KEPPEL PACIFIC OAK US REIT (SGX:CMOU)
MANULIFE US REIT (SGX:BTOU)
PRIME US REIT (SGX:OXMU)
UNITED HAMPSHIRE US REIT (SGX:ODBU)
Singapore REITs - Rich Pickings Among Bombed-Out US REITs
- US office eked out a mild 1.4% y-o-y increase in asking rent in 2Q22 despite a slowdown in leasing volume in 1H22. The average physical occupancy for the top-10 cities remains low at 47.4% as of Oct 22. US REITs have suffered the brunt of recent indiscriminate selling.
- Bargains have emerged with SGX listed US office REITs trading at average P/NAV of 0.60x. BUY
- Keppel Pacific Oak US REIT (Target price: US$0.80),
- Manulife US REIT (Target price: US$0.63) and
- United Hampshire US REIT (Target price: US$0.68)
- – as they provide 2022 distribution yields of 11.2%, 13.1% and 12.0% respectively.
Leasing momentum has slowed for the US office market.
- Leasing volume for the US office market has slowed for the second consecutive quarter and declined 9% q-o-q to 49m sf in 2Q22 (84% of pre-pandemic levels). Vacancy rate has inched higher by 0.1ppt q-o-q to 16.9%, a pandemic era high, with completion of 10m sf outpacing net absorption of 6.2m sf. Net absorption was only 7.3m sf in 1H22, a far cry from 19m sf seen in 4Q21. More tenants are sub-leasing their underutilised office space and sub-lease availability rate has increased 20bp q-o-q to a record high of 3.9% in 2Q22.
- Suburban offices outperform downtown offices. According to CBRE, average suburban asking rent grew 1.3% y-o-y to US$28.33psf per year in 2Q22, compared with an increase of 1.1% to US$52.18psf per year for downtown offices. Downtown offices were affected by increased supply and the slow return of office workers. Vacancy rate for downtown offices increased 20bp q-o-q to 17.0% in 2Q22, rising above the 16.8% (-10bp q-o-q) for suburban offices for the first time in 20 years. Vacancy for downtown offices has risen by 6.2ppt during the COVID-19 pandemic, compared to a smaller 3.6ppt for suburban offices.
- Sun Belt markets most resilient. Demand remains strong for high-growth Sun Belt markets, such as Austin, Atlanta, Dallas/Fort Worth and Charlotte. Technology and life science hubs, such as San Jose, Los Angeles and Boston, are also growing nicely. Sun Belt markets have benefitted from in-migration over the past few years. Eight out of the top 10 markets in terms of office-using employment growth over the past 12 months are in Sun Belt markets, such as Austin, Dallas/Fort Worth, Atlanta, Nashville, Raleigh, Denver, Charlotte and San Diego.
- Sun Belt markets lead in physical occupancy. The average physical occupancy for the top-10 cities in the US remains low at 47.4% as of Oct 22. Sun Belt markets lead in terms of physical occupancy (Austin: 63.1%, Houston: 58.1% and Dallas: 53.7%). Many companies are moving from two days to three days per week in their hybrid work regime. Time spent on commuting is the biggest hurdle to employees returning to the office. Lately, inflation, which leads to higher costs of transportation, food and childcare, has led to a push back from employees who prefer to work remotely.
Carnage caused by panic after FOMC meeting and UK’s mini budget.
- SGX listed US office REITs Keppel Pacific Oak US REIT, Manulife US REIT and Prime US REIT have succumbed to indiscriminate selling and corrected 31.2%, 41.8% and 40.1% respectively on an year-to-date basis. United Hampshire US REIT, on the other hand, corrected by a smaller 23.3% year-to-date due to its resiliency. See the summary of S-REITs share Price Performance.
- Keppel Pacific Oak US REIT, Manulife US REIT and United Hampshire US REIT provide attractive 2023 distribution yields of 11.2%, 13.1% and 12.0% respectively.
SGX listed US office REITs undervalued relative to peers.
- The 3 US office REITs - Keppel Pacific Oak US REIT, Manulife US REIT and Prime US REIT - are trading at an average P/NAV of 0.60x, which is much lower than 0.75x for Singapore REITs and 0.89x for office REITs listed in the US.
Keppel Pacific Oak US REIT (SGX:CMOU)
- Organic growth from positive rent reversion and rental escalation. Keppel Pacific Oak US REIT (SGX:CMOU) achieved positive rental reversion of 1.6% in 1H22. Management has maintained its guidance of positive rent reversion at mid-single-digit in 2022, driven by Seattle (Bellevue/Redmond) and Sacramento. In-place passing rents are 8.9% below asking rents on a portfolio-wide basis, which underpins organic growth from sustained positive rent reversion. In addition, Keppel Pacific Oak US REIT also benefits from built-in average annual rental escalation of 2.4%.
- Clever and early refinancing. Keppel Pacific Oak US REIT secured a new loan facility of US$180m in Jul 22, which was utilised to refinance borrowings of US$130m due in Nov 23 and Jan 24 and partially repay outstanding revolving credit facility. Currently, Keppel Pacific Oak US REIT does not have any refinancing requirement until Nov 24.
- Portfolio optimisation. Keppel Pacific Oak US REIT has completed the divestment of Northbridge Center I & II in Atlanta, Georgie for US$22.1m (16.9% above valuation as of Dec 21) on 28 Jul 22. We expect Keppel Pacific Oak US REIT to recognise a small divestment gain of US$1.6m in 3Q22. Keppel Pacific Oak US REIT has also signed a sale & purchase agreement to divest Powers Ferry in Atlanta, Georgie. In aggregate, Northbridge Center I & II and Powers Ferry contribute 2.7% of group net property income as of Jun 22.
- Maintain BUY recommendation on Keppel Pacific Oak US REIT. We like Keppel Pacific Oak US REIT for its exposure to suburban office (77% of portfolio valuation) and Sun Belt states (38% of portfolio valuation).
- We cut our 2023 DPU forecast for Keppel Pacific Oak US REIT by 6.6% after factoring in Fed Funds Rate hitting 4.5% in early-23 (previous: 3.5%).
- We have lowered our target price for Keppel Pacific Oak US REIT from US$0.99 to US$0.80 based on DDM (COE: 9.0% (previous: 8.0%), terminal growth: 2.2%).
- We increased our risk-free rate from 3.0% to 4.0% in our DDM valuation, in line with higher yield for 10-year US government bonds.
- See
Manulife US REIT (SGX:BTOU)
- Lower overall occupancy. Manulife US REIT (SGX:BTOU)'s 2Q22 overall portfolio occupancy fell 1.7ppt q-o-q to 90.0%, driven by non-renewals and downsizing in existing properties (Figeuroa, Exchange, Penn and Capitol). Large tenants have been re-evaluating their office spaces amidst growing adoption for hybrid working arrangements. Two of Manulife US REIT’s top 10 tenants by gross rental income, TCW group (3.8% of GRI) and Quinn Emanuel (2.9% of GRI), have plans to vacate by end-23 and have already downsized its offices in Manulife US REIT’s Figeuroa asset. To backfill these vacancies, Manulife US REIT has been in negotiation with prospective tenants to take over these vacated spaces, which we reckon may take time.
- Hotelisation of its assets. To ensure its properties remain competitive and command premium rents, Manulife US REIT has initiated several initiatives such as partnering with best-in-class flex operators to reinvest in its existing office spaces. In Sep 22, Manulife US REIT partnered with Flex by JLL to take up 15,407sf (3.3% of NLA) of office space in Plaza with an additional 20,451sf (4.4% of NLA) in subsequent phases by 2023, providing enterprise-grade flexible space solutions at an expected stabilised rent premium of 30% to market.
- Impact of rising interest rates. As of end-2Q22, 85.7% of Manulife US REIT’s borrowings were fixed-rate loans. Manulife US REIT guide that every 1% increase in interest rates will impact DPU by US$ 0.079 cents, which is a roughly 1.5% impact on DPU.
- With the Fed raising interest rates at an unprecedented rate, we have increased our risk-free rate assumptions and decreased our 2023-24 DPU forecasts for Manulife US REIT by 2-3%, causing our target price for Manulife US REIT to drop from US$0.74 to US$0.63.
- Maintain BUY recommendation on Manulife US REIT. The recent selling is overdone and most of the negatives have been priced in.
- See
United Hampshire US REIT (SGX:ODBU)
- Caters to defensive day-to-day necessity spending at strip centres. Consumers are expected to pull back from discretionary spending but will devote a larger share of their wallets on day-to-day necessities at strip centres in their neighbourhood. Tenants providing essential services, such as supermarkets, grocery stores, farmer’s markets, convenience stores, pharmacies, medical supplies, home improvement stores, bank branches, laundromats and pet stores, accounted for 67.5% of United Hampshire US REIT (SGX:ODBU)’s base rental income as of Jun 22. United Hampshire US REIT has also maintained a long WALE of 8.0 years.
- Hit by higher interest rates. United Hampshire US REIT has bank loans of US$94.5m due for refinancing in Mar 23. Its weighted cost of debt would increase to 4.8% (previous: 3.9%) assuming the bank loans are refinanced at an interest rate of 5.7% (previous: 4.0%). We cut our 2023 DPU forecast for United Hampshire US REIT by 7.8% after factoring in Fed Funds Rate hitting 4.5% in early-23 (previous: 3.5%).
- Maintain BUY recommendation on United Hampshire US REIT. We lower our target price for United Hampshire US REIT from US$0.83 to US$0.68 based on DDM (COE: 9.0% (previous: 8.0%), terminal growth: 1.5%).
- See
Sector Catalysts
- Strength of the US dollar, which enhances the valuations of properties located in the US.
- Growth from growth cities and Sun Belt states.
Sector Risks
- Escalation of the Russia-Ukraine war beyond Ukraine.
- Persistent and elevated inflation causing more rate hikes in 1H23.
More on S-REITs
- Read also the recent report on S-REITs with exposure to Europe: Singapore REITs - UOB Kay Hian 2022-10-10: Europe Almost Overcoming Energy Crisis; S-REITs Valuation Attractive After Panic Selling.
- See also the summary of
Jonathan KOH CFA
UOB Kay Hian Research
|
Llelleythan TAN
UOB Kay Hian
|
https://research.uobkayhian.com/
2022-10-14
SGX Stock
Analyst Report
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