Brokers’ take: DBS says US office S-Reits offer attractive yields, prefers KORE for stronger sub-markets
Helene Tian
THE yield spread of US office Singapore-listed real estate investment trusts (Reits) remains attractive despite near-term unit price overhang from macroeconomic uncertainty, DBS Group Research said on Thursday (May 26).
DBS maintained “buy” on all 3 counters, but said it prefers Keppel Pacific Oak US Reit (KORE) to Prime US Reit and Manulife US Reit (MUST). The research team raised its target price on KORE, but cut its targets on the other two.
It noted that KORE has stronger sub-markets, a higher growth profile and lower gearing, which meant a capacity to deliver an upside surprise from its acquisitions.
DBS increased its target price on KORE to US$0.86 from US$0.85, representing a potential upside of 24.6 per cent from Thursday’s trading price of US$0.69 as at 2.48 pm. The counter was up US$0.005 or 0.7 per cent at the time.
The new target price is based on a beta of 0.95 times and a higher risk-free rate of 3.5 per cent, said DBS analysts Rachel Tan and Derek Tan.
They noted that KORE has a “unique exposure” to technology tenants, with its assets located in the tech hubs of Seattle, Austin and Denver. These assets contribute to more than 60 per cent of net property income (NPI).
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
Although KORE is the top pick, DBS has noted that MUST is “too cheap to ignore”. It noted that the Reit, which is trading at a 9 per cent yield and FY2021 price-to-net asset value of 0.9 times, is still attractive.
The research team has lowered MUST’s target price to US$0.70 from US$0.88, which implies a potential upside of 18.6 per cent from its trading price of US$0.59 as at 2.48 pm on Thursday
.DBS highlighted that MUST’s share price has underperformed its peers’, falling below the pandemic trough in March 2020.
“While MUST’s sub-markets appear to have lagged its peers, share price downside risks are possibly limited at this level,” the research team added.
DBS believes Prime US Reit will benefit from US’ office market reopening. Assets acquired in FY2021 will assist in providing earnings stability and future growth.
The analysts lowered Prime’s target price to US$0.88 from US$1 to account for a higher risk-free rate of 3.5 per cent and beta of 0.95 times. The new target price implies a potential upside of 21.4 per cent from its Thursday trading price of US$0.725 as at 2.48 pm. The counter was up US$0.01 or 1.4 per cent at the time.
DBS’ research team also revised its FY2022-23 distribution per unit estimates downwards by 3-5 per cent to account for a delayed and slower pace of recovery, as well as a more volatile market recovery as companies continue to retain a hybrid work model.
DBS believes that the US office is currently at an inflection point. While it expects the positive momentum in Q1 to continue, it anticipates recovery to be uneven with tenants having different needs.
“While some tenants are expanding their office footprints, there were also tenants looking to downsize, given hybrid work policies,” noted DBS.
It also cautioned that the US office’s pace of recovery may be volatile and is dependent on sub-markets with stronger fundamentals.
Copyright SPH Media. All rights reserved.
