Should you go for Singapore-listed US office Reits?
The trio of US office Reits listed here appear to be receiving a lukewarm reception, with all trading below their IPO prices
Singapore
THE US economy is bouncing back. Berkshire Hathaway's Warren Buffett said at the group's recent annual general meeting that the US economy has been "resurrected in an extraordinarily effective way" by monetary stimulus from the Federal Reserve and fiscal stimulus from the US Congress.
As the US economy opens up amid accelerating vaccinations and another US$1.9 trillion stimulus package makes its way through the system, the Federal Reserve forecasts 6.5 per cent growth in US gross domestic product this year.
But the trio of US office real estate investment trusts (Reits) listed in Singapore - Manulife US Reit, Keppel Pacific Oak US Reit (KORE) and Prime US Reit appear a relatively unloved bunch. All trade below their initial public offering (IPO) prices. (Singapore Press Holdings, which publishes The Business Times, holds 20 per cent in the manager of Prime US Reit.)
Based on distribution per unit (DPU) for 2020, the trio trade at a yield of about 8 per cent. Singapore-centric office Reits, Keppel Reit and Suntec Reit, trade at a much tighter yield of around 5 per cent.
Giant New York listed US Reit, Boston Properties, trades at sub-4 per cent yield based on 2020 DPU.
The Singapore-listed US office Reits trade at a spread to the 10-year US treasury yield often in excess of 600 basis points (bps). That's versus large Singapore Reits that typically trade at over 300 bps to the Singapore 10-year government bond yield.
Manulife US Reit and Prime US Reit trade at around end-2020 net asset value (NAV), while KORE trades at a double-digit discount. Big Singapore-centric commercial Reit Mapletree Commercial Trust trades at close to 20 per cent premium to NAV.
The lacklustre trading performance of the US Reits comes despite fairly resilient operating performance through the pandemic.
Manulife US Reit is the largest and was the first US Reit to be listed here in May 2016.
In 2020, DPU dipped 5.4 per cent. Rental reversion was positive in 2020 and in the first quarter of 2021.
Operating environment may still be challenging with portfolio occupancy slipping from 93.4 per cent as at end-2020 to 92 per cent for the quarter ended March 31, 2021.
KORE performed better with DPU for 2020 up 3.7 per cent from a year ago. Valuation of its portfolio of 13 properties as at end-2020 rose 3.9 per cent from end-2019.
Distributable income for Q1 2021 is up 3.6 per cent year-on-year. KORE's manager sees the Reit benefiting from its focus on the historically fast growing technology sector.
The last of the trio to be listed, Prime US Reit, which debuted in July 2019, posted DPU for 2020 that came in 3.6 per cent ahead of its IPO forecast. For Q1 2021, distributable income fell 1.2 per cent year-on-year, but leasing activity was strong with positive rental reversion of 8.5 per cent.
The properties held by the US Reits are freehold compared to many office buildings in Singapore, which have original land leases of 99 years.
Is the market missing something with the Singapore-listed US office Reits? Should their yield spread relative to Singapore office Reits and the US 10-year treasury yield narrow?
Coupled with the positive US economic outlook, US office workers are heading back to their physical offices.
According to a PwC US Remote Work Survey done early this year, around 70 per cent of employers expect employees to work from the office at least three days a week to maintain company culture.
The survey's findings indicate that the majority of office workers should be back at their physical offices by July and office space needs will rise over the next three years amid rising headcount and social distancing needs.
Life in the US may be returning to pre-pandemic norms with the announcement earlier this month by the Centers for Disease Control and Prevention that persons who are fully vaccinated can participate in indoor and outdoor activities, without wearing a mask or physical distancing.
Still, office tenants in the US may be cautious in take-up of space given lingering uncertainties with the pandemic and the relentless rise of tools boosting productivity of remote working.
Established names back the Singapore-listed US Reits, which should give investors comfort. Keppel Capital owns part of the manager of Prime US Reit and is a sponsor of KORE, while Manulife US Reit's sponsor is financial services group Manulife group.
Growth plans are afoot. Manulife US Reit for example is looking to make yield accretive acquisitions in cities with large population shifts propelling rent and job growth at capitalisation rates ranging from 6.5 per cent to 7.5 per cent.
Think markets like Nashville in Tennessee and Phoenix in Arizona, where there is good quality of life, access to talent pool and affordability relative to the gateway cities of New York and San Francisco.
Managers of the US Reits listed here will have to successfully pivot their portfolios to locations where office demand is strong, and capture tenants in growing sectors. That should invite some re-rating by investors.
Perhaps local investors do not like foreign currency risk. The US dollar is down around 6 per cent versus the Singapore dollar from a year ago.
A person who bought US dollars one year back in order to purchase units in a US Reit listed here is suffering a loss on the principal invested. Distributions received become less attractive in Singapore dollar terms.
Nearly 20 years ago, when the Singapore Reit market started, institutional investors bought into Reits here for exposure to income generating high grade Singapore property. Retail investors were happy just to own a tiny slice of chunky Singapore assets such as Tampines Mall and Junction 8, which were part of the portfolio of Singapore's first Reit.
Local investors may lack familiarity with faraway assets and hence not value such assets appropriately.
Investors here could prefer Reits that have a strong Singapore core even if they diversify to augment income streams and strengthen average land lease tenure of the portfolio.
CapitaLand Integrated Commercial Trust has 96 per cent of its portfolio value coming from Singapore and 4 per cent from Germany,
Suntec Reit has been building up its office portfolio in Australia and the UK but intends to remain Singapore-centric. Its manager expects 30 to 40 per cent of its assets under management to be overseas assets in the next few years.
As Reits consolidate to gain size, maybe there is speculation that Singapore-listed US Reits could be attractive yield-accretive acquisition targets for large Singapore-centric commercial Reits.
But this route may not work because of tax considerations. For the said Reits to enjoy favourable tax treatment - including exemption from US withholding tax - no single unit holder can hold 10 per cent or more of the outstanding units of these Reits.
So as options go, Reit merger is likely a door closed. And if the Singapore-listed US Reits continue to get a lukewarm reception, other US Reit hopefuls may not come to the Singapore bourse.
Dogged by higher cost of equity, the existing ones may also find it more difficult to grow via making yield-accretive acquisitions.
The trio of US office Reits listed here could have been hoping to tap the growing wealth creation in Asia and wealth management in Singapore. But the success of these efforts is unclear.
A possible ending to the adventure of US office Reits listing in Singapore may see the existing trio being privatised, as did Croesus Retail Trust and Soilbuild Reit.
