Exclusive Insights: Q&A during Manulife US REIT Operational Update

  • Post author:

On 3 November 2021, Manulife US REIT (“MUST”) [SGX:BTOU] released its operational updates for the third quarter ended 30 September 2021. I have been invited for a call with the management team for updates on MUST’s 3Q 2021 operations as well as on the U.S. office landscape. I would like to thank Manulife US REIT for this opportunity.

 

Q&A Section


In this section I’ll be touching on selected questions regarding MUST’s operations, and their outlook moving forward.

Q: Just wondering, what is your outlook on acquisitions, will you be able to complete an acquisition this year or maybe by next year?

A: We’ve looked through 46 properties this year, and we are definitely getting closer to finding properties that we would be interested in acquiring.

Q: There were some occupancy exits in Q3 2021. How would you characterize these tenants at this point of time?

A: The most notable occupancy exit would be a tenant in Atlanta, they had an option to terminate a floor relating to the tenant’s IT department. Although this department has already been working remotely distributed since pre-COVID, and COVID has only accelerated that transition. Therefore they took the option to terminate that lease.

However, this particular tenant is notably one of our biggest tenants in terms of occupied square footage, and also has very long lease terms. Therefore this drop in occupancy shouldn’t be due to overall market sentiment changes toward the US office market.

Less than 20% of buildings in the US are currently green. In the next couple of years, when regulation on carbon emissions kick in, there will be an inevitable rush to ‘green’ your buildings in the near future.

Q. I noticed you have conservatively recorded portfolio devaluations for the past few years. Just wondering if we can expect a turnaround within the next year.

A: We do feel that our values are conservative, but we cannot rule out the possibility that there will still be a decline. Broadly speaking however, the US office market has been flat but is starting to see positive signs in the leasing market (in terms of rent growth etc), and that should be reflected as we approach our next round of valuation. Furthermore, independent third-party valuers that conduct valuation on our properties may have different views on how valuation is conducted, although we are optimistic.

Q: I am quite heartened to see that MUST is a proponent of going green, and are aiming to achieve 100% of your properties with green certification. Can you give us a sense of how much capex to expect from greening your portfolio (and in the future maintaining the status)?

A: Certainly we won’t be seeing additional discernable capex spending to get to the 100% goal (of seeing our entire portfolio green-certified) next year. We’re looking at the one remaining building, specifically the Energy Star award which takes a year to achieve. Our policy in the future is to ‘green as we go along.’ Recently for example, we renewed energy contracts and moved them to renewable energy sources. The gradual switching to greener and more sustainable options shouldn’t impact capex dramatically, as these are costs that we would have already taken into account anyway.

Also, 8 out of 9 properties in our portfolio are already green (meaning they are LEED and/or Energy Star certified). This means that these properties are already meeting the standards, meaning no additional capex is needed to make it greener. That being said, additional capex to ‘green’ existing buildings which do not meet the above-mentioned standards can be relatively significant.

Large, corporate tenants are already looking beyond energy ratings and green building certifiations. They want to know your environmental philosophies and goals as a sponsor.

Q: Generally, are tenants particular about looking for green and sustainable buildings?

A: Definitely we are seeing an increase in the number of tenants who are looking for green buildings. It has been quite slow in America but it has been steadily increasing. One relatively large tenant in particular has been specific in terms of getting to know about MUST’s green prospects. Big corporate tenants are already looking beyond things such as certification.

One key point to take note is that a lot of American government agencies actually do not allow their office spaces to be in non-green buildings. With USA pledged to net-zero by 2050, steps have already been taken to ensure its goals are met. In New York by 2024, building owners can incur fines if their carbon emissions exceed a certain level.

 

Growth in the US Office Sector


Recovery of Leasing Activity

MUST: We have hardly any more leases coming due in 2021, having executed ~490,000 sq ft in leases from 1 Jan to 25 Oct 2021 – a significant volume which shows that tenants are now more certain about their space needs and are ready to sign leases again. This is a change from when COVID-19 first started last year and leasing activity slowed drastically.

Surge in New Leases

MUST: In particular, we have seen new leases jumping from 3.3% in 1H 2021 to 32.3% from 1 July to 25 Oct 2021, which shows that there is new demand for our office space in the market (i.e. we are not just renewing existing leases). This demonstrates healthy fundamentals in the U.S. office market and good demand for our buildings.

Reduction of Subleasing

MUST: Finally, our performance dovetails with what’s happening across the broader U.S. market, where leasing volume is up and tenants are signing longer leases. Base rents and net effective rents (which take away the effect of tenant improvement allowances and free rent) are recovering, and subleasing declined for the first time since COVID-19.

*Subleasing is the re-renting of property space by an existing tenant to a third party for a portion of the tenant’s existing lease contract. A large volume of sublease space was put on the market when COVID-19 first struck, due to tenants’ uncertainty about their space needs while some also faced financial difficulty. The fact that this is now declining shows that either existing tenants are expanding, or they are more certain about their financial stability and space needs.

Kenny Loh is a Senior Financial Advisory Manager 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

Continue Reading Exclusive Insights: Q&A during Manulife US REIT Operational Update

Singapore REIT Monthly Update (Nov 07 – 2021)

  • Post author:

Technical Analysis of FTSE ST REIT Index (FSTAS351020)

FTSE ST Real Estate Investment Trusts (FTSE ST REIT Index) increased slightly from 842.13 to 872.79 (+3.64%) compared to the last month update. Currently the Singapore REIT index is still trading with a range between 816 and 890.

  • As for now, Short term direction: Up.
  • Medium direction: Sideway.
  • Immediate Support at 816, followed by 775.
  • Immediate Resistance at 890.

Previous chart on FTSE ST REIT index can be found in the last post: Singapore REIT Fundamental Comparison Table on October 3, 2021.

Fundamental Analysis of 38 Singapore REITs

The following is the compilation of 38 Singapore REITs with colour coding of the Distribution Yield, Gearing Ratio and Price to NAV Ratio.

  • Note 1: The Financial Ratio are based on past data and there are lagging indicators.
  • Note 2: This REIT table takes into account the dividend cuts due to the COVID-19 outbreak. Yield is calculated trailing twelve months (ttm), therefore REITs with delayed payouts might have lower displayed yields, thus yield displayed might be lower.
  • Note 3: REITs highlighted in green (32 REITs) have been updated with the latest Q3 2021 business updates/earnings. REITs highlighted in yellow (6 REITs) are still using Q2 2021 business updates/earnings.

(Source: https://stocks.cafe/kenny/advanced)

  • Price/NAV increased to 1.03
    • Increased from 1.01 in October 2021.
    • Singapore Overall REIT sector is at fair value now.
    • Take note that NAV is adjusted downward for most REITs due to drop in rental income during the pandemic (Property valuation is done using DCF model or comparative model)
  • TTM Distribution Yield increased to 5.83%
    • Increased from 5.79% in October 2021.
    • 10 of 38 (26.3%) Singapore REITs have distribution yields of above 7%.
    • Do take note that these yield numbers are based on current prices taking into account the delayed distribution/dividend cuts due to COVID-19, and post circuit breaker recovery.
  • Gearing Ratio decreased to 37.31% 
    • Decreased from 37.41% in October 2021.
    • Gearing Ratios are updated quarterly. This takes into account the recent Q3 2021 business updates.
    • In general, Singapore REITs sector gearing ratio is healthy but increased due to the reduction of the valuation of portfolios and an increase in borrowing due to Covid-19.
  • Most overvalued REITs (based on Price/NAV)
    • Parkway Life REIT (Price/NAV = 2.02)
    • Keppel DC REIT (Price/NAV = 1.93)
    • Mapletree Industrial Trust (Price/NAV = 1.53)
    • Mapletree Logistics Trust (Price/NAV = 1.52)
    • Ascendas REIT (Price/NAV = 1.38)
    • Frasers Logistics and Commercial Trust (Price/NAV = 1.34)
  • Most undervalued REITs (based on Price/NAV)
    • Lippo Malls Indonesia Retail Trust (Price/NAV = 0.57)
    • BHG Retail REIT (Price/NAV = 0.60)
    • First REIT (Price/NAV = 0.74)
    • Suntec REIT (Price/NAV = 0.75)
    • Capitaland China Trust (Price/NAV = 0.76)
    • OUE Commercial REIT (Price/NAV = 0.77)
  • Highest Distribution Yield REITs (ttm)
    • First REIT (10.73%)
    • United Hampshire REIT (8.94%)
    • Sabana REIT (8.57%)
    • Sasseur REIT (8.27%)
    • Elite Commercial REIT (8.01%)
    • Keppel Pacific Oak US REIT (7.86%)
    • Reminder that these yield numbers are based on current prices taking into account delayed distribution/dividend cuts due to COVID-19.
    • Some REITs opted for semi-annual reporting and thus no quarterly DPU was announced.
  • Highest Gearing Ratio REITs
    • ARA Hospitality Trust (48.4%)
    • Suntec REIT (44.3%)
    • Lippo Malls Retail Trust (42.3%)
    • Frasers Hospitality Trust (42.2%)
    • Elite Commercial REIT (42.1%)
    • Manulife US REIT (42.0%)
  • Total Singapore REIT Market Capitalisation increased by 3.86% to S$109.2 Billion.
    • Increased from S$105.1 Billion in October 2021.
  • Biggest Market Capitalisation REITs:
    • Capitaland Integrated Commercial Trust ($13.99B)
    • Ascendas REIT ($13.12B)
    • Mapletree Logistics Trust ($8.59B)
    • Mapletree Industrial Trust ($7.23B)
    • Mapletree Commercial Trust ($7.14B)
    • No change in Top 5 rankings since August 2021.
  • Smallest Market Capitalisation REITs:
    • BHG Retail REIT ($271M)
    • ARA Hospitality Trust ($383M)
    • First REIT ($418M)
    • Lippo Malls Indonesia Retail Trust ($430M)
    • United Hampshire REIT ($458M)

Disclaimer: The above table is best used for “screening and shortlisting only”. It is NOT for investing (Buy / Sell) decision. If you need help to start building your own investment portfolio, or want a portfolio review, book a consultation with Kenny now! First consultation is free.

Top 20 Best Performers of the Month (November 2021)

 (Source: https://stocks.cafe/kenny/advanced)

SG 10 Year & US 10 Year Government Bond Yield

  • SG 10 Year: 1.77% (increased from 1.57%)
  • US 10 Year: 1.46% (decreased from 1.47%)

Major REIT News in October 2021

ESR REIT and ARA LOGOS Logistics Trust propose $1.4 billion merger

The managers of ESR-Reit and ARA Logos Logistics Trust (ARA Logos) have proposed a $1.4 billion merger, where ESR-Reit will acquire all of ARA Logos’ units in exchange for a combination of cash and new units.

The proposed merger, which will result in the merged entity being named ESR-Logos Reit, will be effected by way of a trust scheme of arrangement. ARA Logos unitholders will receive a scheme consideration of $0.95 per ARA Logos unit – comprising $0.095 in cash and 1.6765 new ESR-Reit units, to be issued at $0.51 apiece. – The Business Times

See Exclusive Insights: Interview with ESR REIT CEO

Summary

Fundamentally, the whole Singapore REITs landscape is currently at fair value due to the recent correction based on the average Price/NAV value of the S-REITs. Below is the market cap heat map for the past 1 month. Generally, most S-REITs in the past month have increased in market cap. Noteworthily, 3 of the Top 5 Performers are Hospitality Trusts, namely Frasers Hospitality Trust (6.32%) and CDL Hospitality Trust (12.15%), and Ascott Residence Trust (15.22%).

(Source: https://stocks.cafe/kenny/overview)

Yield spread (in reference to the 10 year Singapore government bond of 1.77% as of 7th November 2021) tightened slightly from 4.21% to 4.10%. This is due to the 10 year Singapore government bond rate increasing from 1.57% to 1.77%.

The risk premium is attractive to accumulate Singapore REITs in stages to lock in the current price and to benefit from long-term yield after the recovery. Moving forward, it is expected that DPU will increase due to the recovery of global economy, as seen in the previous few earning updates. NAV is expected to be adjusted upward due to revaluation of the portfolio.

Technically the REIT Index is currently on short term uptrend moving towards the resistance zone at 875-890. With the containment of China Evergrande debt issue and re-opening of the borders, it is expected the stablelisation of the share price of Singapore REIT and the return of the dividend  for the next few quarters. Based on the latest earning releases, most of the REITs are growing in DPU and cautiously optimistic moving into 2022. 

You can listen to my monthly REIT radio interview on MoneyFM89.3 here.

Note: This above analysis is for my own personal research and it is NOT a buy or sell recommendation. 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.

Kenny Loh is a Senior Financial Advisory Manager 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

Continue Reading Singapore REIT Monthly Update (Nov 07 – 2021)

Exclusive Insights: Interview with ESR REIT CEO, Mr Adrian Chui

  • Post author:

On the 26th October 2021, I had the opportunity to speak to Mr Adrian Chui, CEO and Executive Director of ESR REIT. As you may have known, the recent announcement of ESR REIT’s proposed Merger with ARA LOGOS Logistics Trust has sparked many questions amongst investors. 

Proposed merger of ESR REIT with ARA LOGOS Logistics Trust: Resources

During my visit to ESR Bizpark @ Changi, on behalf of investors, in an interview with Mr Adrian Chui and Ms Charlane-Jayne Chang (Head of Capital Markets and Investor Relations), I asked several questions regarding the proposed merger with ARA LOGOS Logistics Trust, ESR-LOGOS REIT’s future strategy, and what to expect moving forward.

 

 

Kenny: Is the ESR REIT – ARA LOGOS Logistics Trust merger dependent on ESR’s successful acquisition of ARA Asset Management?

Adrian: Yes the merger is conditional on that. If ESR’s acquisition of ARA Asset Management (including LOGOS) does not go through, the REIT merger will not go through. Before the announcement of ESR’s acquisition of ARA Asset Management, both parties (ESR Cayman and LOGOS) have their own property pipelines from our respective Sponsors. The REIT merger will also remove conflicts of interest when ESR acquires ARA Asset Management as the enlarged ESR-LOGOS REIT will trade as 1 enlarged REIT with access to enlarged ESR Cayman’s pipeline of assets and tenant base.

 

Kenny: The new banking facilities have a lower weighted average “all-in” finance cost of 2.25% per annum. Have you considered ‘green bonds’, that have an even lower finance cost?

Adrian: Yes – we are keen to look at green bonds and/or sustainable loans as we embark on our ESG offerings as an enlarged ESR-LOGOS REIT. Post-merger we will review our ESG offerings, plan and then roll out our ESG offerings. It is necessary to align both REIT’s ESG plans, before embarking on further green initiatives. Green loans and/or bonds will be part of our capital structure going forward.

 

Kenny: After the ARA LOGOS Logistics Trust merger, what will be ESR-LOGOS REIT’s strategy moving forward, in terms of property pipeline? The current portfolio of properties is Singapore and Australia centric.

Adrian: We will look to follow the footprint of our Sponsor, ESR Cayman. They have properties in Singapore, China, Japan, Australia, India and Korea. Freehold and/or longer land lease assets will be the focus of our growth strategy in order to address the short underlying land lease of Singapore industrial properties. As such, overseas expansion will pick up with Australia, Japan and possibly China as the key overseas markets. These are countries where ESR Cayman has a long established footprint and full real estate value chain with Australia & Japan being developed countries. As REITs should primarily consist of stabilised assets, the properties have to be in countries where there is rule of law, and money can flow in and out easily. Our Sponsor’s assets in Japan are also relatively new and freehold.

Kenny: Also Japan’s cost of debt is very low. For example ParkwayLife REIT at ~0.6% average cost of debt.

 

“Overall, we are quite excited for the future. Wherever we invest is going to be in the jurisdiction in which ESR Group has a presence in.”

 

Kenny: I also see that ESR Group have a share in Cromwell. Does this mean anything?

Adrian: Nope. Different jurisdictions. Our focus will be on APAC.

 

Kenny: Judging by your responses, despite ESR being a major shareholder in Sabana REIT and also AIMS APAC REIT, I don’t think you’ll be interested in acquiring these two REITS already.

Adrian: In terms of acquiring properties, we would be focusing on our Sponsor’s pipeline of assets. For example, Sponsor has some assets in Japan which we can easily acquire.

Also, as a REIT CEO, when we look at every investment, we look at how it will benefit the REIT. A fundamental issue for ESR-REIT now is that most of our assets are in Singapore, where land leases are short, which means that our yield is relatively higher at about 6% as an equity risk premium is required for short land leasehold assets compared to freehold. As our Sponsor’s asset pipeline consists of freehold and longer land lease assets, this is more valuable to us. Post-merger, with a larger asset base, lower cost and wider access to funding, we can do more and faster.

Kenny: Because your NAV will drop over the years.

Adrian: Exactly. If Singapore industrial assets are also freehold, our yield will be lower than 6%. Now that the REIT will be bigger (S$5.4b total assets), we are in NAREIT Global Index, and we have visible and executable pipeline of assets from our Sponsor with longer land leases, that should be the direction moving forward, acquiring properties with longer land leases, so that the NAV won’t constantly keep dropping. Previously, when our total asset size was smaller, buying a portfolio of properties (such as Sabana REIT acquisition) to help us get into NAREIT would be quite sensible. Now we are already a NAREIT-indexed REIT.

In terms of growing, every year since we became ESR REIT, we generally acquire assets, at about 15-20% of our then portfolio size. This excludes merger years which are one-off.

 

“Our philoshophy is that whenever you want to perform an acquisition, you must be able to digest (and manage it).”

 

Kenny: Last question: Do you personally have a target on how big your market cap should be, or Sponsor tells you to meet this target? For strategic reasons.

Adrian: The answer from the Sponsor is always ‘as big as sensibly possible’. For me, I look at a practical point of view on what I believe the market can accept in terms of size and risk. We also take into account other factors such as resources (you need people to do the work and due diligence properly). Post-merger, with a larger asset base, lower costs of funding, wider access to capital and looking at my Sponsor’s asset pipeline, $800m to $1 billion per annum of acquisitions in the next 3 years is plausible.

Charlene: I think importantly, with our track record we have been very disciplined with the way acquisitions are done, it has been done in a properly staged and “digestible” size which are value-accretive to unitholders.

Adrian: We are quite aware that once you make one wrong move, that’s it. Our philoshophy is that when you want to acquire, you must be able to digest (and manage it). One recent example would be the recent acquisitions of 46 Tanjong Penjuru and 10% investment in ESR Logistics Partnership (“EALP”) which is accompanied by a manageable c.S$149.6mil Equity Fund Raising exercise (consisting of a c.$100mil Placement Tranche and c.$50m Pref Offer tranche for our existing unitholders) which was 3.6 times subscribed (Editors note: Read more about it here). We cannot just ‘gobble’ up on assets for growth sake without considering execution and funding risk. We want to make sure our team is able to manage the assets that we acquire also, making sure it is within our comfort zone and risk appetite.

Kenny Loh is a Senior Financial Advisory Manager 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

 


Continue Reading Exclusive Insights: Interview with ESR REIT CEO, Mr Adrian Chui