SGX Market Updates

1H2020 Earnings of SGX’s 3 Largest US-Focused REITs


PUBLISHED ON |

13 August 2020

  • Of the REITs listed on SGX, the 3 largest REITs with 100% US assets are Manulife US REIT, Prime US REIT and Keppel Pacific Oak US REIT, with all three focused on the office market.

  • For 1H2020, these three US-focused REITs averaged a DPU of 3.22 US cents, up an average 2.9% y-o-y, and a net property income of US$50.5 million, up 14% y-o-y. Prime US REIT, which made its trading debut in July 2019, reported the highest DPU of 3.52 US cents, up 5.1% from its IPO forecast.

  • As of 30 June 2020, the trio averaged an aggregate leverage ratio of 36.5%, versus 36.1% as at 31 Dec 2019. Manulife US REIT had the highest aggregate leverage ratio of 39.1%, while Prime US REIT had the lowest gearing of 33.0%.




Of the REITs listed on SGX, the 3 largest REITs with 100% US assets are Manulife US REIT, Prime US REIT and Keppel Pacific Oak US REIT, with all three focused on the office market. Over the last three weeks, the trio reported their results for the first half ended 30 June 2020.



DPU Highlights

For the 6 months ended 30 June 2020, the three largest US-focused REITs averaged a distribution per unit (DPU) of 3.22 US cents, up an average 2.9% y-o-y, and a net property income of US$50.5 million, up 14% y-o-y. Prime US REIT, which made its trading debut in July 2019, reported the highest DPU of 3.52 US cents, up 5.1% from its IPO forecast.


Name DPU
(US cts)
YoY Chg
(%)
Net Property
Income
(US$M)
YoY Chg
(%)
Gross Revenue
(US$M)
YoY Chg
(%)
MANULIFE US REIT 3.05 0.3 62.2 18.8 98.6 18.3
PRIME US REIT 3.52 5.1^ 47.5 7.6^ NA NA*
KEPPEL PACIFIC OAK US REIT 3.10 3.3 41.9 15.7 70.5 20.1
Average 3.22 2.9 50.5 14.0    

Source: Company data
^ % change computed against IPO Forecast, as trading debut was 19 July 2019
* No y-o-y performance data available as listing date was 19 July 2019 



Debt Profiles

As of 30 June 2020, the trio averaged an aggregate leverage ratio of 36.5%, versus 36.1% as at 31 December 2019. Manulife US REIT had the highest aggregate leverage ratio of 39.1%, while Prime US REIT had the lowest gearing of 33.0%. Interest cover for the trio averaged 4.5 times in the June quarter, versus 4.7 times in the December quarter. Prime US REIT had the highest interest coverage ratio of 5.4 times, followed by Keppel Pacific Oak US REIT at 4.4 times.


Name Aggregate Leverage
Ratio (%) as at
30 June 2020
Aggregate Leverage
Ratio (%) as at
31 Dec 2019
Interest Coverage
Ratio (x) as at
30 June 2020
Interest Coverage
Ratio (x) as at
31 Dec 2019
MANULIFE US REIT 39.1 37.7 3.8 3.8
PRIME US REIT 33.0 33.7 5.4 5.1
KEPPEL PACIFIC OAK US REIT 37.4 36.9 4.4 4.8
Average 36.5 36.1 4.5 4.7

Source: Company data


Outlook


Manulife US REIT
  • High 2H 2020 rental collections expected with majority top-quality tenants from finance, legal, tech, government and healthcare.
  • Adopting proactive leasing strategies:
    • Conduct virtual tours, target resilient tech and healthcare sectors,
    • Work to maximise tenants’ leasing plans e.g. accommodate social distancing.
  • Seek yield accretive acquisitions in cities with strong demographic, high-growth sectors while maintaining diversification.
  • Mitigated near-term interest rate risk with 92.7% of outstanding loans on a fixed rate basis, resulting in a weighted average interest rate of 3.26% and weighted average debt maturity of 2.3 years.
  • On 9 July 2020, US$95.1 million of loans due 2020 were refinanced, including Peachtree’s US$73.1 million loan, via a Trust-level green loan of US$100.0 million due in 2025.
  • Following expiry of a US$10.0 million committed revolving credit facility on 14 July 2020, the REIT has obtained a US$50.0 million committed revolving credit facility on 23 July 2020 for general corporate and working capital purposes.
  • Despite employers adopting WFH practices globally to combat the pandemic, the Manager expects minimal impact on its portfolio for the following reasons:
    • Urban suburban likely to outperform gateway CBD in near-term.
    • Limited supply in foreseeable future.
    • WFH established in US for decades.
    • De-densification creates additional space.
  • Potential faster US recovery from COVID-19 vs Global Financial Crisis.
    • Economic disruption mitigated due to massive fiscal and monetary stimulus.
    • Bigger COVID-19 relief package of ~US$3.5 trillion vs US$0.7 trillion GFC package.
    • Compared to GFC:
      • Banks better equipped to maintain market liquidity due to stress testing requirements.
      • Commercial real estate less levered.
      • Less over-supply of inventory.
      • About 90% of US office leases longer than two years to weather short-term impact.
      • Rents and occupancy expected to rebound post COVID-19 with positive net absorption and net deliveries.

Click here for the full results release.



Prime US REIT
  • Continues to retain a well-staggered debt maturity profile and a conservative gearing ratio of 33.0% as at 30 June 2020, providing ample debt headroom and liquidity.
    • Has fixed interest rates on 90% of its total borrowings of US$478.8 million and fully extended debt maturity of 5.1 years, mitigating against near-term interest rate and refinancing risks.
    • Following the restructuring of interest rate swaps in April 2020, effective interest rate as at 30 June 2020 decreased to 2.6%.
  • The US office market has remained relatively resilient in 1H 2020 with only 4 million office-using jobs lost according to Oxford Economics, compared to the more than 40 million jobless claims filed since mid-March.
    • According to Green Street Advisors, June marked the largest single-month payroll gain in US history with the addition of 4.8 million new jobs, and was the second month in a row that far exceeded expectations.
  • Established professional and financial services sectors have continued to provide a stable demand base; growing technological sectors are expected to drive demand for office space to create shared spaces for employees to foster a culture of collaboration and innovation.
  • Notable companies such as Microsoft are expanding in higher profile submarkets such as Midtown Atlanta and Reston Virginia (Washington D.C.), two markets where the REIT has assets.
  • According to a CBRE Global Occupier Sentiment Survey, while a more flexible work environment is important, the physical office remains an important function, with 60% of participants pursuing renewals and optimising their portfolios, and 70% confident in setting long-term real estate strategies.
  • There is also growing interest in de-densification over the short term, which sees firms spreading out employees to create less dense environments.
  • Over the long term, current footprint sizes are likely to remain steady, balancing the relaxation of space density with potentially less office-based headcount.
  • The REIT’s well-diversified portfolio is exposed to strategic markets that continue to attract large corporations but have little to no new office supply.

Click here for the full results release.



Keppel Pacific Oak US REIT
  • In July 2020, the Manager obtained a loan facility for the early refinancing of the REIT’s borrowings that were due in November 2021 – these were loans obtained during its IPO in November 2017.
    • Interest rate swaps related to these borrowings were also restructured; with this, the REIT will have no long-term debt refinancing requirements until November 2022.
    • All borrowings are USD-denominated and 100% unsecured, providing the REIT funding flexibility as it continues to pursue long-term growth.
    • The Manager continues to limit interest rate exposure with floating-to-fixed interest rate swaps; as at 30 June 2020, 84.3% of the REIT’s non-current loans have been hedged.
  • The Manager remains cautiously optimistic of leasing performance in its key growth markets and is focused on its long-term goal of delivering stable distributions and strong total returns for unit holders.
  • The Manager’s continued prudent approach towards capital management and its proactive leasing efforts will also see the REIT capture rental escalations and positive rental reversions as leases expire.
  • As businesses re-evaluate their space needs and some move toward decentralising their workforce, its suburban office buildings and business campuses are well-positioned to benefit from this potential shift away from downtown, CBD locations.
  • Its distinct portfolio of office towers and business campuses also lends itself well to the additional space requirements as businesses de-densify.
  • The REIT’s strategic exposure to the historically fast-expanding tech hubs provides further income resilience as businesses accelerate their digital transformation strategies driven by COVID-19.

Click here for the full results release.







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