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US Reits in Singapore
The Singapore investor is no stranger to Reits. Real estate investment trusts listed in Singapore, with a combined market capitalisation of S$100 billion, make up 10 per cent of the stock market and are often recommended as safe, solidly-yielding investments. While the universe of Singapore-listed Reits - or S-Reits - is diverse, spanning all real estate sectors and many geographies, a small handful have emerged to pique investor interest especially. This year alone, three US property trusts listed on the Singapore Exchange (SGX), bringing with them exposure to the biggest real estate market globally.
SGX market strategist Geoff Howie tells The Business Times: "Singapore has been growing in strength as a listing platform for US property trusts since 2016, and listed three US property trusts over a three-month span in Singapore earlier this year."
Two property trusts focusing on hotels listed in May. ARA US Hospitality Trust (ARA-H-Trust) has a total of 38 Hyatt Place and Hyatt House hotels in 21 US states and Eagle Hospitality Trust's (EHT's) portfolio has Marriott, Hilton, IHG hotels and even the former cruise liner The Queen Mary as its assets. July saw the listing of Prime US Reit (Prime), which focuses on office properties across nine cities.
On the day of their listings, both ARA-H-Trust and Prime had tepid debuts, each closing at their IPO price of US$0.88. EHT fared worse, dropping 6.4 per cent from its IPO price of US$0.78 to close at US$0.73 on its first day.
Traders were not surprised, as the listings were close to each other in both portfolio and timing: EHT listed just two weeks after ARA-H-Trust, and both are hospitality-focused. As well, markets were volatile in May after US President Donald Trump first threatened to raise tariffs on China this year, hurting sentiment all around.
That said, ARA-H-Trust and EHT have posted their first set of earnings since listing, with distribution per unit (DPU) for both beating IPO forecasts. ARA-H-Trust posted a DPU of 1.36 US cents, 3.8 per cent higher than expected, while EHT recorded a DPU of 0.65 US cent, 1.2 per cent more than predicted.
While these new listings may have come thick and fast, pure-play US Reits first set foot here in 2016 with Manulife US Reit's (MUST) listing. Just over a year later, fellow office play Keppel KBS US Reit (KORE) followed. (It now trades as Keppel Pacific Oak US Reit)
On Friday, MUST gained 0.5 US cent or 0.6 per cent to end at US$0.91 while KORE was unchanged at US$0.75. Among the new boys, ARA-H-Trust added one US cent or 1.2 per cent to US$0.865. EHT was flat closing at US$0.665; and so did Prime, at US$0.895.
Investors might see a fourth such listing in Singapore by year's end.
Last month, BT reported that a US grocery-anchored retail cum self-storage Reit with properties mostly listed on the East Coast and sponsored UOB Global and an American property firm may be on the cards.
With average dividend yield of 6.2 per cent, S-Reits as a group are one of the highest yielding in the region and globally. This compares with the Asia-Pacific median of 5.1 per cent and the global median of 4.8 per cent. Meanwhile, 10 year US Treasuries are currently yielding 1.8 per cent.
Those on the hunt for yield will find the pure-play US Reits and trusts attractive, says UOB Kay Hian director of research Jonathan Koh. Of the five US pure plays, four have distribution yields of 7 per cent, he notes. (MUST has a yield of 6.7 per cent).
Those calling a buy on US Reits believe that macroeconomic conditions support the growth of the US real estate sector. As it stands, the American economy continues to experience stable growth, expanding 2.1 per cent in the second quarter of 2019 with unemployment levels hovering at multi-year lows of 3.7 per cent. Disposable income levels are also expected to remain strong.
While concerns remain that the US-China trade scuffle will be a long-term pain, the US Federal Reserve has committed to keeping its economy's longest bull run going, and odds are in favour of at least one more interest rate cut, which lowers borrowing costs, by year-end.
And in this current climate, Phillip Securities' research head Paul Chew views US Reits listed on the SGX as the most attractive in the S-Reit sector.
"Dividend yields are higher and the US economy is more vibrant and outlook for currency is better. Moreover, the Singapore dollar looks vulnerable in the near term with the likely easing of monetary policy by Monetary Authority of Singapore next month plus the overhang on all Asian currencies from a weaker yuan," Mr Chew says.
His sentiment is echoed by RHB Research Institute analyst Vijay Natarajan, who has MUST as his top Reit pick. He feels that the short term strength of greenback may benefit local investors.
But he adds: "This to me shouldn't be the key reason for investing in US Reits, but to provide some diversification benefits both in terms of geography and currencies." RHB has a "Buy" call on MUST with a target price of US$0.98, in an Aug 15 report.
Similarly, a DBS report dated Aug 22 says: "We maintain our BUY call on Manulife US Real Estate Investment Trust (MUST) with a revised target price of US$1.10. With tax concerns largely allayed in our view, we believe that investors will look towards MUST's consistent delivery of a 4.5 per cent CAGR in FY19-21F DPU (Distribution Per Unit) to drive higher valuations for the stock."
For sure, there are risk factors too. While the US property market's macro fundamentals appear strong, Maybank Kim Eng analyst Chua Su Tye finds that demand has matched the very high supply and there are pockets of higher vacancy rates. "So, there are concerns that the market has reached its peak, and hence limited upside to valuations from here."
And as Alan Lok, a former equity analyst who is currently working on a doctorate on the Reit market points out: "Unlike Singapore, which has a limited capacity to build further properties that in turn ensures generally high occupation rates, the US market is very competitive and land is in vast quantity, resulting in lower occupancies, which in turn affects dividends."
Motley Fool Singapore also points out that for EHT, two hotels - The Queen Mary Long Beach and Holiday Inn Resort Orlando Suites Waterpark - contribute around 31 per cent of the trust's fixed rental income. "As such, Eagle Hospitality Trust, despite its relatively large portfolio of 18 properties, is still highly dependent on just two properties within its portfolio," says the May report.
Sector-specific advantages of US property plays
But there are sector-specific advantages that US Reits and trusts listed here have reaped.
In the Singapore market for office space, leases are typically signed for three years at a time with flat rental charges during the tenure. In comparison, leases in the US are often signed for periods between 5-10 years, with annual rental escalations of 2-3 per cent per annum and mid-term escalations of 1-2 per cent annum.
Longer leases translate to a larger weighted average lease to expiry (WALE), a figure that points to a Reit's income stability. The figure for Prime is 5.5 years and for MUST is 6.2 years , which Maybank Kim Eng's Mr Chua explains is longer than the typical 3-4 years for offices here but in line with US averages.
While KORE's portfolio has a lower WALE of 4.2 years, a Q2 US office rental report by real estate services firm JLL showed leasing activity in the US remains robust. In addition, the technology sector, which KORE has a focus in, took up the most leasing space in the first half of the year. This suggests ample opportunity for the Reit to capitalise on growing demand.
Referring to the three US office Reits, Mr Chua says: "They have sensibly invested in properties with very long leases - which help mitigate any near term down-cycles, and also funded these purchases through locked-in long term debt. This, together with US properties being freehold, supports visibility for dividends."
The office Reits also have occupancy rates well above national and market average, Mr Natarajan says. Meanwhile, rental rates are mostly below the average, which gives the Reits room to make positive rental reversions while remaining a viable option during an economic downturn when firms want to lower rental expenses. Of MUST's eight properties, just one has rental rates above the market average.
In the US hospitality sector, meanwhile, revenue per available room (RevPAR) has consistently grown as demand for rooms has continued to outpace supply.
Future supply growth is expected to be constrained by rising construction costs, tight labour supply and costs of raw materials. The compound annual growth rate (CAGR) for RevPAR between 2013 and 2018 for select-service hotels (which provide limited services and amenities) like those in ARA-H-Trust's portfolio, stood at 4.6 per cent compared with the 3.4 per cent for full-service hotels.
While RevPAR is expected to ease between 2019 and 2022, the growth of select-service hotels like Hyatt House and Hyatt Place are expected to grow at 2 per cent per year, outpacing the 1.3 per cent estimated for full service hotels.
Lee Jin Yong, CEO of the manager of ARA-H-Trust, recognises that the hospitality sector will not avoid the impact of an economic downturn like other real estate classes, but points out: "Select-service hotels are the most resilient category within the hospitality industry. In a recession, full-service hotels (especially luxury/leisure) are usually the most impacted since such spending are usually discretionary in nature."
At its first earnings release, ARA-H-Trust's portfolio achieved a RevPAR index score of 106.8 per cent, outperforming peers in terms of revenue contribution. Its Hyatt House and Hyatt Place properties outperformed RevPAR of comparable hotels by 14.4 and 3.9 per cent, respectively.
Another factor that might attract investors are the better dividend returns that Singapore-listed US Reits and property trusts distribute to unitholders compared to their US-listed equivalents.
US-listed Reits usually retain 50 per cent of their cash for capital expenditure at the funds from operations level, to define the cash flow from their operations.
They then distribute almost all of the remaining 50 per cent of their net income to investors, of which 30 per cent is withholding tax by US tax authorities for non-US citizens. In addition, there are higher limits for development activities for US-listed Reits which can also suppress their yields.
In contrast, there is no tax in Singapore on income that is foreign-sourced. Investors in US Reits and property trusts here benefit from exposure in the US without being subject to the 30 per cent withholding tax, as long as they have their W8 and W9 US tax forms validated. ARA-H-Trust does not require investors to fill up those forms as it makes tax filings on behalf of unitholders.
While there were worries over new tax regulations that kicked in back in January 2018, MUST and KORE acted quickly to adjust their tax structures minimising the impact on distributable income for unitholders.
Education key for US Reit managers
As much as investors here have a strong understanding of investing in property-related entities, pure-play US Reits and property trusts are still a fairly new commodity. This could affect trading liquidity due to a lack of understanding of the US economy and its property market.
With the global economy facing a slowdown, ARA-H-Trust's Mr Lee recalls: "The health of the US economy and the impact of the trade war on our business are two concerns that we frequently hear."
MUST's CEO Jill Smith says: "In the past three years, we have met many investors who, whilst keen to invest, have expressed unfamiliarity with the US real estate market.
"As our properties are not in gateway cities such as New York or San Francisco, we had to work harder to increase investors' understanding and appreciation of the US commercial real estate market."
The sentiment is shared by David Snyder, CEO of the manager of KORE, who feels the biggest challenge tends to be lack of familiarity with itsmarkets.
Yet those markets, he contends, perform better than the average in the US and in the gateway cities. Gross domestic product in cities where KORE's properties are located is forecast to grow 3 per cent annually compared to the US and gateway city average of 2.1 per cent.
In September 2018, at the height of US-China trade tensions, MUST invited its sponsor Canadian insurer Manulife's US-based global chief economist to share perspectives on the trade war and rate hikes, a talk which Ms Smith tells BT was well received.
For MUST, KORE, and ARA-H-Trust, investor education includes talks on economic, employment and population growth in the US market, as well as the annual Reit Symposium organised by ShareInvestor and the Reit Association of Singapore, and educational seminars by SGX.
MUST has also engaged financial bloggers to share the Reit's strategy and even produce videos for its properties, Ms Smith explains.
July-listed Prime intends to follow the path of those before it with a pipeline of analyst briefings, investor outreach initiatives with brokerage houses and SGX as well as non-deal roadshow opportunities.
RHB's Mr Natarajan says prospects for the US-only portfolios are bright. "With more US Reits listing in Singapore, we believe investors will slowly gain a better understanding of US market dynamics which should help in sector re-rating. The US market's large size and deep pool of assets also offers good future growth potential for the sector," he notes.
Maybank Kim Eng's Mr Chua adds: "We are positive on growth for the market - especially in new and niche asset classes - multi-family properties and data centres. The US commercial market is also very deep and liquid and we think offers growth opportunities for the Reit managers."
What draws US Reits to Singapore
THE attraction for Jill Smith, chief executive officer of Manulife US REIT, was quite clear in 2016. Canada-based Manulife decided on Singapore as the city-state was the "only Reit market in Asia that has international Reits".
"The market here was evolving quite rapidly with local Reits expanding out of Singapore to Australia, China and Europe," Ms Smith says in a report recently completed by KPMG and the Reit Association of Singapore.
A Prime spokesperson agrees: "The accessibility to broad capital raising network is another one of those considerations for listing in Singapore."
Other reasons cited include a favourable tax regime for Reits, a clear and transparent regulatory framework with a strong focus on corporate governance as well as a stable government.
"Fast forward to 2019, the attractiveness of SGX for US Reit listings has not diminished," Ms Smith tells BT.
Investors here are also well acquainted with Reits as investment instruments, as well as their structure and exposure to foreign assets.
Around 80 per cent of S-Reits own properties overseas, and the trend suggests that more locally focused Reit managers are looking abroad to make acquisitions.
"As the offerings become more diverse, both geographically and sectoral, local investors have also become more sophisticated in their understanding of and exposure to different Reit products," Lee Jin Yong, CEO of the manager of ARA-H-Trust says.
David Snyder, the CEO of the manager of KORE notes: "We have been seeing increasing interest coming out from Asia in US real estate, and a listing in Singapore was a great opportunity for KORE to access the Asian market given its growing and diverse investor base, both retail and institutional."
The rapid growth of Singapore's private wealth management sector has also added significantly to the investor mix, he adds.
Compared to listing in the US, Maybank Kim Eng analyst Chua Su Tye feels US asset managers with smaller portfolios of assets between US$0.8 billion and US$1.3 billion might be able to get better valuations here than in the US.
As Alan Lok, a former equity analyst who is currently working on a doctorate on the Reit market, notes: "Institutional investors and fund managers in the Singapore market are always keen on income yielding instruments like Reits."
Having covered the asset class for more than a decade, he adds that fund managers based here might have a preference for assets listed in the region, regardless of where the portfolios lie.