”

The center of the band

“For reasons cited above, MAS may not wait 6 months to devalue the SGD.

There could be a re-centering of the policy band lower. This is not fully priced in by the market. So if MAS implements that, USDSGD will trade higher on the news. (Spot reference: USDSGD 1.4268 on 28 March 2020 1430 hrs)”

The width of the band

“USDSGD has been trending up but still in an orderly manner. There is, therefore, no need to widen the band”

Here is What MAS Actually Did on 30th March 2020

This morning MAS announced what they actually did.

The slope of the band: MAS set the slope to neutral. They have not done this since Oct 2017

The center of the band: MAS took more drastic action by lowering the mid-point of the policy band for the first time since the global financial crisis in April 2009. The width of the band was left untouched.

The MAS also reaffirmed that official forecasters expect the Covid-19 pandemic to thrust Singapore into a recession of between -4% and -1% in 2020.

Core inflation, headline or all-items inflation forecast is slashed to between -1% and 0. Disinflation pressure should broaden. The inflation outlook was between 0.5% and 1.5%.

Summary

The NEER is something new to me and I am glad David explain this succinctly to us. Now that I know this, it makes me a little bit more interested to see whether his reading matches what MAS would do.

In this economic climate, we will not be the one setting out a devaluation posture. Everything is relative. It depends on who would dare to take up a posture to make their currency weaker so that they can be more competitive when global trade ever pick up again.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

Retiring into a 2020 Bear Market. The First Three Months.

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Well obviously not me since most readers know I am still working. I am not going to be that financial influencer who touts the virtues of retiring early, only to buffer their anxiety with blog income on the side.

One of the key risks that I bring up frequently (in my Retirement Planning Series) when it comes to planning for financial independence, is the challenge of the sequence of return risks.

In a previous article, I explained the problem of sequence of return risk and what are some of the common approaches to tackle this problem.

This post is more of a retirement, financial thought experiment now that we entered challenging market conditions. This March has been one of the longest March. A few markets are down -30%. The last few days we have a +20% bull rally.

This is probably a nasty sequence a retiree would experience. And I am interested to see how things unfold, in retirement numbers.

The year is not over yet, but since many commentators said the speed of the volatility, is similar to either the 1987 crash or 1929 Great Depression, I thought let’s do a simple thought experiment.

Let us look at your retirement experience if you have accumulated $1 million and decide to start your retirement end of last year (2019).

You have a choice of:

  1. Withdrawing $40,000 a year at the end of 2019 to spend for this year
  2. Withdrawing $3333 at the start of every month to spend for this year

How would your experience be like?

Would your portfolio be able to sustain that spending?

Would withdrawing monthly be better or withdrawing annually be better?

How did a Balanced portfolio (60/40 allocation) do versus a 100% Equity portfolio?

Our Base Case

Since I am at home, I do not have all the data with me, but I do have the rough returns of the Vanguard portfolio for the last 2 months and the returns up till the 26th of February.

This would allow us to do some simulation.

Let me explain how you will retire.

You put your $1 million in either a balanced fund or a 100% equity fund. Then, you will spend $40,000 in the first year. In subsequent years, you will adjust last year’s spending by last year’s inflation.

In this example, you will spend $40,000 a year in the first year. Since inflation last year averages 0.58%, if this continues, next year you will spend $40,232.

In this way, you will have an inflation-adjusted income for your expenses.

I want to see

  1. How the portfolio looks like around end March (like now)
  2. The current withdrawal rate now. I will explain why this data point is interesting later.

You Withdraw in 1 Lump sum Before 2020 and Slowly Spend

The table above shows how the portfolio value changes if you have invested in a balanced or equity portfolio.

The YTD return for the balanced portfolio is -12.35% and the equity portfolio is -20.41%.

It is not rocket science that the balanced portfolio ends up with more money than the equity portfolio.

It does not feel good seeing how much is left

We all do not like to see our portfolios go down and for this retiree that is what they are seeing. If you invest in a portfolio whose net asset value is updated frequently, you are going to experience this.

If you invest in private equity, angel investing, properties, you have less of this problem because the net asset value of the companies and properties do not get revalued frequently.

Viewing Your Portfolio in Absolute Amount Hurts More

The two portfolios are just 10% in return apart, but if you look at the absolute amount, you would feel more pain if you choose to invest in a 100% equity portfolio.

It looks like you lost 25% of your wealth, while for the balanced portfolio, it still looks “manageable”

High returns often come with higher volatility.

I came to believe this over time. This morning, I chat with someone who dabbles in these portfolio strategies on his own. He works in the finance field in his day job. He bang this into me that whatever strategies that lower the downside, it also curtail the upside.

I think the only way out of this was through rules that are more active in nature.

A 100% equity portfolio exposes you to higher returns, but you better be able to take that negative sequence risk where your portfolio gets cut 35% and you are compounding the fall by spending more through the income taken out.

Returns may not keep your portfolio alive.

The Weakness of Solely Using the Safe Withdrawal Rule as a Spending Plan

I have tabulated the current withdrawal rate so that readers can see that, if you retire today, in March this month, instead of the start of the year, your withdrawal rate will look very different.

The safe withdrawal rate of 4% has often been popularized as a way to determine how much you need to save for your retirement, and how much you can spend so that your money will last.

In this example, you withdrew 4% at the start of the year, so we can say that you are selecting to spend your income this way.

You believe that once you accumulate wealth that allows you to spend 4% of it in the first year, your plan should be safe.

However, if you are in a 100% equity portfolio but choose to retire in April 2020 instead of the start of the year, your current spending is 5.2% of your portfolio instead of 4.0%.

It begs the question: Do you think your money will still last 25 to 30 years now versus 3 months ago?

The issue with the withdrawal rate methodology is that it places a lot of trust that your retirement will not be worse than in the past. There will be years where your current withdrawal rate is more than 4%. You have to trust that the money will last for 25-30 years.

In reality, we don’t know what the future will hold.

My conclusion is that people tend to be flexible with their spending. When they see their portfolio value go down, they will review what was recommended by the safe withdrawal rate, but they will tighten up themselves. (This is as far as I will explain on this in this article, if you have questions do comment below)

What if You Withdraw $3,333 Every Month Instead

I was curious whether instead of withdrawing a lump sum, would withdrawing every month be gentler on your portfolio.

So here are the results:

Withdrawing every month instead of a lump sum

In an absolute amount sense, withdrawing month by month is definitely gentler on the portfolio. Instead of having only $764k left, monthly withdrawal will leave you with $786k left.

However, it should be noted that we just taken out 3 months of expenses. There is still $30,000 to be spent.

I think we will only know the true difference at the end of this. (Or if Kyith is less lazy and he decides to use some historical data that has 12 months instead).

What if You Spent a Greater Starting Amount ($60,000) Instead?

I wanted to see the scenario where you believe that spending $60,000 out of your $1 million portfolio is prudent.

We all have a lot of weird theories about what is prudent and what is not.

Withdraw $60,000 at the start of the year instead of $40,000

Looks pretty OK. About $16,000 difference in portfolio value between spending $40k and $60k.

The danger to the sustainability of your portfolio are repeated spending. So this short exercise won’t show much.

If you spend too much, your portfolio has less units to recover if the next 3 months are the months where the market recovers. This will cause your wealth to last not as long.

The Beauty of Spending Less than 4% of Your Portfolio in the First Year

In the following table, I tabulated the current withdrawal rate in March 2020 if you spend a different percentage of your portfolio for the first year:

Observe the column name Annual. This shows us that with the drop in portfolio value, what is the current withdrawal rate.

You can imagine that if you didn’t choose to retire in Dec 2019 but Apr 2020, what is your withdrawal rate and whether you think your financial independence plan is safe or not.

It is a given with a fall in portfolio value, that the withdrawal rate will go up. That is just math.

But if your withdrawal rate is high, you will realize that you would be placing quite a bit of stress on your portfolio.

Conversely, if you spend between 2% to 4% of your portfolio in the first year, even with the lower portfolio value, your spending would just reach a withdrawal rate that many think is still relatively safe.

My Last Word

At Investment Moats, I always shared that if there is a less effort way of accumulating wealth or spending down in retirement, it is by way of funds.

What kind of funds you choose is another matter.

The popular ones are the exchange-traded funds, the funds via a Robo-adviser platform, the unit trust, and ILPs that you can purchase from banks and other distributors. There are also the boutique funds, hedge funds and the scams that masquerade as a legitimate fund.

Whichever fund you choose, in a period like this, you have to endure the pain that your portfolio value will go down. Some of us are confident that despite the fall in portfolio value, our portfolio will still last for the duration we need.

For others, they grow anxious about it. You could find an expert opinion to validate if your plan is sound enough. But sometimes, if you are anxious, despite what we tell you, you are not going to be assured.

If you are near retirement and planning for it, you should think about 2 main aspects:

  1. Your portfolio structure
  2. How much wealth versus your income needed

Portfolio Structure is Important

There are going to be funds that going to tout great returns, but a lot of the times, they are going to come with some greater volatility. I think funds can give great returns, but I do wonder how many investors can base the majority of their portfolio in high volatile funds.

An MSCI World Small Cap fund at one point was down 40% year to date. If you belong to the camp where smallcap can give you above-average return and decide to put 100% of your allocation into it, thinking you can endure the volatility, you would see your $1 million become $600k at this point.

And next year you need to spend $40,000 more on that $600,000.

The current result of the balanced fund shows the right posture going into retirement. If you have accumulated well the past 5 years and needed the money in the next 3 to 5 years, it might be great that you de-risk the portfolio.

Had you done that, instead of still chasing performance, you might not have so many sleepless nights over whether you are doing the right thing now.

Knowing How Much You Can Spend is Important as Well

Just as important to the portfolio structure is knowing whether your portfolio value is enough going into financial independence.

If do not have enough, spending what you think is modest, is also spending too much.

If you have enough, spending a lot is also modest spending.

A good situation is one where you decide to start withdrawing from your portfolio at the end of 2019 and after experiencing this market fall, your current withdrawal rate hits at most 4% to 4.5%.

Why is that?

A negative sequence of returns may result in your portfolio running out faster than you plan for.

However, after your portfolio has been ravaged, and your current withdrawal rate is still around 4% to 4.5%, that means your original portfolio value versus your expenses is conservative enough.

Going forward after this point of portfolio ravage, the expected return of your portfolio should be much better than when you start your retirement.

I came to this conclusion over time that you should base the withdrawal rate at your retirement based on the valuation of the equity market (assuming you are investing in a diversified global diversified portfolio):

  • If the market value based on CAPE (cyclical adjusted price-earnings) is below 20 times, a higher withdrawal rate is fine (perhaps 4-5%). The expected returns going forward should be higher than average
  • If the market value based on CAPE is above 30 times, you should plan with a lower withdrawal rate (perhaps 3.3% or less). The odds of near term volatility is high. You may have accumulated well for the past few years, but a bear might be on the horizon and your portfolio is going to be cut. The alternative is that you have built your wealth, control your portfolio allocation by de-risking
  • If the market value based on CAPE is between 20 to 30 times, your withdrawal rate should be average

The above serves more as a rule of thumb. The short summary is that if you retire in a bear, you can use a higher withdrawal rate (which means you need less money). If you retire after a good bull run, use a lower withdrawal rate (which means you need to accumulate more).

We are 3 months into this, and I am not sure whether we will end the year positive or worse than this. I intend to revisit this exercise probably at the end of the year.

Two articles that I read on the money math in financial independence during this period that I would like to recommend:

  1. Coronavirus Course Correction by Go Curry Cracker.
  2. Dealing with a Bear Market in Retirement – SWR Series Part 37 by Early Retirement Now

My retirement section is below

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

Updates from Manulife US REIT & Prime US REIT

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Most of the REIT investors endure some extreme volatility in this March Madness. Their holdings have quite a good run in 2019.

Coming into 2020, investors believe that the low rate environment is here to stay. Even when the threat of Corvid-19 reaching the United States and Europe, investors rationalize that when the interest rate plunge, this must be a more conducive environment for the REITs.

What comes next is that in a span of 2 weeks, many REITs saw their stock prices plunge 50%.

Manulife US REIT and Prime US REIT both endure the same fate as their peers.

In the past 2 days, both REITs provided some updates to analysts, so as to address the potential uncertainties of investors.

Since then both REITs saw their share price go up 20-25%. Manulife’s share price held up better, probably because they are in the Index and are much more liquid.

Their transparency may have worked wonders for their share price. However, overall, a lot of the REITs managed to bounce off their lows.

Here are some updates that I have gathered.

Possible Reasons for the Sharp Price Falls

Management updated that possible reasons why the drawdown was so swift was due to

  1. Manulife’s entry into the index. When index funds, exchange-traded funds systematically sell down, there isn’t many fundamentals per se
  2. There was a lot of margin calls from the Private Banks (my friend KK from RisknReturns mentioned a few days ago that the three US Office REITs may have been removed from the list of marginable stocks on private banks)
  3. Funds redeeming and switching around. They are switching from smaller stocks to more liquid stocks
  4. Ultra-rich Chinese are facing heavy margin calls (we can guess who they are). Manulife US REIT does not have them on their register

Are Manulife US REIT’s Properties Affected?

The city of New Jersey and California have shut down. Only gas, pharmacy and grocery stores were available.

You cannot take public transport in Virginia, Washington. It is a matter of time before Atlanta shut down.

MUST’s properties are currently 20% occupied. The F&B shops were closed.

Rental Rebate Requests and Business Continuity Insurance

Rental rebates were not offered to tenants. This is even during GFC.

However, they may provide rental rebates to F&B tenants on a case by case basis. F&B tenants only make up ~1% of MUST’s portfolio by GRI.

Management highlighted that a pandemic does not qualify for business interruption insurance.

Adequate Amount of Security Deposits

The security deposits collected by MUST amounts to 0 to 4 months. This is based on the credit profile and length of relationship with the REIT.

A tenant can be considered as default if rent payments are 60 days in arrears.

The Properties’ Experience During the Great Financial Crisis (GFC)

Occupancy during GFC drop to between 80% to 90%.

Figueroa and Peachtree fell to 90% and 80% during the GFC.

One of the fears is that property value will be valued downwards, which will increase the debt to asset ratio, violating loan covenants or MAS guidelines for a maximum 45% leverage ratio.

Management update that valuers will assess value based on the intersection of a couple of different valuation method:

  1. Discounted cash flow of projected forward leases
  2. Comparable transactions

During periods like this, buyers and sellers are likely to halt their transactions. When there are fewer transactions, there are no comparables to use to value the property at a lower value.

New real estate dues will be put off until there is clarity. Nobody wants this price discovery in the short term.

Thus, valuation should be more stable.

Risk of Top 10 Tenants Right-Sizing

While there were comments of structural shifts for tenants to right-size their office space, their top 10 clients may have already the right size recently or unlikely to change as many of the corporates in the US would already have flexible work arrangements.

Still Struggling to Fill Michelson’s Space

Management update that since Covid-19 happen, a lot of the activity grind to a halt. Management was negotiating with a prospective tenant but since then, most prospects would rather adopt a wait and see attitude.

Less Liquidity and Re-financing Concerns

Manulife US REIT’s property valuations need to go down $351 million or 16% of the portfolio (24 Mar) to reach the MAS Cap of 35%.

They have $90 million in liquidity for working capital purposes and $200 million in credit facility from DBS to tap upon, should they need to make acquisitions.

They do not anticipate that there are risks. Manulife has one debt that needs refinancing this year. The current loan has a 2.46% interest. They are quietly confident that the re-finance loan could be cheaper than this. They have the option to extend the current loan for 1 year as well.

MUST’s unencumbered debt position should improve from 34% to 41%.

Low Key Tenant Risk

The top 10 tenants in their portfolios, which comprise 35% of rental income, are mostly MNCs and government agencies.

They mostly have their headquarters or key operations based out of their assets. Tenant sectors are diversified with no one sector being greater than 23% of the portfolio.

DBS also released some updates with regards to their conference call with Prime US REIT.

Here are some of the key takeaways.

Portfolio have Less Near Term Concerns

Prime’s management believes that there will be market disruptions in the next few months, however, its base case is for the economy to rebound on a very quick V-shaped recovery with the stimulus package.

The key attributes of Prime’s portfolio

  1. Long WALE of 5.1 years
  2. Low lease expiries (<10% in the next 2 years)
  3. High committed occupancy of 96%
  4. No debt refinancing in FY2020/21- augurs well as it navigates near-term disruptions.
  5. Management expects more tenants to renew their leases in times of uncertainty which bodes well for Prime.

Prime has limited lease expiries in the near term with only less than 7% and less than 10% (estimated after Park Tower’s acquisition) of cash rental income (CRI) expiring in FY2020 and FY2021 respectively.

While there are termination rights on some leases expiring in FY2021, management does not expect to exercise this especially for a lease to a government entity.

On Tenant Defaults and Rent Rebates

There are currently no tenant defaults and rental rebates are given to F&B tenants which contribute less than 1% of total income.

Nature of Security Deposits and Guarantees

While there are concerns about the WeWork operations, WeWork as a tenant will drop off the top 10 tenants list and is estimated to contribute less than 2% of CRI post the acquisition of Park Tower.

In addition, WeWork’s lease provides corporate guarantees / LCs which covers 2 years of income. Sodexo, one of the top 10 tenants which contributes c.5% of CRI (estimated after Part Tower acquisition), provides corporate guarantees for all remaining obligations.

The lease is expiring in 2023.

Oil & Gas Tenants Lease Expires 2 Years Later

While mining and O&G tenants contribute some 6.6% of CRI, the major O&G tenants’ leases are only expiring from 2022 onwards with a larger lease only expiring in 2024.

Sponsor KBS Experience during GFC

Management believed that in times of crisis, occupancies could fall to 80% which is still decent, and rental rates and valuation may fall by 20%.

During GFC, KBS’ (Prime’s sponsor) portfolio continues to generate good returns (c.11% in 3 years) a testament of a strong team and good quality assets.

Conclusion

I do not think that one of the contributing factors for the price fall is due to these two REITs being based in the United States, which is the epicenter of where the number of new detections are ramping up.

The price fall was across the board.

There are adequate uncertainties for properties based in the United States. billionaire investor Carl Icahn biggest position by far is a short on the US commercial mortgage-backed securities. His take is that banks, instead of securitizing residential loans are now securitizing commercial loans on office and shopping malls and selling them away.

Tom Barrack, another billionaire real estate investor, believes that commercial mortgages are on the brink of collapse.

At this point, I would not dismiss this risk yet. I would only comment that I do not know if the commercial loans they are referring to is similar to the same pool of commercial loans Prime and Manulife use.

While both management paints a picture that everything is OK, it really depends on how much the mainstream economy suffers. If it is a long-suffering, I cannot imagine a scenario where commercial real estate will not be affected.

Carl and Tom’s scenarios will work out if this situation prolongs and there are more rental revenue arrears. Like what the management updated, most tenants would have put a few months of security deposits.

However, if this situation persists everyone does not have enough cash flow, sooner or later the landlords will run into issue. The billionaire’s opinion will prove to be correct in some ways.

Prime US REIT does not have any debt renewal risk. Manulife US REIT does. But I believe at this point, Manulife US REIT should not have a problem refinancing their debt. The unique thing is both REITs should have access to USD denominated loans in the United States and Singapore.

Both REITs have 14-15% of their leases expiring in 2020 and 2021. Prime US REIT may have more risks with their exposure to Apache Corporation. However, even then, at this share price, it bakes in the risk if Apache does not renew their lease in 2 years time. There is enough time for oil prices to normalize (if it ever does). The bigger threat is when companies other than the usual suspects start not renewing or right sizing.

What I am more concerned about is more of the risk of property revaluations. This affects potential forced, dilutive, and non-income generating rights issues. Manulife provided some sensitivity analysis on how much property valuation have to fall to reach 45%. While Prime did not provide a sensitivity analysis, they are 4% lower in terms of their net debt to asset.

Click to see bigger table

I leave you with my own sensitivity analysis. It lists the potential interest savings. It also lists potential non-renewal of 50% or 100% of their 2020 & 2021 expiring leases.