Money and Me: US Office Reits – the immediate outlook is bleak but there are opportunities for investors
We take a closer look at the deterioration of the pure play US office Reit sector. With the US Fed interest rate path as vague as ever, which companies are likely to struggle and can investors find attractive opportunities? Michelle Martin asks Kenny Loh, REIT Specialist and Independent Financial Advisor.
Note: The above analysis are my own personal views and are NOT buy or sell recommendations. Investors who would like to leverage my extensive research and years of Singapore REIT investing experience can approach me separately for a REIT Portfolio Consultation.
Listen to his previous market outlook interviews here:
Kenny Loh is an Associate Wealth Advisory Director and REITs Specialist of Singapore’s top Independent Financial Advisor. He helps clients construct diversified portfolios consisting of different asset classes from REITs, Equities, Bonds, ETFs, Unit Trusts, Private Equity, Alternative Investments, Digital Assets and Fixed Maturity Funds to achieve an optimal risk adjusted return. Kenny is also a CERTIFIED FINANCIAL PLANNER, SGX Academy REIT Trainer, Certified IBF Trainer of Associate REIT Investment Advisor (ARIA) and also invited speaker of REITs Symposium and Invest Fair.
As interest rates rise and costs increase, Singapore REIT managers are navigating tough waters. We had the opportunity to host a panel of top industry leaders shed light on how they’re adapting – and what savvy investors need to know.
The conversation revolved around the impact of interest rates on Singapore Real Estate Investment Trusts (REITs).
SPECIAL GUEST:
Emelia Tan, Director of Research at the Singapore Exchange (SGX); Nupur Joshi, CEO of the REIT Association of Singapore (REITAS); and Kenny Loh, Wealth Advisory Director and REIT Specialist at REITSavvy.
With over 40 years of combined experience between them, the guests were well-positioned to offer valuable perspectives on the issues at hand. Here are some of their biggest takeaways for understanding Singapore REIT performance in the year ahead.
PANELISTS AND THEIR EXPERTISE:
Emelia Tan, known for her extensive research and market analysis at SGX Group, brought her expertise in understanding market updates and data points. Nupur Joshi, as the CEO of REITAS, provided insights from the corporate side and highlighted the association’s role in representing Singapore-listed REITs. Kenny Loh, an experienced REIT investor and advisor, offered a unique perspective as an active participant in the market.
THE IMPACT OF INTEREST RATES ON REITS:
The conversation started with a focus on how interest rates affect the REIT sector. Kenny noted that the market has already absorbed the impact of interest rates, with traders closely monitoring data and correlations between US government bond yields and the REIT sector. He emphasised that the REIT sector is currently in a sideways movement, waiting for earning results and potential market triggers before a potential bull run.
MANAGING THROUGH INTEREST RATE FLUCTUATIONS:
The panel then explored how REIT managers navigate the challenges posed by interest rate fluctuations. Emelia Tan pointed out that REIT managers have to adapt to the current market environment, considering interest rates that are higher than pre-pandemic levels but expected to decline in the future. REIT managers need to reevaluate their portfolios, focusing on divestments and capital allocation strategies to fund acquisitions and asset enhancements.
As interest rates rose sharply last year, Nupur noted “the worst is behind us.” Most panelists agreed rates have likely peaked for now and may start declining. But Emelia cautioned “we are living in a higher for longer environment…capital is still expensive.”
So how are REIT managers coping? Kenny listed popular strategies: “reconstituting portfolios, redevelopment, asset enhancements.” Emelia added some are “releasing more, more, more distribution” or using rights issues to pay down debt. With rising costs in mind, Kenny said ESG initiatives around energy efficiency can help cut utilities and maintenance expenses.
Nupur emphasised the lag some may face, as many interest costs remain locked in at higher rates. But savvy investors can position themselves ahead of the anticipated rate declines. And rates aren’t the only factor – “earnings results will be a kickstart” if no surprises emerge, noted Kenny.
EXPERT OPINIONS AND STRATEGIES:
Throughout the discussion, each panellist shared valuable insights and strategies. Nupur emphasised the importance of collaboration within the REIT ecosystem, highlighting the collective voice of investors and the need for REIT managers to address issues such as corporate actions. Kenny stressed the significance of data from SGX and MLIR (Market Leasehold Interest Rate) in his analysis and portfolio building process.
OVERSEAS EXPANSION AND COMPLEX STRUCTURES
Many Singapore REITs now derive much of their income overseas. But as Reggie asked, does this increased complexity worry investors? Nupur reassured that diversification is part of maturing REIT growth plans.
Kenny weighed in on evaluative factors like targeted regions or property segments, the sponsor’s involvement, and on-the-ground management. And while debt structures can perplex, he highlighted Maple Tree Logistic Trust’s global reach as an example of necessary hedging.
The panel concurred that retail investors need not scrutinise every move. “Trust the manager – how do you trust? Track record,” advised Kenny . As long as core business fundamentals remain sound, overseas diversification should provide growth opportunities.
THE RISING IMPACT OF ESG
When Reggie playfully questioned if retail investors truly cared about ESG, the panel leapt to clarify growing alignment. Emelia noted institutional interest is rising, which will impact returns. Nupur added sustainability efforts now factor into competitive financing alternatives.
But Kenny acknowledged ESG is still nascent for many Asian investors. REIT managers, he acknowledged, must proactively showcase sustainability actions and reporting. Only then can transparency build understanding and trust over time.
For those still skeptical, get ahead of the trends or risk lagging as ESG increasingly influences flows and valuations. Progress today readies REITs and portfolios for the demanding standards of tomorrow.
In summarising the insights, Reggie brought listeners up to speed on the issues constantly evaluated by top REIT managers and experts. Whether navigating volatility, diversifying offerings, or futureproofing through sustainability, their multifaceted perspectives offer invaluable guidance for 2023.
KEY TAKEAWAYS AND MARKET OUTLOOK:
As the conversation drew to a close, the panelists discussed the market sentiment and the varying perspectives of investors. They highlighted the different groups of investors: those who act early, those who wait for news announcements, and those who follow the crowd. The panelists expressed optimism that a positive market catalyst, such as an interest rate cut or better-than-expected earnings results, could potentially trigger a bullish trend in the REIT sector.
You can check their full interview on Chills with TFC, Episode 158 on Spotify, YouTube, Google podcast or Apple podcast for a comprehensive understanding of the impact of interest rates on Singapore REITs. The insights shared by industry experts shed light on how REIT managers manage through interest rate fluctuations and adapt their strategies accordingly. As investors eagerly await market triggers, such as earning results and potential interest rate changes, the future of the Singapore REIT market holds promise.
KEY POINTS DISCUSSED:
Interest rates and their correlation with the REIT sector.
The market’s absorption of interest rate data and its impact on REITs.
Strategies employed by REIT managers to navigate interest rate fluctuations.
The importance of collaboration within the REIT ecosystem.
The role of data in REIT analysis and portfolio building.
Varying investor perspectives and their potential impact on the market.
The possibility of a bullish trend in the REIT sector based on market catalysts.
Courses: Financial Ratio Analysis and Technical Analysis for REITs with SGX Academy
On 2 Saturdays in March (2nd and 9th), I will be conducting 2 courses, for you to get a head start in understanding Singapore REITs. These will be hands-on courses, where I will guide you step-by-step in performing the course content proficiently. This is a very good time to enter!
Financial Ratio Analysis for Singapore REITS (2nd March 2024, 9am to 1pm)
You will learn how to:
Learn how to assess the financial health of Singapore REITs by analyzing key ratios
Identifying financial strengths and weaknesses, enabling them to make informed investment decisions
Interpret ratios and understand what are the operation factors which can affect the ratio in future
Learn how to use valuation ratios to determine the fair value of Singapore REITs and assess their sustainability.
Identify undervalued or overvalued REITs, aiding them in making sound investment choices.
The latest news and insights include exclusive interviews with REIT managers, gaining insights on their management decisions, as well as additional REITs analysis performed that my team that may not be posted here on mystocksinvesting.
Latest insights on REITs.
Yield vs. Price/NAV Bubble chart. A quick overview of the 38 S-REITs.
Also included is a comprehensive, live-updated REITs screener. No more searching for individual REIT results and interpreting financial statements. On the REITsavvy screener, gain access to all the REIT data you need for an informed investment decision. At one glance, toggle between multiple charts for an overview of the 38 S-REITs. With REITsavvy, you can conduct all your investing research in one platform so you can find more winning REITs in lesser time.
Clear overview of the entire REITs market, including trends, in a single interface for investing into strength and momentum.
Kenny Loh is a Wealth Advisory Director and REITs Specialist of Singapore’s top Independent Financial Advisor. He helps clients construct diversified portfolios consisting of different asset classes from REITs, Equities, Bonds, ETFs, Unit Trusts, Private Equity, Alternative Investments, Digital Assets and Fixed Maturity Funds to achieve an optimal risk adjusted return. Kenny is also a CERTIFIED FINANCIAL PLANNER, SGX Academy REIT Trainer, Certified IBF Trainer of Associate REIT Investment Advisor (ARIA) and also invited speaker of REITs Symposium and Invest Fair. You can join my Telegram channel #REITirement – SREIT Singapore REIT Market Update and Retirement related news. https://t.me/REITirement
MANULIFE US REIT unveiled its FY2023 financial results on February 8, 2024. The REITsavvy team made a visit to MUST to attend the live briefing session and met with the management team. Here are key highlights that investors should know of.
*Image from MUST REIT presentation slide
Quick Glance
In the fiscal year 2023, MANULIFE US REIT demonstrated growth with a 2.7% increase in gross revenue and a slight uptick of 1.3% in Net Property Income (NPI). It’s heartening to witness these improvements despite the REIT experiencing distress.
However, there was a notable decline of 15.5% in Distribution Income for MUST, attributable to several factors: Decreased rental and recoveries income due to higher vacancies and increased property expenses.
Elevated finance costs due to rising interest rates and loss of income from the divestment of Tanasbourne in April 2023 and Park Place in December 2023.
Nevertheless, there were some positive contributions from: Increased lease termination fees. Higher carpark income.
Comparing year-over-year Net Asset Value (NAV), there was a significant 40% drop, influenced by factors such as property revaluation and property divestment to name a few.
Highlight 1 – Higher NPI?
How can the Net Property Income (NPI) increase by 1.3% year-over-year despite higher operating expenses, increased interest costs, lower rental income, and higher vacancy rates?
The boost in NPI stems primarily from a one-time influx of termination fees, notably from Exchange contributing approximately US$9.0 million and Plaza with around US$4.0 million.
Without these additional termination fee inflows from the two properties, the overall NPI would have decreased to ~US$101 million, resulting in a negative growth of approximately ~10.78% instead.
*Image from MUST presentation slide
Highlight 2 – Debt Profile & MAS Leverage concern?
Debt Situation
Regarding its debt, there’s no need for refinancing in 2024. Additionally, MUST plans to utilize its cash reserves to pay off the US$50.0 million of debt by March 31, 2024, shown in the diagram.
MAS Aggregate Leverage
At first glance, the aggregate leverage appears to exceed the limit imposed by MAS. However, MUST asserts that it’s not in violation but is restricted from taking on more debt.
MUST: “According to the Monetary Authority of Singapore’s (MAS) Property Funds Appendix, the aggregate leverage limit is not considered to be breached if exceeding the limit is due to a decline in portfolio valuation, which is beyond the Manager’s control. However, the Manager will not be able to incur additional indebtedness and will have to fund capex, tenant improvement allowance and leasing costs with available cash, cash from operations and any disposition proceeds.”
As of now, everything appears to be in order.
*Image from MUST presentation slide
Highlight 3 – Management
At present, MUST continues to face challenges and encounters several new obstacles that must be overcome. There remains a considerable amount of work ahead to ensure progress in the right direction.
Despite the demanding journey thus far and the challenges ahead, the management has maintained transparency in its progress and actively communicates with its stakeholders.
This proactive approach is crucial during times of crisis, as it demonstrates the commitment of the leadership and team to address issues head-on and provide updates on execution strategies. Such active engagement provides some confidence to investors in these times.
*Image from MUST IR
Conclusion
MUST is currently undergoing restructuring, a process that demands time and patience. Given the dynamic nature of the market, unforeseen challenges may arise beyond the REIT control.
However, what can be controlled is the transparency of the management team, actively overseeing the portfolio and finances to minimize or eliminate avoidable missteps.
In such circumstances, success isn’t about timing the market but rather about time in the market. With robust support from strong backers, there’s a greater likelihood of not only surviving but emerging stronger from the valuable lessons learned.
We are pleased to have had the opportunity to engage in a face-to-face discussion with Tripp Gantt, the CEO of MANULIFE US REIT and his team.
Courses: Financial Ratio Analysis and Technical Analysis for REITs with SGX Academy
On 2 Saturdays in March (2nd and 9th), I will be conducting 2 courses, for you to get a head start in understanding Singapore REITs. These will be hands-on courses, where I will guide you step-by-step in performing the course content proficiently. This is a very good time to enter!
Financial Ratio Analysis for Singapore REITS (2nd March 2024, 9am to 1pm)
You will learn how to:
Learn how to assess the financial health of Singapore REITs by analyzing key ratios
Identifying financial strengths and weaknesses, enabling them to make informed investment decisions
Interpret ratios and understand what are the operation factors which can affect the ratio in future
Learn how to use valuation ratios to determine the fair value of Singapore REITs and assess their sustainability.
Identify undervalued or overvalued REITs, aiding them in making sound investment choices.
The latest news and insights include exclusive interviews with REIT managers, gaining insights on their management decisions, as well as additional REITs analysis performed that my team that may not be posted here on mystocksinvesting.
Latest insights on REITs.
Yield vs. Price/NAV Bubble chart. A quick overview of the 38 S-REITs.
Also included is a comprehensive, live-updated REITs screener. No more searching for individual REIT results and interpreting financial statements. On the REITsavvy screener, gain access to all the REIT data you need for an informed investment decision. At one glance, toggle between multiple charts for an overview of the 38 S-REITs. With REITsavvy, you can conduct all your investing research in one platform so you can find more winning REITs in lesser time.
Clear overview of the entire REITs market, including trends, in a single interface for investing into strength and momentum.
Kenny Loh is a Wealth Advisory Director and REITs Specialist of Singapore’s top Independent Financial Advisor. He helps clients construct diversified portfolios consisting of different asset classes from REITs, Equities, Bonds, ETFs, Unit Trusts, Private Equity, Alternative Investments, Digital Assets and Fixed Maturity Funds to achieve an optimal risk adjusted return. Kenny is also a CERTIFIED FINANCIAL PLANNER, SGX Academy REIT Trainer, Certified IBF Trainer of Associate REIT Investment Advisor (ARIA) and also invited speaker of REITs Symposium and Invest Fair. You can join my Telegram channel #REITirement – SREIT Singapore REIT Market Update and Retirement related news. https://t.me/REITirement
*Image from MUST REIT presentation slide
*Image from MUST presentation slide
*Image from MUST IR